GameStop: What to Know Before Jumping In

Summary

WSJ Your Money Briefing

Episode: GameStop: What to Know Before Jumping In

Date: February 2, 2021
Host: J.R. Whalen
Guest: Bure Lam, Personal Finance Editor at The Wall Street Journal

---

Episode Overview

This episode dives into the dramatic swings in GameStop and other "meme stocks," discussing what investors—especially everyday, inexperienced ones—should know before they jump into the current trading craze. WSJ’s personal finance editor Bure Lam explains the risks, the psychology of FOMO ("fear of missing out"), and why these trades are more gambling than investment. Listeners are guided through key concepts such as momentum trading, short squeezes, “greater fool theory,” the risks of options, and the myth of dollar cost averaging in this context.

---

Key Discussion Points & Insights

1. The Temptation and Psychology of Jumping In

• FOMO and Peer Pressure:
  • Many new or casual investors are being pulled in due to hype, potential for quick cash, and social media frenzies (especially Reddit’s WallStreetBets).
  • Quote [00:59] – Bure Lam: "Don't give in to your FOMO. If you're a person who likes to gamble...that could be where you're drawing the funds from. If the funds are for your essentials, that's probably not a good idea.”

2. Understanding the Real Risks

• These stocks are extremely volatile, with day-to-day price changes that can lead to significant gains or devastating losses.
• People are buying sometimes just to “show solidarity” (joining “one share club” or “two share club”), not as a traditional investment.
• Quote [02:56]: "GameStop is a very specific case... Its rise is not based on business fundamentals. It's rooted in technical factors and momentum."

3. Why GameStop is Not a Typical Investment

• The frenzy isn’t based on the company’s fundamentals, but rather a collective effort to spark a short squeeze and ride the momentum.
• Bure cautions: buying now is “really not going to produce returns for you. It's a gamble and you should be prepared to lose that investment."
• Prices can swing wildly, up or down; entering at the top can lead to large losses.

4. Momentum and Market Forces

• The WallStreetBets Reddit community coordinated around the heavily shorted status of GameStop, aiming for a short squeeze.
• “Momentum is a double-edged sword,” which can magnify both gains and losses.
• Quote [05:21]: "Momentum is a double edged sword. It can really make stocks go up or really amplify losses."

5. The “Everyone Sells at $1,000” Myth

• There’s a misunderstanding that everyone can sell at a set price—Bure explains why this logic is flawed.
• As sell orders pile in, prices fall; buyers dry up as sentiment shifts.
• Quote [06:25]: "If everyone sells at a thousand, not everyone will be able to sell at a thousand. ... It's a bad assumption to assume that when the stock hits 1000, there will still be tons of people who want to buy GameStop stock."

6. Platform Risks

• Trading platforms may restrict trading under extreme volatility (as Robinhood did), meaning investors may not be able to sell when intended.

7. Greater Fool Theory

• The hope that someone “a greater fool” will be willing to pay even more for the share can lure investors in at unsustainable levels.
• Quote [08:15]: "The greater fool theory is there's somebody out there who's a greater fool than me and sort of like late to the party, so to speak."

8. Options vs. Stock Risks

• Options allow cheap bets on stock but carry risk of total loss (they can go to zero value).
• With shares, there's at least some bottom based on company intrinsic value (e.g., GameStop’s pre-frenzy price).
• Quote [08:54]: "Options are cheaper because they're unlikely to pay off. ... The risk with options is that you could lose everything."

9. Dollar Cost Averaging: Does It Work Here?

• Normally a sound investing strategy, dollar cost averaging provides little protection with highly volatile, already inflated stocks.
• Quote [10:06]: "I don't think [dollar cost averaging] really matters when it comes to GameStop stock...the shares are already really high. Dollar cost averaging isn't really going to help you when the stock is so volatile and the price is already so high."

10. Is It Too Late to Get In?

• Gains for new buyers are likely to be much less dramatic than those for early risk-takers.
• It’s impossible to predict what happens next—platforms may restrict trades, and the frenzy can evaporate quickly.
• Quote [10:50]: "I can't also say if it's too late to get in. But if you're someone who was looking for, you know, three digit gains, you may not see that. ... The bottom line is don't give in to your FOMO."

