Unless you’ve been living under a rock you probably have heard about the hype and hyperbola around GameStop stock mania. Post’s on how this situation unfolded are a dime a dozen, so I’m not going to rehash that more then a bare minimum. No I really want to talk more about mania stocks, play stocks, and the large portfolio.
A Brief Intro to Meme/ Mania Stocks: GameStop
A detailed introduction of the GameStop situation can be found here. In essence the stock took off in price with an expectation to continue to do so for a few days. Going from 4 dollars a share at one point all the way to 400. The other side of the expectation was that the stock would return to 4 dollars within a short period. A few other stocks, AMC theaters and Blackberry, also were caught up in this mania.
My Investing Style, Slow and Steady
Now for those who have not been reading long, I am an index investor. I hold a large portfolio as I am financially independent although not to my retirement target financial number. I also firmly believe that trading on emotion leads to bad results, something studies support.
My Play Portfolio
However, I have also always been clear I hold a play portfolio. Essentially a small number of funds invested in individual stocks that I feel will outperform. Usually these are long term bets. This play portfolio for reference is less than half a percent of my assets. It doesn’t even show up in my asset allocation. More on that later.
That play portfolio is more of a psychological tool to keep me from playing with the large portfolio. I essentially have a segregated pot of money and that’s it. Typically it under performs the rest of my portfolio by a wide margin. Which brings us to the mania stocks.
Waking up to the Mania
I first got wind of what was going on with GameStop on Monday January 25th. At the time GameStop was priced at 65 dollars and still on an upward trend. I watched the stock through Thursday of that week before getting a bit of remorse that I did not jump in earlier. I could have increased that 65 dollar per share to 300 something. So I decided to do something about it.
No I didn’t buy GameStop. Inherently I understood it would shoot up and shoot down quickly. Without information on exact short positions I knew there would be little to no warning on momentum would change. At 3xx a share run up from 4 dollars, that was a game <pun intended> I was not prepared to play.
The Other Meme Stocks: AMC and BB
So I looked at the other mania stocks. Significantly below their first run up they had much less limited downside. AMC at the time was at 12 dollars. If I assumed worst case scenario it fell to 3-4 dollars a share, which is my assumption of intrinsic value now that the company was bailed out by this mania, the potential down side was no more then 2/3 of the investment. Perhaps the mania would continue to spike this company’s value.
Blackberry at the time was 17 dollars. Again based on my own intrinsic analysis I suspected a value between 10-12 dollars. So only a 1/3 of my investment at risk, weighed against a potential for significant upside if the mania of these meme stocks continued.
Investing .2% of My Portfolio in Mania Stocks
So I bought shares. Not much mind you. I didn’t use my whole play portfolio so I would estimate combined they represented .2% of my portfolio. Teeny Tiny.
We will pause here to diverge for a second. Why such a small investment? Frankly you should never invest in what was clearly speculation with more money then you are willing to lose. Those people that bought GameStop at 300-400 and hung on now have lost 3/4 or more of what they invested in a week. If you bought with a large portion of your account you could see your hard work from years go up in smoke in a week. No thank you. Meanwhile, had either stock gone to 0 I could sleep well at night. Again more on that later.
Refresh, Stare at Screen, Refresh
So I bought these small amounts of stock and I began to watch them on my computer. Refreshing about everything 10 minutes to see their prices… Not a healthy way to spend my day.
2 days later I began to get nervous about AMC as I saw a recession in short interest and sentiment about the stock begin to disappear in the media. So I sold it for a 7% profit. I sold a bit early frankly, I could have made 20% at the later run up. Then again that stock is now significantly down so my instincts were fairly good about bailing.
I held Blackberry meanwhile for a whole week. Eventually giving up and selling with a nominal loss of a few hundred dollars. The stock had settled in my intrinsic value range so I did not expect it would lose anymore. I guess there was still a chance it could have risen on the mania, but there was another push that led me to sell. A much stronger reason and learning from this whole affair.
Chasing Mania is Not a Healthy Way To Spend My Time
Let’s go back a paragraph or two. I noted I was refreshing these stock prices every 10 minutes. This type of hyper attention isn’t healthy. Worse still it’s not really productive…
You see if I invested less then .1% of my wealth in Blackberry then what was my best case scenario? The stock doubles and it’s .2%? A nearly impossible 10x move in Blackberry (BB) and I’d hit 1% of my portfolio.
Conversely the overall market daily moves are say 1-2% on a normal day. As I was checking BB on my trading platform of choice I couldn’t help but notice just that single portion of my portfolio balance held at this broker was moving every few hours multiples of my entire position in Blackberry. Here I was bending over backwards for a roll of the dice on a trivial amount. That’s when I realized the whole thing was just not worth it and sold the final position.
The Larger the Portfolio, the Less Value in Taking a Speculative Bet
So I guess what I’m saying. There comes a point on your journey to Financial independence when mania stocks are just not worth your time. You’d be a fool to take a large position in them. And it’s a waste of your time to take a small one. You are better off investing along with your standard risk tolerance.
Play Portfolio Lives On, But No Speculation
Now, I did not kill off my entire play portfolio. To be honest these are long term plays that I invested in some cases years ago. That also means they are not really speculative plays. But I did decide to back off wasting too much time determining where to move those funds instead. The money from Blackberry and AMC went right into a total market index fund.
Other then follow the general story to it’s conclusion as a student of the market, I have stopped watching individual stock price movements again. Back to my normal habit of logging into my accounts once a quarter to evaluate any rebalancing needs.
Did you invest in any of the mania stocks? Was it worth the effort?