SALT LAKE CITY: In the stock market, there are no safe bets. This is what many learned in the recent GameStop bubble fueled by Reddit that cost big sellers (and some investors everyday) big losses, while others made big gains.
The frenzy introduced many new investors to the market who wanted to be included in the unprecedented event. While several made money with GME, many also lost money when the bubble crashed just under $ 500 per share, far from the Internet’s goal of raising the price to more than $ 1,000.
For Bill Tayler of BYU School of Accountancy, the phenomenon came as no surprise given his research 13 years ago, where he predicted that something like this would happen. The research began in response to the stock market technology bubble in the early 2000s.
“We wanted to better understand why this would happen in the real world,” Tayler told KSL.com, “so we took him to a lab where we got a lot of participants in and exchanged shares in a single company.”
Researchers wanted to understand why educated investors would not bet on a bubble, even though they knew it would end up falling as they had seen with the technology bubbles in 2000 and 2001.
The experiment existed in a very simplified market, where participants were told that there was a fundamental value of the company of $ 500. A market trader was a robot trader, who would raise prices by buying stocks continuously. The robot trader represented what is called a sentiment trader or someone who is uninformed and buys stocks because he likes it, not necessarily because he has researched why it will go well.
Tayler explained that the subjects in the study could do three things: do nothing, try to make a profit by shorting overvalued stocks, or buy stocks and pump the bubble that the robot had created.
In the first rounds, most participants bought shares, knowing that the price would continue to rise due to the robot trader; they were trying to buy low to sell high. It caused a small squeeze for participants who had decided to sell the shares short and buy back at higher prices, which caused the price to skyrocket and a bubble to form.
Near the end, participants tried to sell all their shares before the bubble inevitably burst.
Does it sound familiar to you?
“In a market with sentiment traders who buy not necessarily for their core value, but for some other belief or purpose, and where short-term selling exists, you can end up with massive bubbles caused in part by sentiment trading and in part by narrow short, ”Tayler explained.
While GameStop’s fashion was predictable, Tayler said that doesn’t necessarily mean it will happen again soon. Market bubbles, small and large, are common and occur frequently, but it was a perfect storm that caused GameStop to rise and fall. Not only did social media contribute, but so did the average merchants, which increased the momentum.
One thing that is important to keep in mind is that research shows that the market will learn, said Tayler, who noted how Redditors tried to pump other stocks, such as AMC, but never achieved the same meteoric rise as GME. And not all hedge funds involved in the GameStop frenzy lost money, said Tayler, who noted that many jumped ahead of the bubble and charged before falling.
“We ran this market over and over again, and we showed that over time the market finds out. Market participants realize that: one, selling in the short term was a bad idea because they will be crushed by the margin call and a short squeeze and two, you don’t want to be the last to hold those actions, ”he explained.
The market has already learned and adapted; some hedge funds were already monitoring social media sites like Reddit, and those who weren’t sure are now, Tayler said.
As for the amateur traders who have recently entered the market, either because of GameStop mania or for some other reason, Tayler has some tips: Never put money in the stock market that you are not willing to lose.
“Don’t put the money from the supermarket here, don’t put the rent money,” he said. “If you have additional funds that (you) can invest, fine.”
Long-term investments, such as investing for retirement, are a big financial move for many, and Tayler said people with entrepreneurs offering 401 (k) should make the most of it.
For those looking to invest in the short term, there are many brokers to start with, such as Robinhood or E-Trade. Investing can be an educational and positive experience, and potential investors should do research on the companies they buy from; however, short-term trading carries risks, so it is crucial to be aware of the market and stay smart about the investments being made.
It’s easy to get involved in success stories, with some GameStop catches and winning millions, but there are also hundreds of other little-publicized stories where people lost everything after being lured by the hype, dir Tayler.
“If they’re looking for the next GameStop, I’d say don’t hold your breath,” he said. “I don’t think we’re going to see another short-term bubble in a single company, driven by sentimental trading similar to GameStop in the short term, because, again, what happens is that people tend to leave more and more early.”
“No one wants to brag about how much money they lost at GameStop, so be careful.”