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Strange Things Going On

March 1, 2021 | Commentary

  • The stock market has always had the potential for extreme volatility.  In the 1920s and 1930s it was often characterized as a gambling casino with little to offer serious investors.  Over time, as more institutions and individuals embraced owning equities for the long run, the extreme characterizations waned.
  • Recent events in small cap stocks touted on social media platforms like Reddit, Seeking Alpha and others remind us that not everyone trading stocks is well informed or motivated by long-term returns.  Rapid profits, and losses, become the typical experience of assets trading in a bubble.
  • Whether through illegal means to manipulate or simply by the strong collective force of people on the same side of the market, prices sometimes move to extreme levels.  The experience of GameStop, a stock that began 2021 near $20 a share, reaching $483 in the last week of January before falling back to $40 on February 19, should remind us that ultimately stock prices do reflect the fundamentals of a company.
  • When these episodes happen, there are concerns about the fragility of the system.  GameStop made a lot of headlines over the last two months, but most people do not understand that in small capitalization markets a modest amount of capital can have a big price impact, at least in the short run.  That is why many investors shun penny stocks and some frontier and emerging markets.  The likelihood of extreme volatility is simply not worth it.  Thankfully for the stock market as a whole, these side shows have lacked enough materiality to be a real concern.  But if the number of such events grows, it may signal more caution is warranted.

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