Robinhood, GameStop, & Other “Get Rich Quick” Schemes

Robinhood, Gamestop, & "Get Rich Schemes"

Who wouldn’t want to invest $1 today and have it turn into $2 overnight? Even better, invest $1 today and have it turn into $3 before the end of the day? Even better still, who wouldn’t want to invest $1 today and have it turn into roughly $18 in two weeks? 

That’s what would’ve happened if you invested perfectly in GameStop (GME) during this wild past few weeks. The stock was up over 1,700% during that span. 

The reality is, to get that kind of return, you often must take on big risks. You also have to be right. Not once, but twice. 

I want to go over a couple of scenarios using the information below. 

You are married with a couple of kids. You make good money, but your lifestyle has eaten pretty much anything that’s not going directly into your 401(k). You’ve got some debt, but nothing too bad. You have a little bit of savings, but not as much as you think you need. You’re not risk-averse, but not a huge risk-taker. 

With that being said, let’s assume you can invest $10,000 from your account while leaving your family a couple thousand just in case. 

With that in mind, let’s jump into the scenarios. 

Perfect Timing

Let’s say you got a crystal ball for Christmas from your crazy Uncle. He swears it works, but will only tell you the perfect time to buy and sell on one stock and for some reason, you believe him.

Crystal Ball

You get your first signal to buy GME on the first trading day of the year, January 4th. You invest $10,000 with the stock trading at $17.25/share. 

The stock doubles in the next two weeks and you’re ecstatic. You’re getting ready to sell and take your gains until you remember your crystal ball. All you get is “hold the line.” Seems strange to you, but you listen. 

Over the next week, you start to hear about this Reddit group making some noise and the stock is shooting through the roof. You can hardly contain your excitement. You begin to think about how high this can go. 

Your kids come in and hit you over the head with your crystal ball as you wake up late on the 28th. You start to get mad, but then think about how well you’ve done the past couple of weeks and let it slide. 

You decide to consult your crystal ball reluctantly after considering not asking. You’re surprised when you’re told to sell at 9:54 this morning. Again you think “this is crazy, this thing is going nowhere but up.” Reluctantly you sell at exactly the time you were told. By the time your trade cleared, the stock had begun to freefall.   

You learn that Robinhood has halted trading and will only let people sell. You watch as the stock tumbles to a low of being down over 71% at one point. You feel sick to your stomach, but breathe a sigh of relief. 

Over the next few days, you watch as the stock fluctuates while the theories fly as to why this happened. You realize you won the lottery and are thankful. You turned $10,000 into $271,000!  

This massive victory left a sweet taste in your mouth. One that you want to taste again. Only now, your crystal ball won’t be able to help. 

“I can do this!” you think to yourself. 

Alternate Scenario

Now let’s look at the other side, something a little closer to reality for most. Let’s assume you didn’t have a crystal ball to tell you when to buy and sell at the perfect time. We’ll use the same $10,000 you invested in GME, but with a more realistic scenario for the average investor. 

Going into the new year, you haven’t thought about GameStop. Honestly, they haven’t been a thought since you had your first child and gave your Xbox away. 

On January 27th, you heard something on the radio on the way to the office about this Reddit group shaking up the market buying GameStop stock. You don’t think much about it other than, “that’s awesome, stick it to the man!” You then heard people talking about it at work and every time you look at your social media account it’s coming (or going) up. Now you’re more intrigued, but still don’t know much about it. As we’ve mentioned, you don’t have a lot of cash and know that you aren’t the biggest risk-taker. 

At lunch, your best friend tells you they bought some and that you should too. “It’s a no-brainer,” they say. “Everyone is getting in on this. We’re going to stick it to Wall St. and get rich at the same time!” He mentions something about hedge funds and short selling. It’s clear he doesn’t know what he’s talking about, but his excitement is real and he seems so confident. He’s also a smart guy (you forget that he’s also a big poker player and loves to gamble). 

Shortly after lunch, you create a Robinhood account but don’t do anything with it. You have a quick conversation with your wife and try to explain it to her. She’s not interested and you can hear your youngest crying in the background so you say you’ll talk about it later.

Panic Buy

As you try to work, you can’t stop thinking about it and can’t get away from it. Towards the end of the day, you hear someone mention the market closes at 4 PM EST, and you panic. You’re not one to make hasty decisions, but this is all anyone is talking about so you rush to fund your account and then buy $10,000 worth of GME. 

“That was fun”, you think to yourself. “What an adrenaline rush!” You quickly post something clever on social media like “they GameStop us, GME to the moon!” You don’t mind the traffic on your way home and your wife and kids can’t figure out what got into you. 

