Rarely does a single company change the course of investing history for ever.
But one year ago, GameStop, then a little-known video game retail company in the US, did just that when its share price shot up by more than 700 per cent within a single week.
While its share price has now settled after crashing back down again, the GameStop share frenzy has had a lasting impact that reverberates to this day.
Reality check: Thousands of small investors bought GameStop shares – sending the price stratospheric
How GameStop sparked the ‘Meme Stock’ trend
It all started when a group of ordinary investors learned that a number of opportunistic hedge funds had made financial bets against the future of much-loved retailer GameStop. If GameStop’s shares fell, the hedge funds stood to make millions.
Using online chat forums such as Reddit, these private investors conspired to buy GameStop shares to push up their value. They realised that, if the shares rose, the hedge funds would be left nursing huge losses – a win-win for the conspirators.
It worked: GameStop shares shot up, with rising numbers of investors crowding in and convincing each other to buy more to push up the price.
A similar pattern soon followed with shares in US cinema chain AMC. This phenomenon of companies’ shares suddenly becoming popular became known as ‘meme stocks’ – a reference to the numerous images, or memes, shared on social media.
Several more have followed in the year since, although perhaps none have matched the frenzy of GameStop and AMC.
A traditional investor may wonder what any of this has to do with them. But the meme stock phenomenon sent ripples across all types of investing. And it has lessons that all investors must heed if they want to grow their wealth successfully. Here are some of the lessons we learned.
1. You can’t always trust the share price
The share price of a company is generally a good barometer of its underlying value. Investors determine what they are happy to pay for shares based on what they know about the company and their views on its future, and the combined knowledge and views of all investors is distilled into its share price at any one time. At least that is how it should work.
But when GameStop shares rocketed, nothing had changed about the underlying value of the company. Its prospects certainly didn’t become six times better overnight.
Instead, its share price growth reflected a completely different set of circumstances, including investors’ determination to win a David and Goliath-style battle against wealthy hedge funds and the fact that they had extra cash to hand thanks to stimulus cheques doled out by the US government during lockdown.
Independent investment commentator Adrian Lowcock explains: ‘GameStop is a clear example of how, in the short term, stockmarkets and individual company share prices in particular can be driven by factors other than investment fundamentals or future growth potential.
‘In this instance frustration over lockdowns and inequality, combined with some extra cash from stimulus cheques, drove interest in GameStop.’
2. Retail Investors like us really are powerful
There are two types of investor: institutional investors, which are large companies or funds that tend to hold a considerable number of shares in any one company, and retail investors who are ordinary investors like you and me.
Damien Fahy is founder of personal finance website MoneytotheMasses. He says: ‘Before meme stocks, institutional investors were known in the finance industry as ‘smart money’ and were treated as superior to retail investors, who were largely ignored.
‘But GameStop showed that ordinary investors are a force to be reckoned with and have the power to influence stock markets and share prices in a considerable way.’
Ordinary investors have also been awakened to their power to move markets and influence the companies in which they hold shares. Whether you hold one or one million shares in a company, you have the power to vote at its Annual General Meeting and ask questions of its executive team.
Richard Hunter is head of markets at investment platform Interactive Investor. He says: ‘The GameStop saga was a demonstration that retail investors have some power in the investment market. However, a less risky strategy to get your voice heard is by voting.’
3. You win some… you lose some
Had you bought £100 of GameStop shares at the best time and sold at the best price over the past year, you would now have £1,261.
Had you bought and sold £100 of shares at the worst times, you would now have £8.
The figures are even starker for AMC investors. From a £100 investment, you could have anything from £24 to £2,584 depending on when you bought and sold.
By comparison, if you had invested £100 in an index of the biggest global companies, you could have anything from £94 to £119 today. While not without its ups and downs, your investment journey would have been much calmer. The figures go to show how volatile investing in individual shares can be – especially when there is a buzz around them.
If you want to enjoy the thrill of the rollercoaster ride, be prepared for huge ups and downs. ‘I wouldn’t say don’t do it, but don’t invest money you can’t afford to lose, especially your long-term savings,’ says Fahy.
4. This new band of investors is here to stay
Hundreds of thousands of people started investing for the first time during the pandemic. Lockdowns meant they were saving more and had extra time on their hands.
Meme stocks prompted many to invest in the hope of growing their wealth quickly and getting involved in a massive phenomenon.
GameStop shares were among the ten most popular shares on investment platforms AJ Bell, Interactive Investor and Hargreaves Lansdown.
But, as the excitement waned, these investors did not go away.
Instead, they have now got a taste for investing and many are starting to diversify their portfolios into shares and investment funds more likely to grow their wealth over the long term. Interactive Investor has looked at what its customers who bought GameStop shares went on to buy.
After buying GameStop, they diversified into companies including investment trust Scottish Mortgage, AI company Nvidia and technology company Nokia.
They also bought blue-chip technology companies such as Apple and Microsoft.
Wealth platform Hargreaves Lansdown says that while some new customers started investing by buying shares in GameStop, they have since diversified into investment funds.
Those who joined in 2020 and bought a share as a first purchase had 10 per cent of their portfolio in funds within nine months.
5. Investing communities are gaining power
Investing is generally a solitary business. While some people are members of investment clubs, most invest alone or with the help of a financial adviser.
But it was the power of investment communities that led to GameStop’s share price surge.
Investors took to online forums to encourage each other to keep buying – and not to sell – to keep the share price from tanking.
Rob Smith is head of behavioural finance at Barclays Wealth. He says it is understandable that investors are drawn in by the notion of acting collectively. ‘We naturally form into tribes, and this one had a powerful underlying David and Goliath narrative, so it was particularly persuasive,’ he says.
Smith suggests that investors who enjoy investing as part of a community can find less risky ways to do it.
‘Groups of investors are seeking to improve the environmental, social or governance issues of steadier blue-chip companies, by buying shares in them and voting at AGMs,’ he says.
ShareAction is one investment community working in this space. Female Invest is another, seeking to connect and inform women who want to invest.
6. Boring? Investors love a thrill…
The investment industry continually tells us that investing is supposed to be boring. Growing your wealth slowly is key to investment success.
But the meme stock frenzy told us loud and clear that investors love a buzz, even if many do get stung as a result.
Barclays’ Smith suggests that investors who enjoy a thrill should find a way to do it without putting their wealth at risk.
‘If you do decide to buy risky investments, decide in advance how much you are willing to spend,’ he says. ‘Then, if you get swept up in the excitement of it all, you have guardrails to minimise your losses.’
7. The sudden frenzy is a trend not going away
The excitement around GameStop and AMC may have quietened down, but that is not the last of it.
‘Investors have always been lured by the latest idea that promises to make them rich quickly,’ says Fahy.
He adds: ‘Just think about the technology fund boom of the late 1990s – and the bursting of the bubble in early 2000.
‘Today, thanks to social media, these stories travel more quickly than ever.’
Fahy believes Non-Fungible Tokens or NFTs may be where these patterns play out this year. These are essentially digital receipts that prove an investor owns something digital, such as a piece of art or a song.
8. Meme stock scan be a self-fulfilling prophecy
There is a twist in the tail of the GameStop frenzy.
It is now in a much stronger financial position than last year.
Its inflated share price allowed it to issue new shares. It then used the proceeds to invest in the business.
It is perhaps telling what it decided to invest in to guarantee its future: it is creating an NFT market place.