GameStop is not a good choice for your investment portfolio. Individuals who’ve jumped on the GME train the last several weeks might think they are investing, but in reality it’s more like gambling. For those who don’t understand the difference, it’s a dangerous endeavor.
Investing is about buying or owning an asset with the expectation of receiving a profit or benefit in return. Expectation is having a solid reason to believe the stock has profit potential. In theory, we want to choose companies with steady growth, low debt, are well-managed, have a strong place in their industry and will continue to demonstrate a competitive edge. Why? Because these things indicate the company’s “health” and future viability. It’s hard to make money when a company doesn’t grow or worse, closes its doors.
Considering all these are what make GameStop a terrible choice for long-term investing. The current Reddit lead “stick-it-to-the-man” campaign aside, in almost 20 years the company’s stock has never risen above $40 per share. The company is not growing, no longer has a niche in the market, and management has not found innovative ways to remain competitive. There is nothing about GameStop that lends any sort of expectation that the company will provide significant returns in the future. It’s a sinking ship that will take most everyone that dumped money into it in 2021 down with it..
While investing is underscored by the expectation of doing well, gambling on the other hand is all about hoping. It’s about risk and speculation, with little guarantee the venture will pay off. Those who bought GameStop for around $40 in mid-January then sold a week later at just under $350 per share certainly made a killing. But the company’s sudden spike in price was not because it is a good product with solid long-term potential. It was a volatile anomaly instigated by a small group who were fed-up with certain stock trading policies, and never a good long-term investment.
Perhaps some did “see it coming” and “knew” it was going to (briefly) take off, but for most they simply got lucky. They speculated, took a risk, and like dropping a quarter in slot machine, this time it paid out. Which is where the danger lays, for as intoxicating as the winning is, the losing can be devastating, especially when playing with large sums of money.
Long-term, value-based investing strategies are not sexy or thrilling, and in fact can feel quite boring when compared to the adrenaline high of turning a quick profit. But if creating wealth and generating stable passive income is the goal, speculative ventures like GameStop will never enter the equation.
Warren Buffet, investing guru and champion of value investing, understands this well when he advises that the first rule of investing is don’t lose money. It isn’t take risks, trust your gut, or follow trends, it’s don’t lose money. There’s a reason no casino in the world has ever used this for its tagline.