11. Final Words of Caution

• Only use money you can absolutely afford to lose; treat it as “fun money” or a gambling budget, not essential funds.
• If you have trouble sticking to limits, extra caution is needed.
• Quote [11:37]: “If you have a funny money account...maybe that's where you want to use that money...But if you can't stick to your gambling budget...you should use a lot more caution.”

---

Notable Quotes & Memorable Moments

• [00:59] Bure Lam: "Don't give in to your fomo. ... If the funds are for your essentials, that's probably not a good idea."
• [02:56] Bure Lam: "GameStop is a very specific case... Its rise is not based on business fundamentals. It's rooted in technical factors and momentum."
• [05:21] Bure Lam: "Momentum is a double edged sword. It can really make stocks go up or really amplify losses."
• [06:25] Bure Lam: "If everyone sells at a thousand, not everyone will be able to sell at a thousand."
• [08:15] Bure Lam: "The greater fool theory is there's somebody out there who's a greater fool than me."
• [08:54] Bure Lam: "Options are cheaper because they're unlikely to pay off. ... The risk with options is that you could lose everything."
• [10:06] Bure Lam: "Dollar cost averaging isn't really going to help you when the stock is so volatile and the price is already so high."
• [10:50] Bure Lam: "But if you're getting in now, your gains might be much more modest than those who got in at $18 at the beginning of the year."
• [11:37] Bure Lam: "If you have a funny money account...maybe that's where you want to use that money...But if you can't stick to your gambling budget...you should use a lot more caution."

---

Timestamps for Important Segments

• 00:36 – 01:17: Introduction and why FOMO is a bad reason to buy
• 02:08 – 05:01: Why volatility is dangerous for new investors
• 05:16 – 06:15: What actually drives GameStop’s price and momentum
• 06:15 – 08:08: The fallacy of a mass sell-off “at $1,000”
• 08:08 – 08:41: “Greater Fool Theory” explained
• 08:41 – 09:56: Options risks vs. stock risks
• 09:56 – 10:45: Dollar cost averaging: why it doesn’t help here
• 10:45 – 12:34: Is it too late to get in? Final advice and major cautions

---

Summary Takeaways

• Investing in GameStop now is much closer to gambling than traditional investing.
• Only risk money you can afford to fully lose, and be wary of hype-driven buying.
• Momentum can swing violently; you may not be able to sell when you want.
• Platforms may restrict trades at any time, compounding risk.
• Common strategies like dollar cost averaging or “everyone sell at $1000” don’t work in this unique situation.
• The best course for most is “don’t give in to your FOMO”—educate yourself before making quick moves on meme stocks.

---

For more information and careful investing advice, stay tuned to WSJ Your Money Briefing.

Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your money briefing for Tuesday, February 2nd. I'm J.R. whalen for the Wall Street Journal. Gamestop shares took a wild swing lower Yesterday, down about 30%. That might make it tempting for casual investors who've been watching the current trading frenzy to jump in with the hopes of scoring some quick cash. But before you tap buy, there are some good reasons to think twice and set down your phone.

[Bure Lam]

I think the bottom line is don't give in to your fomo. Some fear of missing out. And if you're a person who likes to gamble and you do gamble and you have a gambling budget, that could be where you're drawing the funds from. If the funds are for your essentials, that's probably not a good idea.

[J.R. Whalen]

Our personal finance editor, Bure Lam and her team have been studying the current trading craze and the potential impact on your money. She'll join us with some important information about the market you'll need to know before you consider buying and discuss the market forces that could prevent you from selling when you want to. That's after the break.

[Charles Schwab Podcast Host]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and and how they may affect your finances and portfolio. [e-mail] WashingtonWyse.

