Page 23 - Waterfall Issue 5 2021

dOn’t fAll

fOr tHe HYPe

By Adriaan Pask, CIO at PSG Wealth
I n the current economic climate On 5 February 2021, just five days

where market returns disappoint
after logging one of its best days
expectations, investors can
easily fall for the hype around on record, GameStop concluded its
worst week in history “as a reversal
speculative investments that promise of fortune wiped out $18 billion
high yields. Most importantly, from its stock-market value,”
investors should be careful not to Bloomberg reported. The stock
get caught up in a trading frenzy plunged 80% from $483 to $63.77
in fear of missing out on the latest in a week, marking its biggest
buzzing stocks. While some people decline on record. The sharp increase
may get lucky from time to time in GameStop’s share price was
picking individual stocks, the unwarranted, resulting in a sharp
odds make it more like gambling pullback within a short period.
than an investing strategy.
lOcAl InvestMent
even tHe MOst scHeMes Are On tHe rIse
seAsOned InvestOrs Recent media headlines indicate an
GrAPPle WItH stOcK- increase in dubious and unregulated
PIcKInG investment schemes locally, too.
Just because stock prices have been Praesidium, Imagina and Mirror
climbing, it doesn’t necessarily mean Trading International (MTI) are
they will continue to do so. Perhaps don’t own. Eventually, actual shares just some of the cases that have
the most significant risk to consider must be bought to offset the short made the headlines. In a market
when betting on stocks that have position. If the price goes down, the where consumers are pressured
recently had a good run, is that the short seller buys the stock at a lower and traditional investment returns
positive sentiment and artificial price, making a profit. However, if the are lower than expected, it’s easy
hype around them overshadow the price rises, the short seller will make to succumb to the promise of the
real valuation and outlook of the a loss since they will have to buy high ‘guaranteed’ returns that
actual business. You may be paying shares back at a higher price. Thus, the these unregulated products offer.
for the popularity of the stock decision to intentionally drive share
rather than for what the business is prices higher could force significant stIcK tO YOur lOnG-
inherently worth. When the hype is losses for hedge funds, since they terM InvestMent PlAn
finally over, and the stock eventually would be forced to buy the shares at While many investments advertise
goes back to normality, investors higher prices to close out their short higher yields, we caution investors
could see share prices plummet, positions and prevent further losses. to resist the urge to jump onto the
and they may not recover in the latest trading frenzy in fear of missing
short-run (or in some cases, ever). Bloomberg data shows that by the out on potentially big returns. The
end of January 2021, GameStop’s yield may look attractive, but if
understAndInG tHe stock price had shot up to over $480 you cannot explain why it looks
GAMestOP frenZY from $6 in just a few weeks. That’s attractive, you should avoid these
Consider the case of GameStop, an a gain of approximately 5 300%. investments. Sticking to a long-
American-based video game retailer However, although the Reddit- term investment plan provides
whose shares spiked when stock army successfully forced some a buffer for your investments
market pundits on Reddit noted that hedge funds to realise large losses, in the face of various market
some hedge funds had taken large the inflated share price couldn’t conditions. A sound investment
short positions in the stock. When you be sustained since it wasn’t based plan, patience and discipline go
sell a share short, you sell a stock you on any fundamental valuation. a long way in wealth creation.

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