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Shares in the video game company GameStop have fallen back to Earth, but the Reddit group called WallStreetBets helped it take off like a rocket for several memorable days. So it's natural to wonder if there's an opportunity to get in on the next hot stock on social media. NPR's Chris Arnold works with our Life Kit team and has this report.
CHRIS ARNOLD, BYLINE: OK, some people in that Reddit group made money if they got out at the right time. A few became wealthy in a life-changing way. So has the power of social media changed the investing world? Can we follow the advice of the people in this group and get rich quick? Well, I mean, come on. Probably not.
BARRY RITHOLTZ: We'll see if they can create lightning in a jar a second time, but I would be skeptical if they're going to take anything from $5 to $500 anytime soon.
ARNOLD: That's Barry Ritholtz, the chairman of Ritholtz Wealth Management. He helps manage about $2 billion on behalf of clients. So we talked to him and put together four things to know about this GameStop phenomenon and how it relates to making you a smart investor in general. And the first thing to know...
RITHOLTZ: GameStop surely looks like something that was a unique combination of elements. This was very much the perfect storm.
ARNOLD: Ritholtz said the stock took off for a bunch of reasons - enthusiasm on Reddit, hedge funds got caught in something called a short squeeze and that set off a chain reaction of forced buying of the stock, rocketing the share price higher.
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UNIDENTIFIED REPORTER #1: We have some breaking news right now, and that is the story of GameStop.
UNIDENTIFIED REPORTER #2: What, just what, is going on with GameStop?
ARNOLD: But before too long, the rocket ship ran out of fuel.
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UNIDENTIFIED REPORTER #3: GameStop shares get killed, plummeting lower at lightning speed.
ARNOLD: The huge pop, the sudden crash - it was dramatic and weird. And that's also why it's unlikely to happen again any time soon. Call this tip number two.
RITHOLTZ: Markets seem to operate almost as a learning machine.
ARNOLD: You have human beings trading. Some smart hedge fund investors got burned here being in a vulnerable situation. They learn, the market learns.
RITHOLTZ: Markets are highly adaptable and tend not to see the same mistake happen frequently.
ARNOLD: OK. So if riding the next Reddit group rocket ship is probably not going to work, what's a better strategy? Tip number three, don't try to pick individual stocks. It's too difficult to pick winners. And trying to get in and out of stocks quickly day trading or buying options, which can be much riskier than just buying regular stocks, that gets even harder. As an everyday investor, you're just outgunned.
RITHOLTZ: The Super Bowl is coming up. I don't want to get on the field with those guys. They're bigger, faster, stronger, tougher than me. I would need three stretchers for them to carry my body pieces off if I played football with them. When you are buying and selling against high-frequency traders and momentum hedge funds, that's the - you're playing against Super Bowl-level people.
ARNOLD: This gets us to tip number four. You beat Wall Street by not playing that game. You buy broad-based index funds. That lets you own the entire stock market, basically, and a mix of other types of investments, too, at a very low cost. History shows that approach gives you the best returns. Ritholtz says that's the best bet for most people. He says if you just really want to buy some individual stocks, just make that a very small part of your portfolio.
RITHOLTZ: And listen, I like to buy and sell stocks occasionally. I don't mind occasionally taking a flyer on something. But I do it with money that I can afford to lose and I'm going to assume that is going to go to zero.
ARNOLD: There are riskier bets that you can make, too, some that only pay off if a stock like GameStop goes through the roof. Ritholtz says that's more like gambling than investing. He says if you want to put 100 bucks on a number on a roulette wheel, OK, but the odds are very high that you're going to lose. Chris Arnold, NPR News.
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