Jeff Prestridge: investor lessons now the GameStop dust has settled

There are four big themes to take from the activist investor saga, our columnist argues.

I quite enjoyed the rise of the ‘Reddits’ – the merry band of private investors who recently took on some powerful institutional investors and bloodied a few corporate noses in the process. It was a true David versus Goliath situation.

Of course, it was never going to end in David winning, with accompanying tears of joy – just Goliath triumphant and tears all round. But it was fun while it lasted – and a triumph for people power.

Sadly for the Reddits, bidding up the price of shares to harm those institutions that hold them in the hope of their price falling might well work in the short term. But, ultimately, the stock market is a pretty good judge of businesses.

Companies that are bedevilled by poorly-performing shares are not unlucky. It’s for a good reason – they may be badly run entities or are businesses that have failed to move with the times (look no further than many retailers that have been unprepared to think outside of their high-street premises).

• The ETFs that benefited from the Reddit silver rally
• A risky investing craze: GameStop’s most volatile day
• Backing from Elon Musk’s Tesla sends bitcoin price rocketing

When hedge funds appear on the scene, looking to make a financial killing by shorting the shares (in effect, betting on them falling), it usually means the beginning of the end for the targeted company – whether it’s administration, a takeover or a rescue.

Hedge funds (or financial vultures as some call them) are right more times than they are wrong. That said, some did walk away from their battle with the Reddits over the share price of US company GameStop (NYSE:GME) with their fingers seriously burned.

Fascinating though the recent Reddit battle royale was, what does it tell us about stock markets and investors?

First, it is a fact that a combination of lockdown and new low-cost share trading platforms (offering complex financial derivatives as well as the opportunity to buy shares) has spawned a new breed of stock-market trader.

One that is keen to make quick profits, and, through collective action, fight back against the stock-market establishment (the big institutions).

They’re not long-term investors – they’re day traders, stock-market gamblers - although you could argue that anyone investing in equities is gambling.

I can’t imagine we have heard the last of them, although a sharp stock-market correction would probably send many running for the hills.

Second, the Reddit phenomenon is a reflection of the fact that there are currently few viable investment alternatives to shares.

Cash saving will always make sense in terms of ensuring any unexpected financial emergencies can be dealt with quickly, but cash is not currently an effective builder of long-term wealth.

Savers will be lucky if they can get more than 0.5% annual interest on an easy-access account, and extremely lucky to get one that beats inflation (0.6%). In fact, only two one-year bonds pay 0.6%, and none beat that rate.

Cryptocurrencies may be considered an alternative by some, but bitcoin’s price is extremely volatile and the asset space is awash with fraud and scams.

Maybe wider support from the City, and from go-to companies such as Elon Musk’s car firm Tesla (NASDAQ:TSLA) will improve the image of these assets. But it will take time.

So, it’s a choice between shares or peanuts from your bank or building society by way of interest. It’s no contest. As all investment platforms are reporting, investors of all ages – young and old – are taking up the investing habit because they want to earn a return from their surplus cash. The Reddits are just part of a wider share-buying boom.

Third, there is no doubt that the strong performance of stock markets throughout the pandemic – especially in the US – has persuaded many to join the shares party – ether by investing for the first time, becoming a Reddit or by increasing their contributions into the market via an ISA or pension. They want to participate in the boom – they don’t want to miss out.

Fourth – and crucially – there is no doubt that the current enthusiasm for stock markets is taking on the appearance of a bubble. It’s frighteningly reminiscent of the late 1990s, when investors piled into technology stocks on the back of the internet boom.

The stock-market bubble then burst in March 2000, decimating the portfolios of many investors along the way. It could all happen again, although it might not be for a while – nobody knows.

• Try ‘from couch to £5K’ and run the investment marathon
• Are you saving enough for retirement? Our calculator can help you find out

So, what should investors do? For a start, diversify – don’t have all your eggs in the technology basket. Invest across markets (UK and overseas, developed and emerging), sectors and investment themes.

Build a portfolio of diverse funds – growth and income-oriented – that are managed by a range of fund managers. Buy active funds, buy passive funds. Mix it all up. Go green.

Also, try to get into the habit of investing regularly rather than waiting to ‘time’ the market.

Finally, don’t forget your cash buffer and a little bit of exposure to commodities - especially gold – and cryptocurrencies.

Of course, keep investing. But don’t get carried away by all the Reddit hot air. Think long term.