What Compounding Investors Should Know About the GameStop Trading Scandal

Through most of January 2021, the financial news cycle was dominated by headlines related to shares of GameStop, the American video game retail store chain with an uncertain future. Perhaps you caught some of the news stories and analytical opinions that attempted to dissect the situation; in essence, members of an online social network decided to invest in GameStop shares for various reasons, but the most prominent motive was to disrupt what some hedge funds had planned for this stock, which trades in the New York Stock Exchange under the ticker symbol GME.

Shorting Stocks, GameStop, and Compound Interest Investment Strategies

Most compound interest investors who choose to include equity securities in their portfolios would likely skip over GME. The company has had a good run despite the challenging climate for physical copies of video games; let’s not forget that the industry is pivoting towards cloud computing technology to let players download their own titles over broadband connections. The outlook for GME was not good; however, the company expected a profitable period materializing around 2023 despite current challenges. Analysts did not agree with this forecast, which is why hedge funds turned their attention to the troubled GME and started placing short orders.

it carries considerable risk

Shorting a stock is a strategy that not many compounding investors engage in because it carries considerable risk. On Wall Street, a short-order means that you agree to buy the stock when it has fallen behind a certain price level, and you would quickly sell it for a nice profit, but this is contingent upon what the market decides to do with the stock. Everyone knows that betting on or against Wall Street can go either way, and this is not an acceptable risk for many fans of compound interest. The exception would be those investors who correctly assumed years ago that a video game revolution was imminent, thus making the case for accumulating GME shares in a compounding portfolio.

both sides of the GME trading debacle were playing a game of chicken

In the end, a group of Wall Street outsiders managed to upend hedge fund managers and shake up the entire market. Compound interest investors mostly stayed on the sidelines because they know that both sides of the GME trading debacle were playing a game of chicken that was too easy to lose. For the most part, fans of compounding will stick to blue-chip stocks with a nice and long projection of appreciation.

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