If you’re one of the thousands, maybe tens of thousands, who made money this week from the GameStop GME, -44.29% ramp, this is for you.
First, many congratulations if you just made bank — especially if you cashed in your gains before the stock’s 44% plunge on Thursday. All free money is good, but making it by beating hedge-fund managers at their own game is especially sweet.
See: Here are the biggest short squeezes in the stock market — including GameStop and AMC
It says something that people on Wall Street, along with various regulators, are huffing and puffing about “market manipulation.” Where were they when billionaire traders were, say, buying bitcoin BTCUSD, +2.13% and then going on TV to talk up the price?
Funny, isn’t it, how it’s not market manipulation when they do it, but it is when the peasants do the same thing?
Second point: Please don’t confuse luck or a bull market with genius. You’re not the first people to make free money, and you won’t be the last. Whenever there’s a bubble, somebody makes a windfall. The question isn’t how much you make but how much you keep.
Read: How will the GameStop saga end? The ghosts of trading catastrophes offer clues
I remember during the dot-com bubble 20 years ago an inveterate gambler used to call up my then-newspaper every day looking for stock tips. At one point he was up $1 million from a standing start. I’m not kidding. Six months later he was broke.
I thought I’d never again see anything as crazy as the dot-com bubble, but when I look at bitcoin, and now GameStop, I think: Here we go.
Have fun. Gamble away. It’s a free country. But just don’t forget you’re gambling. I paid off my mortgage with the money I made in the dot-com bubble. But I was lucky. I was in the right place at the right time. And I got out in time. Several of the companies in which I owned back then ended up going bankrupt.
As the money manager Peter Bennett used to say, there’s nothing wrong with trading — just never, ever confuse it with investing. Remember to get out.
And there’s a third thing that’s especially relevant to ordinary Joes and Joannas.
Every so often I meet people who refuse to invest in the stock market. They won’t own stocks or mutual funds. They don’t have a 401(k) or an individual retirement account, and, if they do, it’s only invested in bonds.
They think the stock market is a casino, a rigged game, that exists to scam every poor sap who gets suckered in.
And it’s usually the same story. These people speculated in stocks once. They bought into a hot stock tip from a friend of a friend. Or they jumped into a mania when “everyone” was doing it, and “everyone” was making money. And then they lost a bunch of money when the bubble burst.
And after that they swore: Never again.
In the past two decades, especially in the aftermath of the dot-com crash of 2000, it was quite common to meet people who’d had this experience.
“Never again,” they’d say.
And the sad thing is that this needless reaction ended up costing them way more money than they ever lost speculating on Pets.com or believing in Lehman Brothers.
Far from avoiding further losses, they ended up losing more. That’s because they’ve missed out on the stock market’s huge, steady gains since then.
The last dot-com mania peaked in March 2000.
Since then, an S&P 500 SPX, +0.98% index fund like the SPDR S&P 500 ETF SPY, +0.86% has quadrupled your money. Yes, really: If you’d stuck your money in the S&P 500 at the absolute peak of the last total madness, and then just left it alone and forgot about it, you’d be up more than 300%.
And if you’d invested in a truly global stock-market fund over that time you’d have done even better. The Vanguard Global Equity fund VHGEX, +0.94% has sextupled your stake over that period. You’re up more than 500%. Just for leaving your money in there.
Gambling is exciting. Gambling and winning are fun. Good luck. But make sure you remember this is gambling, not investing. Don’t confuse the two. And if you end up gambling and losing, please don’t cost yourself even more money by walking away from long-term investing.
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