The Great GameStop Stock Heist
Because of a still ongoing, widely publicized kerfuffle, lost in the momentary chaos is the fact that GameStop is a business, not just a bunch of shares with lives of their own. Fact is, the company has suffered six or so years of stock price declines as sales of video games increasingly moved online so the company's current business model is “disappearing under their feet”.
The younger investors among us made a loud and strong statement with GameStop stock in the past month. I am impressed by their resolve, but can't resist the temptation to view it as a investing lesson. In this week's Q&A, I expound on the great GameStop stock heist. I also throw out my opinion on 401(k)s and IRAs per usual. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Q: Can you explain rise and fall of GameStop's stock recently? I thought that their business model was disappearing under their feet.
A: Because of a still ongoing, widely publicized kerfuffle, lost in the momentary chaos is the fact that GameStop is a business, not just a bunch of shares with lives of their own.
Fact is, the company has suffered six or so years of stock price declines as sales of video games increasingly moved online - the company's current business model is “disappearing under their feet”. This conundrum attracted the attention of the Wall Street buzzards, more commonly know as the short sellers - investors who borrow shares and immediately sell them anticipating a price decline. Whether or not a decline happens, they have a legal obligation to buy back shares (regardless of price) to replace those borrowed and hopefully pocket a positive price difference.
Fact is, GameStop became one of the most “shorted” stocks on Wall Street. Then came the 2020 rebound.
The stock rose sharply, particularly in early January 2021, after a co-founder of Chewy joined GameStop’s board hoping to transform the company by focusing more on digital sales and less on its struggling brick-and-mortar outlets. Though alarmed by the sudden price increase, short sellers remained pessimistic that GameStop's stock could retain its stock price gains. After all, they say, it’s just a place to buy a video game.
But then, a blood-letting broke out involving countless small investors, many of whom were neophyte traders making a bold… and surprisingly successful… stand against a cohort of savvy hedge-funders. Shares of GameStop spiked dramatically for fundamentally questionable reasons. Occupancy of the high ground offered increasing validation to this cohort of small investors, encouraging others via Reddit… many for the first time… to buy the stock through brokers on free-trading apps. Question is, will GameStop’s stock eventually tumble? Yes. Are GameStop investors, specifically, and investors in general, taking excessive risks? Yes. Is a broad-based stock market bubble developing? Not necessarily. The Fed downplays its rather conspicuous role (of continuing low interest rates) and points to investors' expectations for widespread COVID-19 vaccinations and still another generous stimulus package out of Washington as important drivers of record stock prices. And, by and large, marketplace fundamentals appear strong despite the pandemic.
The little guys (and some hedge fund boys) drew first blood from the short sellers, but it could be a fleeting victory. They’re backing a weak horse. Many are almost certain to lose their big paper gains. Because I believe in the old saw - pigs get fat and hogs get slaughtered – if I still had a gain in GameStop, I’d take it and run. A weak, overpriced stock will eventually reach its apex, and then drop like a rock. Signs indicate that’s already happening. I hope I’m wrong but paying off a student loan or credit card balance just might be the wise thing to do with those remaining chips.
And, despite a pending SEC investigation, encouraging “volunteers” to bid up the value of a stock to make a point doesn’t seem like criminal activity to me. Just saying.
Q: I was laid off recently and my pension plan is eligible for a lump sum withdrawal. If I don't take the lump sum, it will earn a minimum of 3.8% per year. Should I take a lump sum and pay taxes due or let it be?
A: Hmmmmm. As to taking the lump sum or not, if you do, you should seriously consider rolling it into an eligible retirement plan – to avoid immediate taxation – and investing the entire proceeds in a low-cost, highly diversified fund. Note: Since 2000, Vanguard’s Total Stock Market Index Fund has earned an average annual yield of better than 7.75%, and their Target Retirement 2050 has averaged 8% since inception. Investment options abound that seem equal to or better than the 3.8% you mentioned.
If your company allowed you to contribute after-tax dollars to the plan, then no taxes would be due on the portion of your lump sum benefits that represents a return of your initial investment. However, you can defer paying taxes on the lump sum distribution by requesting your old company’s plan administrator to directly roll the money (within 60 days) into an IRA or other eligible retirement plan. A direct transfer exempts you from having to pay the 20% federal withholding on an indirect transfer. By transferring the lump sum amount to an eligible retirement plan, you effectively defer paying taxes on it until you start making withdrawals in retirement or at age 72.
Q: I have a 401(k) and some liquid savings, but most of my wealth is equity in my home. I am about to sell my house, and will have $100K to invest. My plan is to open a Roth IRA, contribute the max and invest the $100k elsewhere. What are your recommendations?
A: Since you have a 401(k), I assume you are working and that you have “earned income” with which to make contributions to a Roth retirement account. Contributing an annual maximum to a Roth IRA makes sense, but does not quickly achieve your second objective of putting money to work ASAP.
Since you seem to be somewhat unprepared for retirement at this point, tying up funds in a new home (as opposed to renting) might be ill-advised, depending on your age. I would suggest you consider a low-cost, highly diversified index or Target Retirement Fund as a place to park your supplemental $100k during the time you draw it down to fund your Roth. Hopefully, you will have a nice Social Security check as supplemental income to the savings proceeds mentioned.