This article is the finale of a three-part series on the latest GameStop saga. The first article “GameStop and the Short Squeeze” can be found here and the second article “Short Selling is an Important Trading Activity” here. Today we’re talking about what would have happened if GameStop retailers had been good at risk management.
Every trader claims to follow rules. While some trading rules are solid philosophies and will keep you grounded, only one is critical to your success: good risk management. Imagine if these GameStop buyers weren’t driven by greed. There would be many more millionaires among Wallstreetbets dealers.
Yes, I know it is extremely difficult to maintain discipline when a hot trend occurs. The allure of risking capital for wealth is tempting. Sometimes it’s hard to resist.
As we discussed a few weeks ago, the GameStop saga was a massive shorthand triggered by members of the sub-Reddit Wallstreetbets. You managed to generate excitement for this very low float stock (lots of stocks available). At the end of 2020, the stock was trading at around $ 4 per share. It was cheap enough for people to buy hundreds, if not thousands, of stocks without risking too much capital.
GameStop’s very poor basics were known, but that didn’t matter to this crowd. They wanted to make a statement – and they ever did! I read that some who stuck with their stocks were instant millionaires. That’s great! It’s the American dream – risk some cash and hit the jackpot.
Risk management could have produced more GameStop millionaires
When such a strong hand is dealt many dealers either freeze or become so overwhelmed by greed that common sense is thrown out the window. Case in point: Missouri Man.
About a month ago I heard the story of a Missouri man who followed Wallstreetbets. He bought some shares in GameStop last year and then bought some call options.
By the end of January, his account had grown to over $ 1 million. For someone who only makes $ 35,000 a year on their regular job, they were now sitting on a fortune 30 times their annual income! Quite a lot, wouldn’t you say On that day, GameStop closed at $ 320 per share.
When the reporter asked what he would do, he grinned and said he believed the stock would go up to $ 500, then to $ 1,000. No, you don’t have to sell any of these. GameStop would make him even richer than it was that day. I could only think, “Why not sell some? Maybe half of it? “
The following Monday the stock began to scratch. After three weeks of intense sales, GameStop is now only $ 40 per share. It’s still higher than it was at the beginning of 2021, but it has fallen sharply since January.
Greed is very difficult to control. I’m not sure Missouri Man ever sold GameStop. If not, he must have learned a valuable lesson: when you take a risk and are given a life changing opportunity, follow your head. To sell! You may not get out on top, but you will be better off in the end.