GameStop’s lesson for kids: Investing is supposed to be boring
If you have been following the news about the meteoric rise of GameStop stock shares, you may think investing is exciting - a chance for anyone and everyone to make fast money.
The story is that individual GameStop investors pushed up the value of the video game retailer’s stocks to protest the inequity of a system that rewards big Wall Street players who “short” stocks, which means they make money by gambling that the price of shares in a company will drop.
What has followed are tales of regular investors scoring big on the rising price of GameStop stocks. One mom told a story of buying $60 worth of shares in 2019 for her young son and selling it recently when the price skyrocketed, locking in a 5,000 percent return — before taxes.
Borrowers claim they’ve made so much money buying and then selling the stock that they have been able to pay off student loan debt.
These stories are not inspirational tales that should be used to ignite a passion for investing in children or young adults, or anyone else, for that matter. In gambling parlance, the GameStop windfall is something closer to beginner’s luck, akin to someone pulling the lever on a slot machine and winning big on the first try. It can happen. But it doesn’t happen for most people, most of the time.
Just witness what’s happened this week with GameStop’s stock price, which fell 31 percent on Monday closing at
$225. On Tuesday, the stock closed at $90, down 60 percent. The 52-week high was $483.
This can’t be fun for people riding the surge and now watching the stock plunge. For regular investors, investing should be boring.
Ordinary people who have become extraordinarily wealthy typically have been investing for nearly three decades, based on data about 401(k) millionaires from Fidelity Investments. They invest not based on the news or to spite greedy Wall Street investment managers. They invest regardless of whether the stock market is up or down. They patiently wait to reap a return that will allow them to cover retirement expenses or send their children to college. Or, they earn enough money for a down payment on a home, or to purchase a car with cash after several years of dollar-cost averaging, a technique that involves investing a set amount of money on a regular basis.
Concerned about the flurry of buying and selling in shares of companies such as GameStop, the North American Securities Administrators Association (NASAA) issued a warning last week to regulated firms.
“State securities regulators are closely monitoring this developing situation and will examine actions by online brokerages and others to ensure that they are in compliance with their client obligations,” Lisa Hopkins, NASAA president and West Virginia’s senior deputy securities commissioner, said in a statement.
Although not discussing GameStop specifically, Hopkins said that NASAA also wanted to caution investors about the risks associated with stock speculation.
It’s a good thing for young adults to be interested in investing earlier rather than later because, obviously, the sooner you start putting money in investments and keeping them there for the long term, the better off you’ll be, Hopkins said. But it’s also important to have an investment objective, which keeps you from overreacting or taking on too much risk.
“Seems like sometimes — and current events bear this out — that we see a gamification of investing,” Hopkins said. “Most investments are not made for instant gratification. The lessons of history show that diversification and sound investments made a little bit over time usually pays off the best.”
I’m not a fan of stock-picking games for children to teach them how to invest. But telling children or young adults they must wait years to profit from their investments is a hard sell. It’s not exciting to a generation used to exhilarating, high-intensity video games.
“I’m firmly in the camp of this is not a game,” said Christine Benz, director of personal finance and senior columnist for Morningstar.com. “To the extent that you want to teach kids about investing, having them put money on single companies is generally not the way to get started. The stock market games that go on in school don’t reflect what we know about what tends to lead to good results in the equity market, which is being diversified, being patient, being long term.”
Morningstar has reams of data on how professional fund managers perform picking individual stocks versus simply buying an index fund that tracks the whole market.
“And what we find is that it’s extraordinarily hard for these professional money managers to beat the market over time by picking individual stocks,” Benz said. “Now, individual investors do have a couple of things on their side. They don’t have any pressure from shareholders to sell stuff or to perform in the short term. They don’t have to deal with cash flows in and out of the funds. But by and large, they’re not as educated as professional investors who underperform.”
Want to teach your child about investing? Purchase shares in a low-cost S&P 500 index fund and point out the holdings in the fund, Benz said.
“They’ll see Tesla,” she said. “They’ll see Apple. They’ll see Netflix, companies that they really like and know. They’ll see that they are owners.”