Your Money: Trading in GameStop vs. investing in the market

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Are you getting dizzy trying to keep up with the unfolding news about GameStop and all the other Reddit-driven, short-sale squeezed, red-hot trades o’ the day? By the time you read this, the meteoric, late-January rise of a number of stocks that had been short-sold by various hedge funds may already have fizzled out. Or not.

Either way, I’m not worried. If there’s not one tantalizing, “BUY NOW!” opportunity in play, there’s always another one just around the bend.

What should you do to make the most of these opportunities?

Sorry to be a spoilsport, but if your goal is to build lasting wealth based on your personal financial goals, the answer is: Nothing. You should ignore these hot trading tips, because none of them are, in fact, investing. They’re just random trades.

The Wall Street Journal columnist Jason Zweig explained it like this, when describing his own experiments with RobinHood: “You can’t invest without trading, but you can trade without investing. … [T]hinking you’re investing when all you’re doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other.” 

By definition, trading is a messy, cut-throat, zero-sum game. For every trader who gets to buy low and sell high, there must be a pair of traders on the other side, who were willing to sell low and buy high.

Investing, on the other hand, smooths out the ride, and offers more reliable (if still not guaranteed) outcomes. Over time and around the globe, winning and losing traders converge, and create market growth. Their volatile trading games translate into long-term market returns. Investors can capture these returns by buying and patiently holding broad market positions, based on their willingness, ability, and need to take on investment risks in exchange for expected market returns. 

As an investor, it’s really that simple. As a trader? If anything, recent adventures in trading land should underscore how impossible it is to predict where any given stock, sector, or forecast is headed next. All the more reason to bet on the efficiency of a long-term, globally diversified portfolio, and to leave the GameStop gambles to the traders.


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