GameStop – a renaissance or a false dawn?

• GameStop was the second-most bought stock on interactive investor yesterday (13 May 2024)
• Stocks in GameStop surged by over 74% yesterday. The stock is up 45% in premarket trading today (14 May) at the time of writing

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The surprise return of a social media account that helped fuel the meteoric rise in GameStop Corp Class A (NYSE:GME)’s share price in 2021 has breathed new life into the meme stock, which had broadly been following a downward trend since its peak.

“The surge has nothing to do with a turnaround in the company’s fortunes and everything to do with the renaissance of the FOMO (fear of missing out) sentiment that saw the stock price of the video game retailer inexplicably spike, despite the company’s fundamentals painting a bleak picture. Mark Twain’s famous maxim, ‘History doesn’t repeat itself but it often rhymes,’ is worth remembering here. Time will tell whether the latest uptick in GameStop’s stock price becomes the latest in a string of flash-in-the-pan moments the firm has experienced over the years.

“One of the key takeaways from the meme stock saga is the importance of understanding investment risk. Risk is an inherent part of investing, but there are some investments that raise the stakes to levels akin to slot machines in a casino. Treating investing like a spin at a roulette wheel by betting on highly speculative stocks is not a sustainable strategy to build wealth over the long term. The reality is that the odds are heavily stacked against those who attempt to time the market.

“Some investors can afford to speculate on the stock, knowing full well that there is a substantial risk of losing money. But betting it all in hope of substantial gains is not a wise investment strategy.

“The meme stock saga is a ready-made case study that can be taught in schools to highlight the dangers of FOMO investing. While some people were fortunate to make money in a short amount of time by buying and then selling at the right moment during the social media-fuelled surge, many lost out once the bubble burst.

“The challenge for novice investors is to resist the urge to invest in a particular proposition out of fear of missing out. It is important to understand what you are investing in. Funds and investment trusts, which use a professional fund manager to spread your risk globally, are a good place to start. A well-diversified investment portfolio helps to cushion the occasional shocks that come with investing in a single asset class or region.”