This week has been an interesting week in the stock market. Retail investors took on hedge fund managers, reddit vs. Wall Street. Many companies reported earnings this week. Companies such as Facebook and Apple reported strong earnings but seen the share price drop. Overall, the stock market was down this week. What does all of this mean?
The big news this week was the David vs Goliath story in which members of the subreddit r/wallstreetbets took on hedge funds and forced a short squeeze. Essentially, people on r/wallstreetbets noticed that there was a lot of short interest in several stocks especially GameStop. People started buying the stocks and options which caused the price of the stocks to skyrocket. This created a short squeeze for some hedge funds. Billions of dollars were lost by hedge funds. At one point, some brokerages such as Robinhood halted and/or limited trading on stocks such as GameStop. Some viewed this as the brokerages helping out the hedge funds and hurting the retail investors. Personally, I did not participate in any of this. I think it is neat that a group of retail investors were able to take on hedge fund managers and beat them at their own game. I do not like brokerages halting or limiting trading on certain stocks. Overall, I am not sure that there are any true winners in this situation. Some people are going to make a lot of money by buying low and selling high on some of these stocks. Some people, especially those who got in after the stock prices already ran up could lose a lot of money if they do not get out before the price comes tumbling back down which it will eventually. This is some risky investing by both the retail investors and the hedge funds. In my opinion, this is more like gambling than investing. I do set a very small portion of funds aside for speculation plays but I prefer to invest in fundamentals rather than gambling. It will be interesting to see how this all plays out.
In the short term, the stock market can go up or down with little rhyme or reason. We can see companies report strong earnings yet the stock price falls. Companies that appear heading toward bankruptcy can see the stock price shoot up. I firmly believe that over longer periods of time the stock market will go up. All of this volatility in the market this past week had little effect on me. Sure, my overall portfolio value dropped when the market dropped. Did I panic? No. Instead, I stuck to my plan. On Friday I noticed that a dividend ETF that I hold, SCHD, dropped below my cost basis so I bought 17 more shares to lower my cost basis and increase my cash flow. Since I am first and foremost a dividend investor I worry more about how much cashflow I can create rather than the overall value of my account. When the price of shares of dividend stocks that are part of my plan drop I see it as a buying opportunity and a chance to increase my cash flow.
Having a plan helps me navigate through the turbulent times in market. I hope those who are in on the short squeeze have a plan. Congratulations to all who have profited this week on stocks such as GameStop but also be aware of how much risk you taking on. As far as volatility in the stock market goes, I welcome it. Volatility creates opportunities. Because I have plan in place I do not panic when the market drops. Instead, I execute my plan to take advantage of the opportunities that are presented by volatility.
*Disclaimer – I am not a financial professional. The information shared here should not be considered financial advice. I am just a factory worker sharing my experience as I strive to achieve financial freedom. Before investing or making any financial decision do your own research/due diligence and consider seeking the advice of a financial and/or tax professional.