By: Dividend Sensei
There is a saying on Wall Street: “If you don’t know who you are, the stock market is an expensive place to find out.”
That’s very true, as is this next statement. It’s in my own words, but it’s a classic truth reiterated by countless experts…
There are very important differences between investing and speculation.
Speculation means the odds are against you. And any profits you make are primarily a matter of luck. While you might make money from it here or there, the longer you speculate, the more likely you are to lose money, potentially 100%.
Investing, on the other hand, is when sound analysis and fundamental facts indicate high likelihood you’ll make adequate returns to compensate you for the risks involved. Over the long-term, sound investing principles almost always come through.
I bring this up, of course, because of the financial drama that’s been playing out in recent weeks. The world has been glued to the WallStreetBets short-squeeze saga surrounding such “meme stocks” as GameStop (GME), AMC Entertainment (AMC), and BlackBerry (BB).
Such drama and excitement may get headlines, but it has little place in a prudent investor’s portfolio.
If Investing Seems Exciting, You’re Doing It Wrong
For a while there (and perhaps still today), GameStop was considered the quintessential YOLO (you only live once) stock. The most famous WallStreetBet darlings invested 50%-100% of their life savings into the troubled retailer a few months ago.
Others used deep out-of-the-money long-term equity anticipation securities (LEAPS) calls, which are highly leveraged and extremely speculative options that almost always expire worthless.
Admittedly, a few of these people cashed out millions. One saw $50,000 turn into $50 million at its peak. Though that has since fallen to $7.5 million as GameStop plunged 85% and counting.
Meanwhile, AMC, BlackBerry, and other short-squeeze meme stocks have similarly collapsed.
I take no pleasure in the demise of so many of these gambler’s life savings. But this was the inevitable outcome of a short but historic bubble that saw GameStop hit an untenable market cap of $42 billion.
That’s more than Chipotle (CMG) and equal to Walgreens (WBA).
AMC, for its part, was worth 5x more than before the pandemic at its recent peak – a pandemic that still threatens to drive it into bankruptcy and its stock price to zero. S&P estimates the company has a 65%-70% chance of bankruptcy.
In “short,” the bullish behavior behind it makes no sense.
Speculative manias like GameStop and AMC sure are exciting. But sound long-term investing isn’t about excitement.
It’s about building enduring income and fortunes.