We're looking back at this crazy week on Wall St. with the “short squeeze” and companies like GameStop. We're asking the question: When does investing start to feel more like gambling?
Stock market volatility got you nervous?
There's no question that Wall Street has been a great place to invest your money over the long haul. However, one of the challenges can be that it can be very volatile sometimes with wild swings up or down in a matter of days or weeks. Nothing exemplifies that better than the craziness we saw on Wall Street this week with companies like GameStop. GameStop is a brick-and-mortar mall-based business. Mall traffic is down and retail in malls is a tough place to do business. But on top of that, GameStop sells video games. And today those video games can all be downloaded directly to people's consoles, PCs, and other gaming devices. There's really no reason to go to the mall and buy a game anymore. For that reason, GameStop was a favorite of short-sellers. These are people that are betting that the stock will go down.
How can this happen?
However, what happened is a small group of people within the wallstreetbets group on Reddit got together. They felt that the institution of Wall Street was out to get them. And it was time for them to take some of their revenge. So what did they do? They got together and drove the stock of GameStop higher. What that did is cause those hedge funds that were short-selling GameStop to have to cover their losses. They had to buy more GameStop stock which caused it to go even higher. This stock was at 20 bucks a share or less just a few weeks ago. It soared to nearly $500 a share. At the end of the day is GameStop really any more valuable than it was a few weeks ago? It's still a mall-based business with a dying business model. That starts to feel more like gambling than investing.
What can you do?
I think GameStop is just one example of some of the craziness on wall street of how fortunes can be made or lost in a matter of days or weeks. But what can you do? Everybody knows you have to be invested or your money will never keep up with inflation and grow. I subscribe to the theory of a diversified portfolio. I think that a diversified portfolio, if it is only invested in Wall St. (stocks, bonds, mutual funds), maybe even split across different geographies is not diversified. I prefer to diversify some of my portfolio into alternative assets, specifically, apartment buildings.
One thing I love about real assets like apartment buildings is that they are based on intrinsic value. It is land that you own. It’s buildings that cost money to create. That creates a much more stable asset than Wall Street’s paper-based assets where the whims and sentiments can drive prices higher or lower. Real assets are also illiquid, meaning it's harder to buy or sell them. You can't do it on a whim like day traders can and move with the sentiments of the day on the market.
Steady investing, not "get rich quick"
Instead, if you buy the right real estate and you manage it effectively, you can reap the benefits of the cash flow from that real estate every month. And over time, real estate has proven to be an excellent investment opportunity to grow your capital as well. I know that real estate will never drive those thousands of percent return that some people saw in GameStop last week, but I sleep a lot better at night knowing that my investments are based on real assets with an intrinsic value that I expect to grow over time. I'm going to leave the gambling for when I go to Vegas.
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