You feel like you’re part of something, you feel like you just made a decision that will change the trajectory of your family’s future. 

During dinner, your oldest asks why you’re so happy. You say “because we’re going to be rich!” This draws a confused and concerned look from your wife. You say, “remember that stock I was telling you about today on the phone? I bought $10,000 worth right before the market closed today.” 

The look of confusion and concern quickly turns to anger and disapproval. “We said we would talk about this later! How could you spend that much money without us talking about it?” You do your best to reassure her and try to explain the situation, but don’t have the rationale to back up such a big decision. You relay what your friend told you and how much they invested. This doesn’t help much, but you change the subject and get through dinner. 

As the conversation ends, you feel a little regret in your gut, but shake it off as you jump on social media and read all the articles about GME and all the posts about sticking it to the billionaires. As you read, you feel a sense of community, you feel like you are a part of something bigger than yourself. This leads to a blissful night of sleep and you’re up before your alarm clock can go off. 

Before yesterday, you would’ve had no clue when the market opened, but as you got ready for the day, you began counting down until 9:30 to see what was going to happen. 

GME opened almost $80/share lower than it closed (when you bought it) yesterday and you feel sick. That doesn’t last long though as the chart began to head straight up again. “Here we go!” you think to yourself. The $10,000 you invested is up to around $13,500 just before 10 am. “Is this really happening?” You think to yourself. 

What Just Happened?

You try to get some work done, but you can’t stop thinking about it. All of a sudden your phone starts going crazy. You’ve got texts and notifications everywhere. And then you see it, Robinhood restricts trading in GameStop…” the headline reads. 

“What does this mean? This can’t be happening!” You think to yourself. You call your buddy and he doesn’t know what’s going on either. 

You begin to feel sick to your stomach as you check and see the chart has the same straight line, but this time, straight down. By 11 am, the $10,000 you invested was now worth $4,400.

The more you read, the angrier you get. “The system is out to get us.” You’ve got politicians on both sides actually agreeing about something and calling out Robinhood. This makes you feel vindicated in your anger, but what about your money?

By the end of the day, you can’t think straight. You didn’t get anything accomplished at work and your $10,000 is now worth $5,700. Now, along with several times throughout the day, you wonder if you should just sell. “How much worse can it get?” you wonder. 

But then you see that Robinhood’s CEO tweeted that they would allow limited trading tomorrow and this gives you hope. You’re seeing more and more people on social media hyping it back up. #GME #TOTHEMOON is everywhere. Elon Musk is even tweeting about it. 

GME To The Moon

On your drive home, you’re just hoping your wife doesn’t ask you about it though. Of course, it comes up as soon as you walk in the door (she has social media accounts too). You tell her everything is okay, they’re going to open trading back up tomorrow and it’s going to blow up again. 

She asks you what’s the plan and you say to make a lot of money. As you walk away you realize, that’s a pretty good question and you hadn’t thought about it before. All you knew is that you were going to make a lot of money.  

The Concession

The next day is a roller coaster for you. GME jumps as the market opens and you’re back to break even. You briefly consider selling and walking away unscathed, but before you can do anything it drops big time again. It continued to yoyo throughout the day, finally closing just below where you bought it. 

Your conversations with your wife over the weekend go from tense, to hopeful, to doubt, and all over the place. You actually take some time to think about a plan. The two of you decide if/when it gets back to $400/share, you’re going to sell. 

You’re not happy about it because you think it’s going way higher after reading about the Hedge Fund Melvin losing more than 50% in January and the hype is still there. You concede though because while the last few days have been an adrenaline rush, it’s also been very stressful.  

Houston We Have a Problem!

As you drive to work Monday morning you begin hoping the market opens up so you can sell your shares and stop worrying about it. But that’s not what happened. In fact, it’s going the opposite direction. This wasn’t part of the plan. You didn’t have a plan for it going down. 

“It’s okay,” you tell yourself. This has happened before, it will come back up. You again have trouble getting much work done as you’re constantly checking your phone to see what’s happening. GME ends up closing down 34% from where you initially bought it. 

At dinner the discussion centers around just getting back to break-even and then selling. That becomes your new plan. You give some thought to what to do if it goes lower, but that’s not easy to think about and you don’t see it happening anyways based on what you’re reading. 

Unfortunately, what you didn’t think would happen, happens. The stock opens with you being down roughly 60% from where you started. You can hardly believe it when you look and see you only have $4,000 in your account. 

