The Stock Market on Steroids
March 2, 2021
The stock market hit a speed bump recently.
A large number of small individuals inspired by social media pounced on a speculative stock in part to combine their collective force to defeat some Wall Street mega money managers.
The wealthy pros were betting against a speculative stock called GameStop. As a result of a social media frenzy, many investors that could be classified as young, novice, and speculative bet against the pros and drove the stock price upward.
It was volatility on steroids.
The opposite end of social media driven feeding frenzies on stock speculation is academia.
In the 1960s, Prof. Fama developed the Efficient Market Hypothesis, meaning that stock prices reflect all available information.
A few weeks ago, this was true for investors speculating in the stock. There was information. That information was known. And that information informed trading decisions.
For a brief time, the efficient market impacted the supply and demand for the stock and as a result the stock price went on a roller coaster ride.
The tragedy of this type of volatility is that it can harm or financially ruin an unsophisticated investor that gets caught up in the excitement and invests far more than they can afford to lose.
Normally the markets are more rational. Each day millions of market participants decide at what price they will buy a stock while others decided what price they will sell.
That is the logic of how stock prices are determined. That is what long-term investors do.
Speculating is not investing. It is gambling. You can win and you can lose. It is not a formula for repeatable success.
If you own stocks, we recommend you think like an investor and not a speculator.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.