When I go to the casino, it’s by invitation only, usually for a birthday or some other celebration. Otherwise, it’s not somewhere I usually go.
Do I gamble when I do go? Absolutely! But I have a set amount of money with me. I know how much I’m risking and I take steps to assess patterns and use my money in positive ways to mitigate losses. That said, I expect losses, but I’m fully aware of my limits. It comes down to one simple principle: In the long term, the house always wins.
I bring this up because by now you’ve probably heard all the talk surrounding GameStop and silver. You may be wondering what’s going on. In January, a group of like-minded people found a way to band together and take advantage of certain aspects of the market.
Normally, investors buy and invest in portfolios based on fundamentals. They look at companies doing well over a longer period of time. Some investors want to invest in the probability that these companies will do better in the long term and invest accordingly. However, there are select investors who invest in companies that are expected to do worse in the short term, which is where the term “shorting” comes from.
The vast majority of the market operates with a “buy-hold, buy-sell” approach using scenarios based on a company’s valuation and expected longevity. This is the opposite of what happened with GameStop in January. These particular investors took a very different approach.
Their approach was high risk. For some talented, knowledgeable investors, who concentrate their efforts and research on a small segment of the market, they can produce results. As you may have heard, a small number of investors put a limited amount of money into GameStop stock (between $10,000 and $50,000). If they successfully timed it right, they walked away with $3 million in profit or more.
They took the risk and got the reward. They will pay their taxes on this and move onto their next potential investment opportunity. But how long will it be until they actually find that opportunity? There’s also the question of how many times they’ve had losses before finding an opportunity that net them gains.
Some of these investors may have already lost thousands of dollars on bad bets. And then, there was the one time the bet came out in their favor. That’s really what this is: a bet. It’s like going into the casino, doubling down, and hitting 21 on your first try. You didn’t plan for this. It was an accident or very good luck.
It happened that everything came together for these investors just right and the house had to pay up and a few people made serious money. Most people didn’t not.
Is this approach to investing worthwhile for the average investor? Think of it this way: This is an area you can play in. It’s not an area you want to live in. Our clients don’t want to risk their futures on a bet that’s going to go negative in a short period of time, and then bet against it in the hopes of multiplying their money. The risk is extremely high.
Just as when you go to the casino, make sure you’re betting what you can lose, because you likely will. But if you do win, pick up your chips and walk away to play another day with the house money.
-Gary Mattson
