If you had bought shares in the ailing US electronics retailer a year ago for $3.94 and sold when they peaked on January 27 at $347, you would have enjoyed a staggering return of 8,820 per cent.
That would have turned a £1,000 investment into around £88,200 (we will ignore costs for the purposes of this illustration).
In reality, probably only a handful of people in the world saw that level of return on their GameStop investment. More common are those who jumped in on the way up as the share price passed $50 (£36) and then $150.
And more common still are those who read the headlines and were enticed into buying at $347, only to then watch the value of their investment plunge. At the time of writing, shares are back down to $50.
Increase in armchair trading
Is the rise of the armchair trader something to be celebrated or cause for concern? For every penny in profit made by the hedge fund haters, you can guarantee another investor is nursing a hefty loss.
The months since the Covid-19 lockdown was first implemented have brought unprecedented growth in trading. The likes of IG, eToro and Hargreaves Lansdown have all reported increased user numbers and a surge in new accounts being opened.
It was not that long ago that investing was the preserve of the very wealthy, something that your average Joe or Josephine were not privy toFor many sites, the greatest growth has come in younger traders, those aged 30 and under, who are dipping a toe into the investment game for the first time.
In the US, trading app Robinhood has been widely accredited with the rise in younger traders, with its promise of commission-free trading and access to tech superstar stocks such as Tesla and Apple.
Meanwhile, in the background you can almost hear the cry of the seasoned financial adviser: “Don’t do it! Run for the hills!” Because we all know the common Warren Buffett refrain: be fearful when others are greedy. With that adage in mind, now feels like the time to be afraid – very, very afraid.
Sensing an opportunity
Of course, we can not entirely blame GameStop for the rise of the armchair trader. Figures from Statista show that the real peak in day trading last year came at the height of the market volatility in March. As the extent of the coronavirus pandemic started to become clear and governments around the world put their populations into lockdown, traders sensed an opportunity.
During that month, an average of 2m trades a day were made through the London Stock Exchange, compared with 874,000 a day in March 2019.
The trend quickly subsided, though, and trading volumes were soon back to their usual levels. The GameStop furore may then just be the latest in a long line of brief spikes of interest in trading, amplified by the fact that many people currently have little else to do.
Yes, stuck in lockdown with the ‘beast from the east’s’ younger sibling raging outside, many people have had more time on their hands than ever before.
And thanks to the proliferation of the smartphone, they have cheap and easy access to the stock market. Trading stocks may well be the next logical step on from completing Candy Crush.
This ease of access is the democratisation of investment at work. It was not that long ago that investing was the preserve of the very wealthy, something that your average Joe or Josephine were not privy to. But these days almost anyone can trade stocks with a tap of a button, and often it costs just pennies.
Smartphones, technology and disruptive companies have made investing simple and cheap. Slick apps make it easy and even – dare I say it – fun; and that means more people do it.
This phenomenon is not unique to the investment world: we have seen it before with budget airlines bringing worldwide travel to the masses, or the proliferation of car finance allowing drivers to leave the forecourt with a top-of-the-range motor for a small monthly cost.
Start of a worrying trend
But if those factors have led to the democratisation of investing, they have also led to its gamification, and that may be a more worrying trend. When something is done quickly and easily, we put less thought into it.
And if we have been successful in our first attempt — as have many GameStop first-time investors — we get overconfident and assume our winning streak will continue.
Unfortunately, this rarely turns out to be the case. Indeed, a Brazilian study of 20,000 people found that as the success of day traders dropped, the more days that individuals continued to trade.
That means that people appeared to become worse at trading the longer they did it. The academics then homed in on those people in the group who traded for more than 300 days — 97 per cent of them lost money. A similar study in Taiwan put the proportion of successful day traders at just 1 per cent.
However, the forum bods cry that this is not just about profit-making. It is about showing those hedge funds who is boss, it is anti-Wall Street, and it is proving to Goliath that David has the power to move the market. And while those are all very noble sentiments, they have little to do with Josephine’s pension pot.
If we are to take anything from the GameStop fracas, it is not ‘how to stick it to the man’, but ‘how do we keep hold of investors’ interest this time?’
Should advisers, then, warn their clients off from dabbling in day trading? Maybe not. Dabbling small sums on the latest stock du jour is, arguably, not going to do a huge amount of damage to a client’s long-term financial plan.
And is it not better to experiment with a few quid and find out it might just be worth taking that long-term view your IFA is always talking about?
Holly Black is senior editor, Emea, at Morningstar
