What History Is Warning about Gamestop
The buzz about the $345 share price of Gamestop is all over the media. It is the battle of the small retail investor versus Wall Street. It is also a classic story of a repeat in history warning us this bull market could be in its final days.
The 1999 Day Trader
The similarities between today and 1999 are unbelievable. In 1999, day trading became popular, and day traders were making money by betting on tech and internet companies that were hardly in business. Let us call it like it is: They were betting or gambling on an idea on paper. The activity inflated tech prices up to the point that they were in a bubble. Bubbles burst! That is what happened to S&P in 1999. The S&P 500 went on to lose 50% of its value.
Fast forward to 2021:
Day-traders raised technology stocks in 1999, and speculative investing is making a comeback in 2021. Through applications like Robinhood, technology makes it easy for anyone to buy and sell stocks for free. You have people of all ages purchasing stock in a Bull market and making money. Today, technology stocks and investors' collaboration drove up game stock prices, not because it is a good company but because it will collectively make them all rich. Keep in mind, before this madness began, Gamestop was a company preparing for bankruptcy. This speculative behavior did not end well in 1999, nor will it in 2021.
Making Money in Stocks is Easy
Towards the end of a Bull Market cycle, just about everyone becomes overconfident when it comes to picking stocks. The conclusion is that it is easy to make money in the stock market. Plus, there is the feeling that it will never end. Remember, everything cycles and good cycles do come to an end.
The Potential Collapse of Robinwood
The rumor is that the trading application Robinwood is in trouble. Their environment is ripe for a potential collapse. During the end of bull market cycles, companies surprisingly collapse. In 2008, Lehman Brothers failed overnight. Even though Robinwood is no Lehman Brothers, events such as that tend to negatively affect the stock market ushering in a cycle change.
Manias, Bubbles Never End Well
One could argue that our current stock market is in a bubble. The story of Gamestop is just a single example of mania where everyone piles in to make as much money as possible. History would tell us that these periods never end well. Take the example of Gamestop – The current value per share of Gamestop at the end of the last trading day of January was $325 a share. In 2020 it ended at $18.84 a share. It is highly unlikely that Gamestop was even worth $18 a share, much less $325 a share. Ultimately share prices of companies come back to their real value, and for Gamestop, that share price is one of a company that is more than likely heading for bankruptcy.
When your gambling, the house wins the majority of the time. When you are gambling with stocks, the house or Wall Street usually wins. Pay attention to history! It can give us a roadmap.
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