The herd and its mentality

Marketwatch has been watching the GameStop saga with a sense of déja vu.  A large group of individual investors, called in the trade “retail investors”, have got together on social media platforms and have taken on the professionals at their own game.

For those who have missed the saga, this is a brief synopsis.

GameStop is a video gaming store chain in the United States.  It’s a bit of a dinosaur so is losing market share to streaming and internet providers.  The company is closing hundreds of stores.  Professional investors (aka hedge funds) have been shorting the stock.  This means they have been borrowing shares from other funds and selling them.  If they do this in large enough numbers it can drive the price down, at which point they buy the shares back, return them to their owners, and pocket the difference.

Enter the retail investors.  Lots of people each armed with a bit of cash, principally from the stimulus cheques, have leapt in the market and have gone on a buying spree.  This has driven the price up to levels which simply does not reflect anything like the value of the company.  The professionals are now faced with the problem that, instead of buying shares at a lower price than they sold them for, they must now buy them for more than they paid.  Share transactions have settlement dates so they are taking a bath.  A very big and expensive bath.  But don’t feel too sorry for them, they are professionals, they have to take the rough with the smooth.

The motivations of this herd of investors differ.  Some have a goal of making enough money to pay off the credit card, or student debt, or the wedding bill.  Others are a lot less defined and appear to following in the belief that the company’s share price can remain elevated and everyone can make their fortune.

This took Marketwatch back to 1984.  In the UK the Jaguar car company was about to launch itself on the Stock Exchange.  The market was booming and there was a rush of applications for shares.  News on the television showed people racing along the pavement as the doors of the Stock Exchange were closing at the deadline.  A reporter asked a potential investor why he was applying for shares.  The reply was along the lines of, “it’s not a question of whether or not I will make money, it’s just how much.” Marketwatch well remembers the chill that went down his spine.  In 1987 we had Black Friday, a day in October when the market spectacularly crashed.

You can be pretty sure that most of the retail investors do not understand anything about the company whose shares they bought.  But they are spurred on by social media posts.  Some of the people posting are doing it so they can sell and make their own profit.  After all, someone has to be holding the shares when the party is over and the price tanks.

The drive for wealth, particularly when it requires little effort, is stronger in some of us than others.  But nearly all of us like the idea of a freebie.  In some it is simply a matter of greed.  For others it is less pronounced but is a variation on that theme.  And there is another motivation present; fear.  The fear of being left behind, the fear of looking like a failure, these are also the things that drive these events.

Now apparently, these groups are taking on the silver market.  This is an entirely different kettle of fish.  The general idea seems to be that they can take a wrecking ball to the business of the banks which specialise in dealing in this precious metal.  There are some very real dangers for this group here.  The silver market is already quite buoyant and many professional investors are in there pushing the price up.

These events are not unlike a novice, like me, going to the casino.  I might win a couple of times, and then, flushed with success, I get bolder and bolder.  You can guess the outcome.

In Greek mythology, a young man called Icarus, and his father Daedalus, attempted to escape from the island of Crete in the Mediterranean Sea.  Daedalus had made wings for them both so they could fly away.  He warned his son that, because the feathers were held together with wax, he should not go too close to the sun.  Being young and invincible, Icarus ignored him and did just that.  The wax melted, he fell into the sea, and drowned.

Doubtless, when he took his place in the Halls of the Dead, Icarus had time to reflect on the fact that, if he had filed his flight plan and stuck to it, he could have had a prosperous old age.

Make sure your flight is safer.

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Christmas was, as usual, a jolly time, and Marketwatch and his family did sterling work in supporting Australian wines.  Yes, I know it’s hot, but that is not necessarily a reason to ignore a glass of red.  I recommend the Deep River Shiraz form McLaren Vale.  For a more than decent chardonnay, don’t forget the Leeuwin Art Series.  A big price, though a great wine.