GameStop's 'wild stock ride' carried risk for investors, Behrend professor says

A portrait of Greg Filbeck, director of the Black School of Business at Penn State Behrend.

"The market always corrects itself, eventually," said Greg Filbeck, director of the Black School of Business and the Samuel P. Black III Professor of Finance and Risk Management at Penn State Behrend.

Credit: Penn State Behrend

ERIE, Pa. — For a week, at least, game company GameStop’s stock leveled up: As word spread that several hedge funds had “shorted” the stock, betting that its price would drop, amateur investors started buying shares. They pushed the price up 1,500%.

The rally started on the Reddit forum WallStreetBets, which has more than 8.5 million subscribers. They were willing to overlook GameStop’s performance in 2020, when the company stopped paying dividends and closed 462 stores.

“There was a sense of, ‘Let’s teach these hedge funds a lesson,’” said Greg Filbeck, director of the Black School of Business and the Samuel P. Black III Professor of Finance and Risk Management at Penn State Behrend.

GameStop’s stock shot from $17 a share to a high of $483. Then the bubble burst. On Feb. 9, the stock was selling for $49.45.

We asked Filbeck what investors can learn from GameStop’s stock, and whether the rules are any different now, with Robinhood and other investment apps in the picture.

Q: We’ve seen this story before, right?

Filbeck: In 1640, it was tulip bulbs. The prices increased to the point that a single bulb was equal to about one month of wages. Then somebody woke up one day and said, ‘That’s entirely too much money for a tulip,’ and the bubble burst.

It happened with silver, in the 1980s, and again with the subprime mortgage crisis, when the value of homes went up overnight by tens of thousands of dollars.

It almost always ends the same way, however. You have to show your cards, eventually.

Q: Did access to trading apps, such as Robinhood, draw more investors in?

Filbeck: Those apps kicked open the gates for new investors. They have slick designs, and it’s easy to make a transaction. It’s so easy, in fact, that some people get caught up in it.

You can point to Robinhood as the bad guy in this, and a lot of critics have, but the truth is, if you are an inexperienced participant, the responsibility is also on you.

Q: You partnered with CFA Society Pittsburgh to develop a financial literacy initiative that is being taught at high schools in eight states. What’s the most important thing for a new investor to remember?

Filbeck: If a deal sounds too good to be true, you should probably stay away from it. If you time it right, it’s possible to hop on and off the train and make some money on a stock, but that strategy almost never pays off. It’s notoriously difficult, and a naïve investor is likely to get burned.

This isn’t like pulling slots in Las Vegas. GameStop was a company the market had valued quite appropriately, and its stock is already moving back down to a more reasonable price. The market always corrects itself, eventually.

Q: Do you expect to see this sort of unwarranted meteoric rise in a stock again?

Filbeck: Not with the same stock, obviously, but it will continue to happen. It’s like the game Whac-A-Mole: Someone will see an opportunity, or a flaw in an algorithm, and investors will try to exploit it.

Markets aren’t perfect. They are efficiently inefficient, and investors are always looking to make the most of any advantage.