Money Rehab with Nicole Lapin - GameStop is Soaring— Here's Why, and Investing Advice from a Redditor Who Made Millions on GME

Episode Date: May 14, 2024

GameStop jumped 70% in one day... what is this, 2021? Nicole explains why the stock is having a moment (again), and explains a central plot point of this story: trading halts. Plus, you'll hear advice from a Redditor who made millions on GameStop in 2021... and his advice is not what you think!

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every occasion, and every celebration. Be sure to check them out at justinwine.com and receive 20% off your order for a limited time. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. If you thought 2021 was the grand finale of GameStop shenanigans, and I kind of hoped it would because GameStop stock is such a tongue twister. But guess who's back? I'm recording this Monday, May 13th, 2024, and as of market close today, GameStop was up 74% for the day. The surge had nothing to do with GameStop's

financials because those are not looking so good. Nope, this surge was all because one guy, known as Roaring Kitty, posted on X. If you've been listening to Money Rehab since the very beginning in 2021, you'll remember Keith Gill, better known as his online screen name, Roaring Kitty. Keith is known as the leader of the 2021 meme stock rally specifically for GameStop. Keith invested $53,000 in GameStop in 2019, and at the peak GameStop craze, his $53,000 grew to an estimated $48 million. So what did Keith post that sent GME soaring? A thoughtful prediction about the value of the company?

Nope. He posted a photo of a guy sitting back in his chair and then sitting forward in an engaged, attentive-type way with a video game controller in his hand. The photo leaves the impression that Roaring Kitty is ready to get back in the game. GameStop jumped nearly $4 billion in market cap since Friday, all because Roaring Kitty posted a doodle with no caption. We all remember how GameStop threw the financial world for a loop because before Roaring Kitty, a lot of hedge fund bros on Wall Street had decided to short GameStop, meaning they were betting the value of the stock would go down. But the Reddit thread

WallStreetBets, championed by Roaring Kitty, drove the value of GameStop up, which caused the hedge fund bros to lose a lot of money. Today, I'm going to be talking about, yes, whether or not there are any opportunities for you with this whole GameStop surge. But most importantly, I'm going to unpack the messy business of halting trading, which has become a major plot point of the GameStop story. One of the most controversial pain points coming point of the GameStop story. One of the most controversial pain points coming out of the GameStop frenzy was the fact that brokerage platforms halted trading on the stock due to volatility. And that's exactly what it sounds like. All activity

on the stock froze. No one could buy it. No one could sell it. The GameStop bulls felt like the success of their meme stocks represented them beating the finance bros at their own game. But the finance bros weren't playing fair. Even though several brokerages halted trading, the app Robinhood received the most criticism because that app had become a popular platform for newbies, especially newbie traders. So there were a lot of Redditors using Robinhood to trade. Another group that received a lot of hate online was Citadel Securities, a major hedge fund that stood to lose a lot of money in short positions on GameStop. There were allegations that Citadel pressured Robinhood and other brokerages to limit trading in order to soften Citadel's losses. However, later that year, Citadel was taken to

court for those allegations, and a judge found that there was no collusion between Robinhood and Citadel. Today, trading was halted on GameStop nine times. Is this 2021 all over again? Should we be up in arms? Well, no, because this time, the type of trading halt is different. There are actually four major ways that stock trading can be halted. Trading suspensions, trading halts, brokerage halts, and circuit breaker halted. Trading suspensions, trading halts, brokerage halts, and circuit breaker halts. Trading suspensions are ordered by the SEC. The SEC can stop trading for any stock for up to 10 days if they believe it's in the public interest to do so. So for example, if a public company hasn't filed its quarterly or annual financial statements, 10 Ks, 10 Qs. The SEC may suspend trading in case the reason these reports weren't filed is because there's some funny business going on. And so they would

want would-be investors to be protected. Trading halts, in contrast, are not ordered by the SEC, but by the exchange on which the stock is listed. So GameStop, for example, is listed on the New York Stock Exchange, also known as NYSE. Isn't that NYSE? So NYSE could initiate a trading halt on GameStop. Exchanges might issue a trading halt if a company is about to announce something that would likely affect the stock price, like a change in the overall health of the company or an intention to merge with another company, or if some damaging information about a company's product is about to come out. Normally, these halts last about an hour, and it gives the typical emotional market a moment to just chill out before taking immediate action. And then there's the individual brokerage's ability to halt trading on their platform at

any time. That's what happened with GameStop in 2021 that had Redditors riled up. The truth is brokerages don't have any obligation to sell a particular stock. So that's the wiggle room when it comes to halting their trades. But the SEC could come after brokerages for halting trading in a way that is nefarious. And then there's the fourth way, the circuit breaker halt. In U.S. stock markets, there's a rule that if the S&P 500 decreases 7% in one day, trading is halted for 15 minutes. If it drops 13% in one day, there will be another 15 minute break. And if the decline hits 20%, trading will end for the day.

This rule originated after Black Monday, the 1987 stock market crash, when the Dow dropped by more than 20%. After that mess, regulators decided that it would be really helpful to have a mechanism to help pump the brakes on the stock market in instances like those where investors might be experiencing some panic and instead of acting on that panic, would be forced to take some time and strategize. There's also a version of this for individual companies rather than the entire stock market. This is called the limit up, limit down circuit breaker. Similar to a market-wide circuit breaker, these are price-dependent halts. So if a stock price moves 5%, 10%, 20% and does not move back within 15 seconds, trading in that stock will pause for five minutes. And that's what happened

today with GameStop. The limit up, limit down circuit breaker was triggered by the New York Stock Exchange. This is not the same as 2021 when it's finance with a capital F versus the retail investor. This is just a standard rule that automatically is triggered by financial exchanges. So again, the stock was halted nine times today. And with the volatility that GameStop has, that will probably happen. So if you're a meme investor, brace yourself. If you're thinking about getting into the GameStop craze now, I have some advice from someone who lived it in 2021. I did an episode with a Redditor who was at the center of all of

this. Here he is. What would you tell novice investors who are looking at GameStop and WallStreetBets and seeing like this meme stock phenomenon? What would you advise them about getting into the market? Stay away from all that stuff. Really? Why? You made almost two million bucks. And I'm incredibly lucky to have done that. For every GameStop situation that happens, there's just as many that stay trading in that $12 range or go lower. I mean, ultimately, I have a couple friends that aren't aware of, obviously, what happened here, but know that I've been invested for a while and ask for advice. And it's just dump it into index funds. Start with index

funds, be conservative. You know, you're not going to hit a home run in six months and quadruple your money. You know, there's this other investor who really advocates for index funds. His name is Warren Buffett. Heard of him. Yeah. I think he said something like the greatest investment Americans make is low-cost S&P 500 index funds. I don't think he said something about GameStop, but I could be wrong. I'll check the tape. Index funds and chill, baby. This was taken from a full interview I did on the show, which I have linked in the show notes. For today's tip, you can take straight to the bank. If you are risk-averse, you want to invest in funds or companies with very low volatility.

You can find a company's volatility score on its stock chart on Yahoo Finance or Google Finance or any other company that provides stock tables. And the volatility score will be represented by beta on the stock table. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you.

Thank you for listening and for investing in yourself, which is the most important investment you can make.