[J.R. Whalen]

Depending on the day, shares of GameStop, AMC and other stocks that have been part of the latest trading craze are just as likely to zoom higher as they are to fall. That could wreak havoc for investors putting their personal finances on the line and in hopes of making some quick cash. Bure Lam heads up the personal finance team at the Wall Street Journal. She's got some things that new investors need to know and watch out for before pulling the trigger and joining the frenzy, and she joins me now. Baret, thanks for being with us.

[Bure Lam]

Thanks, Jer.

[J.R. Whalen]

You know, the other day we spoke with personal finance reporter Julia Carpenter from your team about the pressure people might feel from online forums to get in and try to score some quick cash. But what kind of self imposed discipline does this involve on the part of traders to protect their finances even if they want to buy just one share?

[Bure Lam]

So yeah, this is a question we've been getting from a lot of people who may be feeling some fomo, some fear of missing out when they're sitting on the sidelines with their stimulus money and watching these extraordinary gains in these hot stocks. GameStop, AMC BlackBerry. But as you can see, the day to day changes can be really dramatic in either direction. You know, these stocks can go way up or way down. And so that's what I think that people who are sort of fighting the urge to jump in should really think a little more about. Is that right now jumping into GameStop because of peer pressure or because you're seeing this fun party online that you want to be part of, this is really not going to produce returns for you. It's a gamble and you should be prepared to lose that investment. And I'm seeing that, you know, there's, there's people who want to buy in solidarity of these Reddit traders. They call themselves the one share club or the two share club. They're just buying not to move the market, but just to show solidarity with these traders. And so if you're doing that and not treating as an investment, then that's your call in terms of if you want to make that bet, knowing that you can lose that one share or two shares value entirely. So for example, GameStop ended Monday's trading session at 225 a share. So if you're going to be part of this one share club putting 225 into GameStop, then you should be prepared to lose that 225. And so if you're okay with that, then that's something that's where you have to start from if you're considering being part of the one share club or two share club. GameStop is a very specific case right now and that's part of the reason so many people want in. But its rise is not based on business fundamentals. It's rooted in technical factors and momentum. And that's what makes this buy so different from anything else you can buy on the market right now.

[J.R. Whalen]

But doesn't it also require some homework about the market itself? You know, the market is a game of ups and downs and people need to know that this can't go on forever. The prices of Gamestop and others as we've seen even if they were to go up, they're eventually going to go down.

[Bure Lam]

That's where I think it's worth reading a little bit about what the genesis of this bet is.

[Electronic Payments Coalition Spokesperson]

Right.

[Bure Lam]

So to Hear it from WallStreetBets, the popular Reddit forum, they made the investment together because GameStop was heavily shorted and they wanted to do a short squeeze. So what comes next now that momentum has kicked in? Right. So momentum is a double edged sword. It can really make stocks go up or really amplify losses. So that's where I think you really need to do a little reading about momentum, is momentum pushing these stocks up. And also a lot of people on these forums are saying we'll all sell at a thousand together. Like that's one of the rallying cries on, on these Reddit message boards. And that's a hard thing to do because if everyone's selling, who is going to buy those shares? So I think investors need to think really carefully about that kind of plan, if that's what they're thinking.

[J.R. Whalen]

Yeah, you bring up a really good fundamental point. It may sound like a silly question, but if everybody were to wait and sell Gamestop at say $1,000 a share, wouldn't everybody win?

[Bure Lam]

So there's a couple problems with this strategy, if you can call it that, that will all sell when it gets to 1,000. First of all, we're really far off from that. Even with the January 1600% G GameStop like we, we were, you know, just over 300. So you know, to get to a thousand, it's, it's kind of out there. But the other thing to remember about this, this so called strategy of everyone selling at 1000 is that stock prices change as people sell their shares. And so if everyone sells at a thousand, not everyone will be able to sell at a thousand. And so I think that's, you know, a hard thing to think about perhaps. But the other side of this is that someone has to buy if you want. And so when sentiment changes, there will be less people who want to buy. So, so it's a bad assumption to assume that when the stock hits 1000, there will still be tons of people who will want to buy GameStop stock. If you assume that, then you could, you could think about this everybody winning situation, but that is just not true, that there'll be an equal number of sellers versus buyers in that kind of situation. And another thing to think about is the technical part of this, right? Robinhood last week, when, when a lot of volatility was going on. They had restricted trading of specifically these hot stocks. So, you know, for a day there they were saying, you can only close your position, you can't buy more. And so if the trading platforms also make a move, if GameStop ever hits a thousand, then, then there are just lots of problems to think about.

