The GameStop Investor Is the Definition of Insanity

Advertisement

In March, there have been 18 days of trading through March 24. GameStop (NYSE:GME) has seen GME stock rise nine times and fall nine times for an equal number of up days to down days.

GME Stock On a Mobile Phone

Source: Shutterstock / mundissima

Overall, GME stock is up over 850% year-to-date. What’s not to like?

The only problem: The volatility is off the charts. Except for the most battle-hardened speculators, it is insane, not to mention unhealthy, to put yourself through this for an extended period. GME stock’s rollercoaster defies all conventional logic, left only for mad scientists and evil villains.

The definition of insanity is the GameStop investor. Here’s why. 

GME Stock Continues Its Rollercoaster Ride

If you look at GME stock’s trading for the 18 days in the table below, you’ll see that the average up day gained 12.5%. The average down day averaged 8.2%. Not a bad trade-off.     

GameStop Trading March 1 – March 24

Date Closing Price % Return Date Closing Price % Return
Feb. 26 $101.74 N/A March 12 $264.50 1.73%
March 1 $120.40 18.34% March 15 $220.14 -16.77%
March 2 $118.18 -1.84% March 16 $208.17 -5.44%
March 3 $124.18 5.08% March 17 $209.81 0.79%
March 4 $132.35 6.58% March 18 $201.75 -3.84%
March 5 $137.74 4.07% March 19 $200.27 -0.73%
March 8 $194.50 41.21% March 22 $194.49 -2.89%
March 9 $246.90 26.94% March 23 $181.75 -6.55%
March 10 $265.00 7.33% March 24 $120.34 -33.79%
March 11 $260.00 -1.89%

The problem is that the highs — up 41.2% on March 8 – and the lows — down 33.8% on March 24 — could put you in a situation not unlike betting at a roulette table.

I’m not a doctor, but the highs and lows GME stock investors must feel from these price changes, at the very least, has got to be a major adrenaline rush. Too many of these episodes could be detrimental to one’s mental and physical health. 

What’s the Average Stock Do?

When I put together a gallery of stock recommendations — take my May 2016 article of 10 retirement stocks — over the long haul, say 3-5 years or longer, I want those recommendations to do well. 

What do I mean by well? 

To consider my recommendations to be a success, I like to see at least two-thirds of the stocks gaining ground. Further, I want to see the stocks gaining ground generating returns (dividends not included) that are double the ones losing ground. 

So, let’s assume in my retirement portfolio that six gained ground and four lost ground. If the average return of the stocks that lost ground is 8% annually, I need the gainers to generate 16% on an annualized basis. 

I’ve looked back at the stocks in the portfolio. Nine of the 10 still trade. Eight of the nine have made money, with the only loser being Equity Residential (NYSE:EQR), down 5%. With a healthy dividend, it’s got a positive total return.

One stock, EQM Midstream Partners LP, doesn’t trade anymore. It was acquired by Equitrans Midstream (NYSE:ETRN) in June 2020.EQM shareholders received 2.44 ETRN shares for each unit held. In May 2016, EQM units were trading for $77. Today, the 2.44 ETRN shares are worth approximately $19.98, which means EQM is the second loser, down about 75%.

So, on an equal-weighted basis, the eight stocks that went up had an average return of 93%, while the two down averaged 40%, for an overall average gain of 66%. I’d consider that a success.

However, over the same period, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) had a 90% return, proving Warren Buffett’s point that a low-cost S&P 500 index fund is the best investment for most retail investors. 

The Bottom Line

According to Crestmont Research data, between 1950 and 2020, the S&P 500 had up days 54% of the time and 46% of the time, it had down days. 

However, if you look at the up days to down days in each of the decades from the 1970s through the 2020s, you’ll see that the percentage of up days has risen gradually from 51.3% in the 1970s to 57.3% in the 2020s. 

Between 2015 and 2020, the up days went from 47.2% to 57.3%, with only 2015 experiencing more down days than up days.     

Why am I telling you this?

Crestmont’s data suggests that the latest 18-day run by GameStop is about average historically in terms of up and down days. 

However, given the added volatility of its stock and the above-average risk attached to GameStop’s business model, GME stock investors ought to get more up days versus the historical average as a necessary trade-off against the 34% down days that are likely to continue to plague it over the remainder of 2021.

GameStop’s risk-adjusted returns just aren’t delivering the goods. To continue to speculate on GME stock, in my opinion, is the definition of insanity.   

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2021/03/gme-stock-the-gamestop-investor-is-the-definition-of-insanity/.

©2024 InvestorPlace Media, LLC