You can’t bring yourself to sell though because you had $10,000 less than a week ago and now you only have $4,000. Your wife calls and you reluctantly answer it. She keeps asking, “What does this mean? Do we have any more left?” 

You tell her, “yes, but only $4,000.” She starts crying. “What are we going to do? Did you sell it?” You tell her that you didn’t and feel like it has to come back up. She doesn’t know what to think, but says “Okay, I trust you.” This is like a dagger because you don’t know what to do. You wish this was all a dream. 

As the day comes closer to an end, it doesn’t look like GME is ever going to stop falling. Around 3:30 you call your wife and say “I think we need to just take our losses, it’s not looking good nor like it’s going to get any better.” She asks what that means and you tell her that if you sell now, you will have around $2,800. 

She immediately starts crying and you do too. You feel terrible. You didn’t want this to happen. You didn’t even think this was possible. This seemed like a no brainer. Everyone was talking about it, GME was going through the roof. You never would’ve done this if you knew this would happen. 

You reluctantly make the trade at 3:42 PM on Feb 2nd and finish with just $2,748.12 in your account. 

So What Happened?

Several psychological and behavioral things were happening in this scenario that was admittedly a little exaggerated, but probable that something similar happened to some.

The trader above ended up losing a majority of his family savings, but it actually could’ve been a lot worse. Some people invested significantly more money than our trader above and that only amplifies the behavioral experiences we’ll talk about below. 

“Mr. Jansen, 29, said he had spent the equivalent of a year’s salary on GameStop shares and had watched his money quadruple. He assumed he had lost most of that when the stock price dropped Thursday, but he does not plan to sell.”

FOMO:  We all know what this is, but how does this apply to the situation above? Our investor above admittedly hadn’t thought about GameStock in years, much less the idea of investing in it. 

The hysteria of the runup and sticking it to the hedge fund guys was all almost anyone was talking about the middle to end of last week. This was something that has never happened in my adult life. 

I overheard people talking about it when I was out to eat, at the golf course, and it was all over social media. I even had people talking about it in some group texts I’m in. 

When something like this starts picking up steam, the urge to get in is real. You don’t want to miss out on this seemingly once in a lifetime opportunity so you make a decision based on the fear that you might be missing out on something instead of the merits of the purchase. 

Endowment Effect: This essentially just means that we value things that we own more than they’re actually worth. If you’ve ever tried to sell something you really loved, you’ve experienced this. 

Once our trader purchased the stock and bought into all the hype, the value in his mind was always greater than the $345/share he purchased it at. This is one of the reasons it was so hard for him to sell when he got back to break even after being down so big. 

Sunk Cost Fallacy: This happens when we get invested in something and we know we’re likely to take a loss, but continue down the same path to try and negate it. 

I used to do this when I was younger if I went to a nice restaurant. You know, one of those where all the sides are a la carte and the cheapest steak is like $60? Well when you’re 25 and you don’t have any money, you eat until you make yourself almost sick to make sure you get your money’s worth.

In doing this, I would make myself so uncomfortable I ended up not enjoying the meal or the rest of the night. The same thing applied to our trader above. He couldn’t cut his losses when he had the chance to get out earlier. He continued to stay in even though the wise thing to do would’ve been to get out. 

Loss Aversion: This merely means that we feel losses more than we feel gains. For example, if you found $20 in your pocket you would be pretty happy. But if you went to look in your wallet for $20 you knew was in there and it was gone, that would be more impactful on you. 

This didn’t show up much here since our trader didn’t really have much of a gain ever. This is something to be aware of if you intend on trading in a similar manner. It can be very hard to get out of a trade because of the pain you feel with a loss and hope it will recover.   

“Get Rich Slow”

“Get rich quick” schemes fit our 2021 need for instant gratification. That’s why they’re so attractive. Whether it’s GameStop, Bitcoin, or the next can’t miss thing, we have a tendency to be attracted to them.  

One of, if not the most brilliant mind in investing believes in the opposite. The “get rich slow” plan. Jeff Bezos (Amazon) once complimented Warren Buffett on how simple his style of investing was. He then asked him why more people didn’t just copy him. Buffett’s response was “because nobody wants to get rich slowly.” 

I’m not here to tell you what to do with your money. What I do want to encourage you to do is have a plan. If you want to be a day trader, that’s fine. I personally don’t think it’s a strategy with a high likelihood of success, but it’s possible. Even still, you need to have a plan.  

There are a lot of good financial planners out there. Here’s a great resource to find a CFP® professional in your area.  

If you would like to talk with someone on our team, click here to schedule a free consultation. 

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