If you had to pick one publicly traded security to define Wall Street for 2021, likely most people will select GameStop (NYSE:GME). Heck, it wouldn’t surprise me if the voting was unanimous. Once left for dead, GME stock soared from the ashes like a phoenix, taking along with it legions of fans who previously never put a dime in the market.
In some ways, the euphoria was a positive. Prior to the pandemic that set up what we now call meme stocks, financial analysts bemoaned that millennials were not investing in the market to the same degree as prior generations. The criticism was that young people were denying themselves a crucial opportunity to earn wealth for the future.
It’s safe to say that today, arguably most young people got the message. But in a wider context, the interest in the market is a double-edged sword. Yes, millennials and Generation Z’s received a crucial lesson in finance and wealth management. But a platform like GME stock is hardly what you would call a sound strategy.
Sure, we love reading about the stories of instantaneous success, figuring if random folks with seemingly no market experience can make it big, we can too. And certainly, more than a few people made extraordinary, lifechanging profits through GME stock.
But that’s not where the story ends — that can’t be where the story ends. If something’s too good to be true, it usually is. While the New York Post recently acknowledged the fairy tale endings, it also showcased how others gambled serious money, only to lose most or all of it.
If we’re being honest with ourselves, the losses are probably more emblematic of the GameStop phenomenon than the wins.
GME Stock and the Culture of Speculation
Against the backdrop of the euphoria behind GME stock, I had to wonder: are we creating a culture of speculation? And if so, will this have dire consequences down the road?
In the Post article, the writer described a pregnant hair-salon worker “who used her stimulus money to be part of the hype, only to lose nearly all of it.” Given that the retail service industry was among the hardest hit, the responsible thing to do in this case was to save most of it. Instead, the pandemonium for GME stock was so intense that it apparently caused reasonable people to lose their head.
Earlier this year, The New York Times showcased stories about how smart, educated individuals got caught up in the GME stock frenzy, only to suffer sharp losses as well. Should this narrative continue unabated, it could cause serious financial and/or economic damage.
The best example is the Roaring Twenties, the period leading up to the Great Depression. During this phase of excess, influencers of the time outright endorsed speculation. According to a History.com post:
In August 1929, Ladies Home Journal published an article titled “Everybody Ought to Be Rich.” In it, businessman John J. Raskob told Americans that if they invested $15 in the stock market every month, in 20 years they could have $80,000 (over $1 million today). Raskob insisted that “almost anyone who is employed can do that if he tries.”
Of course, History.com noted that it was bad advice. “For wealthy, white Americans like Raskob, the “Roaring ‘20s” was a time of immense economic prosperity. Yet for most Americans, it wasn’t. Low-wage jobs paid an average of $25 a week for men and $18 for women. So if low-wage workers had followed Raskob’s advice, they would have been placing most of a week’s earnings in the stock market every month.”
When I consider the narrative around GME stock, it seems we’re repeating the same mistakes.
Be Careful About What We Don’t Know
If you happen to be new to my columns, don’t interpret my take on GME stock as me hating the trade. Well before market memes were a thing, I acquired GME stock. I still have some shares after pocketing some profits so I’m playing with house money. Therefore, I’m in a position to be harshly objective about GameStop.
Which brings me to my final point. Mainstream media reports showcased the stories of people who were willing to fess up to their mistakes. I think we should be worried about the many that haven’t.
My point isn’t that we should hold everyone who screws up in the market accountable. Rather, it’s that if GME stock mania can cause otherwise smart and responsible people to lose all self-control, then how many people who lack such characteristics lost badly to GME stock or to the market speculation in general?
While it’s probably an impossible question to answer, I’d bet the figure is uncomfortably high. That’s not to say that you should fear investing in the market. However, you don’t want to assume that the meme trading phenomenon occurs inside a vacuum. As our own history demonstrates, there’s no such thing as a free lunch.
On the date of publication, Josh Enomoto held a LONG position in GME. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.