By now, you’ve probably heard about the insanity that is the Reddit stock community, which has sent a previously destitute video game retailer into the stratosphere. There are others out there, but GameStop is the poster child at the moment.
What this level of unbridled speculation says about the state of the markets (and society, writ large, for that matter) is another topic of discussion. I have a few “degenerate” friends in GameStop currently. And as I write, another texted me to inform me he purchased a different, near-bankruptcy company, pocketing a quick 200%+ (paper) gain in the process.
To state the obvious: this isn’t a good sign for short-term market sentiment. Jared Dillian once noted that “the definition of a bubble is when people are making money all out of proportion to their intelligence or work ethic.” But bubbles can persist for a long time. And there are ways of staying invested and protecting yourself in times like this. Namely: having allocations to cash, bonds, and “risk-managed” strategies.
Momentum Investing and Reddit
I’ve read some out there comparing what is happening with “Reddit-linked” stocks to momentum investing. As you know, momentum is a concept we write about frequently and are big believers in.
However, it is disingenuous to equate what is happening with GameStop and the Reddit degens to sound momentum investing. For sure, there are similarities. Both rely on the concept of high prices begetting high prices. What some might call “FOMO.” And both are risky, in the broadest sense of the word.
But that’s where the similarities end. It’s like calling a raging alcoholic a wine connoisseur. Both might dabble in pinot noir’s, but one is pairing popular vintages with four-course meals, while the other is pounding Two-Buck Chuck en route to perpetually red teeth and puke stains in the sheets.
Said more politely, there is a big difference between sound momentum investing and unadulterated speculation. The difference is big enough to drive a truck through.
- Momentum has entry rules. Unadulterated speculation does not.
- Momentum has position sizing and targeted investment selection. Unadulterated speculation does not.
- Momentum has a sell discipline. Unadulterated speculation does not.
More fundamentally, momentum is a tool used to achieve a financial goal. Unadulterated speculation is just that…unadulterated speculation. Ultimately, momentum is a method to help avoid losers. And because equity investing is a long-term, right-tail game, we use it to try to cut off the left-tails.
Our call to action is this: don’t be a degen. And if you are, be smart about it. Don’t risk what you have and need for something you don’t have and don’t need.
Keep looking forward,
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