5 Important Lessons from the GameStop Reddit Saga

Key takeaways from the trade of the century

The GameStop short squeeze is far from over. Keith Gill doubled down on his position and owns 100,000 shares as of February 19th. Let’s not wait for the movies and documentaries to come out to understand the key takeaways from this story. Here are five things that I’ve learned from the trade of the century.

Create accounts at multiple brokerages

I could not log into my brokerage account when the market opened during the last week of January. This was when the GameStop hype was off the charts. Other users experienced similar problems. Web servers became overwhelmed when everyone tried to get in on the action at the same time. Things would get better around noon as some traders prioritized lunch. Being able to access your account in a volatile market may not matter to the long-term buy-and-hold investor. However, it does matter to short-term traders who need to quickly enter and exit their positions.

Proactively spreading your assets across multiple brokerages mitigates the effects of outages. You can switch websites if one platform freezes. This would have helped a lot of people when the trading restrictions started.

Make your own decisions

“Be fearful when others are greedy, and greedy when others are fearful.” — Warren Buffet

This summarizes contrarian investing. You can make a lot of money by making investments that differ from overall market sentiment.

Do not simply listen to other people and buy whatever they are buying. You do not know what their true intentions are. People who follow the herd might become willing victims of penny stock pump-and-dump schemes. The usage of anonymized chat rooms has made this extremely easy. You do not want to be holding a bag of garbage when early investors head for the exits.

When GameStop’s stock price surpassed $300, people were still telling each other to hold and even buy more shares.

However, the person telling you to hold might be secretly selling their shares. This was exactly what happened. It was not cool to sell GameStop stock and post about it on WallStreetBets. You would get downvoted for even suggesting the idea. Posting GME gains was only more acceptable after the hype died down.

Investing is not a team sport. Knowledge and information may be crowdsourced, but at the end of the day, everyone needs to make their own decisions.

No one cares more deeply about your money than yourself.

The best way to protect yourself is by doing original research.

Why is the stock a compelling investment? What is so special about the company?

To use Buffet terminology, does the company have a moat?

Asking yourself these questions will help you become a better investor.

There are extremely smart people on Reddit

Keith Gill himself has a CFA or Chartered Financial Analyst. This is a highly respected credential within the finance industry. Candidates need to spend hundreds of hours studying for three levels of a rigorous exam. Charter holders must demonstrate exceptional technical and analytical abilities. Therefore, hedge funds are more willing to hire candidates with CFA status.

Besides professional investors, WallStreetBets also have software engineers and statisticians as members. Their insightful thoughts lie underneath the self-deprecating humor and flashy memes the subreddit is known for.

Therefore, it is time to stop labeling the retail investor crowd as “dumb money.” Technology has indeed democratized investing, and things are just getting started.

Sentiment can change very quickly

People used so many rocket ship emojis during GME’s rise. The overall vibe of WallStreetBets was overwhelmingly positive. Then, the stock price started falling. There were fewer emojis and more questions with the overall theme of “what now?”

You never know when the music will stop playing. It was the same thing when the stock market went into freefall in March 2020. People thought the world was going to end. There was this invisible tension in the air.

So, how do you protect yourself against the worst-case scenario? First and foremost, do not invest more money than you are willing to lose. Kevin O’ Leary said it best, “The definition of the market is speculation.” It doesn’t matter what strategy you use. It doesn’t matter if you invest using fundamental or technical analysis.

No one knows the future.

Living on the edge may be exciting, but it will keep you up at night. You most definitely should not be investing your life savings in a single stock. Some people did that with GameStop. Now, they are regretting their decision. Diversification may be cliché, but it works. Think of it as risk management 101 as opposed to being pessimistic.

Algorithms create fortunes

My last lesson is not about GameStop stock but rather Reddit and social media in general.

The WallStreetBets subreddit gained millions of followers in a matter of days. As of now, it has over 9 million followers. There are a few reasons why. Part of it has to do with the whole world watching as GameStop’s stock price skyrocketed. News articles linked to the subreddit during coverage. Financial journalism talked about the company all day. I was even hearing about GameStop on the radio.

However, we also need to acknowledge how r/WallStreetBets was getting a lot of love within Reddit itself. Because of the sheer amount of upvotes, comments, and awards, content from WallStreetBets consistently appeared on Reddit’s front page. This further increased the subreddit’s engagement metrics as users across Reddit became familiar with the community. In a sense, Reddit’s algorithm helped the community grow.

This phenomenon occurs not only on Reddit but across all social media platforms. The almighty algorithm affects the types of videos we watch and the articles we read. It plays a crucial role in helping users discover new content and creators.

Follow the algorithm. Follow the money.

YouTubers create 10-minute videos because YouTube’s algorithm favors watch time. They ask viewers to like and comment. Videos about certain topics are also more likely to appear on the home tab, such as commentary on stimulus check updates.

Do creators do things that they enjoy? Or do they create content that the algorithm favors? This is a constant challenge in the social media game.