HUNTSVILLE, ONT. -- Momentum is an interesting concept, and was on full display when millions of young and potentially first-time investors poured money into "meme stocks" like GameStop. Some were purely trying to stick it to Wall Street, tired of the concept "Wall Street always wins" while others had wild ideas of making tons of money.
Both groups had likely done little or no research on the actual company GameStop before they decided to invest. I'm sure some did and may have made money, but many didn't and a lot of money was lost by hedge funds, as well as by the novice investors who bought in high and sold out low in an effort to try and time the market.
Here are some of my thoughts to consider before you invest:
- Do your homework and know what you are invested in and why. You should be able to explain to your younger self why you are invested in the company.
- You might have gotten lucky and made some money on your first foray into investing or day trading, however, it is tough for even the pros to get it right twice. Don't get sucked into believing your own predictive powers. You likely aren't that good.
- You need to have a plan, stick to the plan and not get greedy. Rebalance your portfolio, especially if an investment is doing really well. Buy low and sell high is a mantra for a reason. Lock in your gains.
- Ignore the herd mentality. Just because everyone else is getting into a investment doesn't mean you should too. Bitcoin comes to mind.
- Don't try to time the market or concentrate all of your money into one company, one sector, one currency or one country.
This may sound boring to some. However, for others who lost a lot of money, it was a lesson learned the hard way.
A quick recap of what happened: The stock did go up like a rocket over an incredibly short period of time - from US$39 on Jan. 19 to its peak of $347 on Jan. 27. Today the shares have slid all the way back down to $40.59.
Here is my concern: trading platforms are not video game apps. There is real risk and the potential to lose money -- a lot of money -- if you don't treat the investing process with the respect it deserves.
I reached out to Doug Allan, who has written a booked targeted to younger investors called "A Fighting Chance Finance: The high school finance education everyone deserves". He tries to give young investors the tools they need to do proper due diligence and really get to understand the financial position of a publicly traded company. The book includes demystifying financial terms, how to read financial statements and even explanations of macro trends in the economy and how they can impact a companies performance and outlook.
You might still be tempted to jump in on the next big trend, however, it is important to note that it is extremely difficult to beat the returns of the overall market through an active trading strategy.
In Allan's book, he references the $1-million bet famous investor Warren Buffett made in 2008 with a hedge fund manager that a low-cost S&P 500 index fund would fare better than a collection of a hedge funds with active trading strategies and high investor fees. Buffett won the bet, proving that boring long-term investing in diversified portfolios is the way to go.