Maybe you bought in late to last week’s GameStop stock rally and lost money. Maybe you’ve held your shares and your loss is only on paper.
More likely you’ve read all the accounts of huge gains made by other investors, and hope not to miss out the next time a similar situation arises.
Because, according to Mark Cuban, it probably will.
If you aren’t familiar, video game and accessories retailer GameStop shares traded at $20 per share on January 12, briefly topped $500 per share during last Thursday’s premarket trading, and closed yesterday at $90 per share.
Why such wild moves? The answer lies at least partly with a large group of investors on Reddit’s WallStreetBets chatroom who banded together to buy shares and call options on heavily shorted stocks.
Why pick GameStop? In mid-January, over 60 million shares of GameStop stock were held by short sellers. Yet on an average day’s trading, only 10 million shares tended to change hands.
Making GameStop a perfect target for a so-called “short squeeze.”
Since a short seller’s loss is theoretically unlimited — if I buy a share of stock for $20, the most I can lose is $20, but if I short a share of stock at $20 and it goes to $500, I lose $480 in the process of covering my short position — a rapid rise in share price can cause short-sellers to exit their positions. That means they have to buy stock to cover the stock they borrowed to sell short, which further increases demand and causes prices to go even higher.
The resulting vicious (or virtuous, depending on your perspective) cycle of price benefited the WallStreetBets (WSB) crowd — and others who piled on as well — and resulted in serious losses for hedge funds that held huge short positions. One hedge fund experienced portfolio losses of over 50 percent.
During an AMA (Ask Me Anything), Cuban seemed more than okay with that.
“What happened the past few weeks with WSB has all happened before,” Cuban wrote, “it was just the big guys doing the battling. The only new thing was WSB traders took them on… What I love about this now, is that if you pick your spots right and work as a group, you can hit again and again.”
Interestingly, that advice seems to contradict Cuban’s answer to another question. When asked for advice for people who lost money the last few weeks, Cuban wrote:
I learned some expensive lessons when I first started trading stocks. It was painful. But I tried to learn what I got right and wrong. Right now, right here, the game is changing. The hard part is to ask yourself if what you believed in has actually changed…
When I buy a stock I make sure I know why I’m buying it. Then I HODL (hold on for dear life) till I learn that something has changed. The price may go up or down, but if I still believe in the logic that made me buy the asset, I don’t sell. If something change that I didn’t expect, then I look at selling.
That’s great advice, but not necessarily applicable to GameStop. While the company’s e-commerce revenue quadrupled during the 2020 holiday season, total revenues continue to fall. GameStop is on track to deliver its third full-year loss in a row. While the company ius attempting to save its way to profitability by closing brick-and-mortar stores, still: Total earnings are down, and so is growth.
Which — and this is just my opinion — means a recent GameStop investor’s thesis focused on profiting from a short squeeze and not a fundamental belief in the company’s long-term potential value.
So what advice did Cuban have for investors who still hold GameStop stock?
“Best thing you can do is hold on to the stock and do business with GameStop,” Cuban wrote. “If everyone goes to their website and buys from them that is going to help the company, which will help the stock, which will help everyone here. If you still believe in the reason you bought the stock, and that hasn’t changed, why sell?”
In short, Cuban isn’t a fan of selling into a diving market: Momentum can clearly swing both ways, but usually prices stabilize.
Cuban then doubled down on that advice:
If you can afford to hold the stock, hold it. I don’t own it, but that’s what I would do…
I have no doubt there are funds and big players that have shorted this stock again thinking they are smarter than everyone on WSB.
I know you are going to hate to hear this, but the lower it goes, the more powerful WSB can be stepping up to buy the stock again.
What I love about this now, is that if you pick your spots right and work as a group, you can hit again and again.
Bottom line? Cuban says do your homework. Know why you buy a particular stock. Know why you sell it. Think long term.
Know that you won’t always get it right — but if you put in the work and are willing to learn from your mistakes as well as the people around you… the odds are better that next time, you will get it right.
Whether that’s riding the GameStop wave, believing in Bitcoin… or simply believing in your startup.
Because that’s an investment outcome you’re much more likely to be able to control.