SALTMER CITY – In the stock market there is no sure bet. This is what many learned in the recent Reddit-fueled GameStop bubble that cost short-sellers (and some everyday investors) huge losses, while others earned big.
The madness introduced a bunch of new investors into the market who wanted to be included in the largely unprecedented event. While some made money from GME, many also lost money when the bubble crashed just under $ 500 a share – far from the internet’s goal of pumping the price to more than $ 1,000.
For Bill Tayler of BYU School of Accountancy, the phenomenon was not at all surprising, given his research from 13 years ago where he predicted that something like this would happen. The investigation began in response to the technological bubble in the stock market in the early 2000s.
“We wanted to better understand why this would happen in the real world,” Tayler told KSL.com. “So we took it to a lab where a lot of participants had to come in and trade shares in a single company.”
Researchers wanted to understand why trained investors would not bet on a bubble, even though they knew it would eventually crash as they saw in 2000 and 2001 with the technological bubbles.
The experiment exists in a very simplified market, where the participants indicated that the company has a fundamental value of $ 500. One trader in the market was a robot trader, who would raise prices by constantly buying stocks. The robot trader represented a sentiment trader or someone who is uninformed and buys stock because they like it, not necessarily because they did the research on why it would do well.
The topics of the study could do three things, Tayler explained: Do nothing, try to make a profit by selling the overpriced shares, or buy shares and pump the bubble that the robot created.
In the early rounds, most participants bought shares, knowing that the price would continue to rise due to the robot trader; they tried to buy low to sell high. This caused a short pressure for the participants who decided to sell the stock short and buy back at higher prices, which caused the price to skyrocket and create a bubble.
In the end, participants tried to sell all their shares before the bubble inevitably crashed.
Does this sound familiar?
“In a market that has sentiment traders who do not necessarily buy because of fundamental value, but because of another belief or purpose, and where there are short sales, you can end up with big bubbles, partly through sentiment trading and partly through short pressures,” he said. Tayler explains.
While the GameStop craze was predictable, Tayler said it does not necessarily mean it will happen again soon. Bubbles in the market, small and large, are common and occur frequently, but it was a perfect storm that led to GameStop’s rise and fall. Not only did social media make a contribution, but average merchants also increased, which increased the momentum.
One thing that is important to keep in mind is that research shows that the market will learn, Tayler said, pointing out how Redditors tried to pump other stocks, such as AMC, but it never hit the same meteoric rise as GME . And not all hedge funds involved in the GameStop frenzy lost money, Tayler said. Many jumped in before the bubble and paid out before it dropped.
“We have managed the market again and again and again, and we have shown that the market learns over time. The market participants realize that: one, short selling early was a bad idea because they are crushed by a margin call. and a short press and two, you do not want to be the last one to hold those shares, ”he explained.
The market has already learned and adapted; some hedge funds have already tracked social media sites like Reddit, and those that were not sure are now, Tayler said.
As for the amateur traders who have recently entered the market, whether because of the GameStop craze or some other reason, Tayler advises: Never put money in the stock market that you are not prepared to lose.
“Do not bring the groceries in there, and do not bring in your rent there,” he said. “If you have some extra funds that (you) can invest, that’s fine.”
Long-term investments, such as retirement investments, are a major financial step for many, and Tayler said individuals with 401 (k) employers should take full advantage of them.
For those looking for short-term investments, there are plenty of 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 in which they buy; however, short-term trading involves risks, so it is important to be aware of the market and stay smart about what investments are being made.
It’s easy to get caught up in the success stories, with a little money on GameStop and earning millions, but there are also hundreds of other stories that are not widely published, where people lost everything after being attracted to the hype. Tayler said.
“If they’re looking for the next GameStop, I’ll say do not hold your breath,” he said. ‘I do not think we are going to see a short-term bubble in a single company, driven by sentiment trading like the GameStop in the short term, because it happens again that people tend to come out earlier and earlier.
“No one wants to brag about how much money they lost on GameStop, so be careful.”