Colin’s Note: No offense to the meme stock enthusiasts, but there are smarter ways to make money.
You’re much more likely to lose money on them than you are to make any sort of substantial or lasting gains.
And with the recent meme stock resurgence, today, we’re spotlighting an essay from colleague and income investing expert Brad Thomas. He pens an open letter to those who might be tempted to take a gamble, once again, on popular meme stock GameStop.
And within the words of caution, he offers a smarter, more sustainable way to build – and more importantly, keep – your wealth…
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To Whom It May Concern,
My name is Brad Thomas, and this is an open letter to all the GameStop (GME) traders.
First, congratulations. You really showed them.
In 2021, you took a dying business, GameStop, and – through sheer grit – forced that stock up nearly 4,000%. And just when everybody counted you out, here you are again pushing GME up nearly 400% in a matter of days. I’d never seen anything like it.
I know why you did it.
Regardless of whether you realize it or not, you’re tempted by three reasons. Each one feels compelling.
First, you don’t want to “miss out.”
GME entered 2021 with shares below $5. But within weeks, they’d soared to over $80.
Other people made money with the trade. Why not you?
Sure, shares crashed from there, but then they rebounded… then fell and rebounded… and fell and rebounded again. Surely, it’ll happen again. Right?
And if the rebound does come, it’ll surely be overnight. That’s the second temptation; instant gratification.
Who doesn’t want to make a mint overnight? Think of the fortune. The fame. The fans you’d get!
And then there’s the third temptation. You want to be “part of something.”
Believe it or not, I did read your Reddit posts when this all kicked off. You want to stick it to the “hedgies.” After all, the big boys manipulate the market. Why can’t you?
But I’m imploring you right now. Walk away. It’s all fun and games until someone loses an eye. Or, in this case, a whole lot of money.
Let’s start with the company’s financials. It’s not pretty.
GameStop is a business in secular decline. The company sells physical video games and related products. As of the latest earnings, more than half of the company’s net sales were from “hardware and accessories.”
That’s going to be a tough road in a world where nearly 90% of video game sales are digital only. And it shows in the numbers.
In 2018, the company had nearly $8.6 billion in revenue. Last year, it was $5.9 billion. That’s quite a drop. At the bottom line, the company swung to negative net income in 2019. It’s been negative ever since.
That won’t end well.
I know you typically don’t think of GameStop in this context. You want to trade the stock, not own the business. But whether you know it or not, you do own the business with your trades. And there’s a lot going against it.
You have an emotional attachment to the company. I get it, really. But that’s just no way to go through your investing career.
Sometimes, businesses decline. Markets change. Consumers change. The world moves on.
It’s not right or wrong. It just is.
A good investor recognizes that. I’m asking you to recognize that now. This can go on for a while. But it can’t go on forever. I don’t want you “holding the bag” when the bottom falls out.
Because it will fall out… sooner or later.
Making money is great, but it means little if you can’t keep it.
This has been a lot of fun. Watching the stocks bounce up and down is entertaining. But there are real people behind those movements.
And most of them won’t come out ahead. I don’t want you to be one of them.
I have my reasons. In some ways, I once was where you are now.
As a younger man, I got caught up in an investing craze, and it ended badly.
Horribly, in fact.
I was a commercial real estate developer for two decades, building stand-alone retail properties and entire shopping centers alike. It was a profitable business during the hype of the housing boom, which lasted far longer than meme stocks could ever dream.
Yet it still eventually came crashing down since it was only based on those three factors I already mentioned:
When that house of cards fell, I lost almost everything. I even almost lost my house – all while I was the sole breadwinner in the family with five young children to support.
That’s not something I would wish on anyone. And I don’t want it to happen to you.
I’d much rather you follow my journey. It involves making money the slow, but sustainable, way.
If you take nothing else away, let it be this: It’s not worth it.
Investing in the current craze might feel exciting and edgy in the moment. But those emotions only last so long.
I’m not saying you can’t make money that way. Roaring Kitty (aka, Keith Smart) might have walked away with millions in profits when all was said and done. Although, it’s still unclear since he went dark after a certain point, leaving everyone else to guess.
But for every winner, there were so many more who lost. That’s just what happens with these types of things.
It happened with the dot-com crash in 2000.
It happened with the housing crash in 2008, as I experienced firsthand.
It happened with “meme” stocks in 2021.
It happened with non-fungible tokens (NFTs) in 2022.
And it will no doubt happen again in 2024… if it’s not happening already.
If you put a small amount of throwaway cash into a few of these positions, be my guest. Have fun, and I hope you come out ahead!
Just don’t bet the farm on it. Don’t bet half the farm. Don’t even bet a hundredth of your net worth.
Treat meme stocks like the gambles they are. They’re fun. But they’re not investments. Not really.
Your actual investments should be in assets that offer steady growth based on real, lasting, expanding consumer demand.
Start thinking of ways to own a great business and spend less time finding entertaining stocks to trade.
If you do that, and if you’re patient and consistent, there is every indication that you will be substantially wealthier in the years ahead. It’s not as exciting. But it works. It’s what will always work.
That’s how I recovered from my personal experience. I’ve remade my millions the slow and steady way. And I’ve never regretted that focus since. I want you to say the same one day.
Once again, you pulled something off that I never thought I’d see. And that’s not nothing.
But it’s time to call it quits. There’s a better way forward.
I hope you’ll take it.
Sincerely,
Brad Thomas
Editor, Intelligent Income Daily
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