Like lemmings going over a cliff, small investors a have been buying shares of GameStop and a few other stocks that hedge funds had bet against, causing a short-squeeze that is captivating media attention. Don’t fall for it!
The financial fight is widely depicted in the media as a battle of small investors against giant Wall Street hedge funds, and everyone loves an underdog -- but it’s not that simple. Although an army of small investors successfully united to sock Wall Street hedge funds with staggering losses estimated at $20 billion, they are alleged to have succeeded only by using illegal tactics, and, small investors are ultimately going to suffer huge losses. A group of small investors came together on an online forum and bid up GameStop’s stock price, along with other out of favor companies, to irrational valuations.
The Securities & Exchange Commission said it is investigating, and whoever gets caught could face civil, criminal, and financial penalties. Moreover, once small investors are no longer willing to speculate on the absurdly priced stocks, the game will stop and the last small investor still holding the bag could get stuck with big financial losses.
In the real world of financial news that matters to sensible investors, the 60 economists surveyed in mid-January by The Wall Street Journal were still forecasting a V-shaped recovery over the seven quarters ahead. No double dip recession is expected, despite the slower than expected growth in the latest figures.
While the GameStop story is capturing media attention, don’t fall for it.
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