[J.R. Whalen]

You know, we sometimes hear about a thing in the world of stock trading called the greatest fool theory. What is that and does it apply here?

[Bure Lam]

The greater fool theory is there's somebody out there who's a greater fool than me and sort of like late to the party, so to speak. So If I have GameStop stock and I know it's going down, I will be able to offload it to the greater fool. And so that's the same as what I just went through in terms of assuming there will always be a buyer you want to sell. It's very, very optimistic, to say the least.

[J.R. Whalen]

Now, I want to ask you about a couple of things that some people online are discussing as possible ways of investing in GameStop. A lot of the talk is about buying GameStop stock, but what about GameStop options? Is there risk there?

[Bure Lam]

So options is a cheap way to bet on a company. It gives you the right to buy shares at some price that's much higher than the current price at some point in the future. And so options are cheaper because they're unlikely to pay off. But that's also the way a lot of people have been betting on GameStop. The risk with options is that you could lose everything. Unlike buying a stock, an options contract can just be completely worthless. Whereas if you think about GameStop at the beginning of this year, they started at $18, $19 a share. So if you buy a share versus an option, you could at least get 18, $19 back. Let's say, like that's what we' as a baseline of what the share is worth. Without all these factors, the factors of the Reddit traders and the short squeeze and the momentum drivers so you can get $19 back. And so that's the difference between buying a share and buying an option for a regular investor.

[J.R. Whalen]

Now, there's also an investment strategy called dollar cost averaging that some investors are talking about in relation to GameStop. Can you explain what that is and whether it would help here?

[Bure Lam]

I have heard dollar cost averaging thrown around as a way to invest in GameStop safely, so to speak. But dollar cost averaging is to even out your price of buying the stock by investing over time. The reason I don't think that that really matters when it comes to the GameStop stock at this moment is that, you know, as of closed Monday, we're still at like $2225 a share. So the shares are already really high. So I think dollar cost averaging isn't really going to help you when the stock is so volatile and the price is already so high.

[J.R. Whalen]

Okay, Bure bottom line, a lot of people want to know, is it too late to get in on this?

[Bure Lam]

No one knows how this will end. In terms of the brokerage platforms and your ability to get in. We know that Robinhood is still only allowing limited buys of these hot stocks. Whereas on e trade we Bull Interactive Brokers, Schwab and td, you can still, you know, unrestricted by these stocks at Schwab and td, as long as you meet the margin requirements, you're able to trade the stock. I can't say how this will end. So I also, because of that, I can't also say if it's too late to get in. But if you're someone who was looking for, you know, three digit G gains, you may not see that. So if you bought at $20, then maybe you've seen these massive gains that you've been seeing as the headline for many media reports and TV reports. But if you're getting in now, your gains might be much more modest than those who got in, say at $18 at the beginning of the year. I think the bottom line is don't give into your fomo. And if you're a person who likes to gamble and you do gamble and you have a gambling budget, that could be where you're drawing the funds. Funds are for your essentials. That's probably not a good idea. Whereas if you have a funny money account, so to speak, for going to Vegas, then sure, like maybe, maybe that's where you want to use that money, that part of your budget. But it's also based on your personality too. You know, if you're the type of person who can't stick to your gambling budget and, you know, has a tendency to keep going with a certain kind of bet, then I think that's the kind of person where you should use a lot more caution and do a lot more reading about this topic before jumping in.

[J.R. Whalen]

All right, that's Wall Street Journal personal finance editor Beray Lam Bure, thanks for coming on the show.

[Bure Lam]

Thanks, J.R. always a pleasure.

[J.R. Whalen]

And that's yous Money Briefing. I'm J.R. whalen for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees that I don't really need it.

[Retail Industry Representative]

Infliction is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.