In my blog post dated January 30, 2021, I said that the craziness around GameStop shares would end badly.
To be precise, I said it would end in tears. Rivers of tears.
Well, was I right?
Let’s look at the tape…
GameStop shares closed at $320 on Friday, January 29, 2021, the day before I wrote my article.
And where are GameStop shares now, just two weeks later?
Over an 80% drop. Gulp.
So, do I have a crystal ball?
Am I some kind of stock predicting genius?
So, how did I know this would happen?
The truth is, I had no clue that the stock would drop that fast. In fact, my article made no prediction of how fast the stock would drop nor by how much the stock would drop.
I just merely said that the craziness around GameStop’s shares would end in tears.
And it did.
How did I know this would happen?
Due to one simple fact: The market corrects that which is incorrect.
It wasn’t hard to see that the share price for GameStop had become grossly incorrect:
- People where buying the stock based on some anonymous tips posted on a Reddit forum of all things. Geez.
- These same people were relying on complete strangers to artificially keep the stock high via some cockamamie scheme to never sell the shares. As if that would never happen.
- The stock’s real value was nowhere near the lofty prices it was trading at then. This could have easily been checked by anyone looking at the company’s financial statements.
Given this, it wasn’t a big stretch of the imagination that it would end badly.
So, am I hear to gloat? Rub it in to those who lost their shirts?
Not at all.
The entire purpose of my blog is to help people. In fact, I wrote that article on 1/30 precisely to keep people from getting hurt on GameStop stock.
So, what’s the purpose of today’s article?
To remind my dear readers of Warren Buffett’s principles of investing:
Rule #1: Never lose money.
Rule #2: Never forget Rule #1.
A lot of people misunderstand these rules to mean that you should sell out of a temporary losing position in a stock.
That’s 100% incorrect.
In fact, as a value investor, you’re typically buying at the bottom of a market, where the stocks you purchase may actually continue to go down after you buy them.
What Buffett is saying here is this….
Don’t willfully buy into something that has a high chance of losing money.
The reason is simple…
If you lose your money in an investment, you have to make a 100% return on the next investment, just to break even.
Yes, moon rides like GameStop bring out the animal spirits in nearly everyone, as they purport to be easy and fast vehicles to untold riches.
But the problem for most people who bought into the GameStop hysteria is that it resulted in a loss for them.
They’d been better off not doing anything.
At least they’d still have those investable funds.
And here’s something else, from time-to-time the market does serve up legitimate buying opportunities for high-quality stocks.
And guess what you’ll want to have a big supply of when that happens?
The insult to injury for those who speculated with GameStop is that those investable funds are gone. It may mean that they miss out on a legitimate buying opportunity in the future, simply because they don’t have the resources.
Friends, all investing is intelligent investing. Anything else is speculation. And we’ve just seen again what happens to speculators.
Just like the Dotcom speculators.
Just like the Tulip mania speculators.
Just like the every wild speculation before it…
They end in tears. Rivers of tears.
Be smart. Do your homework. Invest wisely and compound your money instead of flushing it down the toilet chasing something unrealistic.
That’s how you’ll become wealthy. And when you become wealthy, you become financially free.
Be free. Nothing else is worth it.
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