The biggest story in the financial markets so far this year has been the battle between so-called retail investors and Wall Street in the most shorted names. This battle has focused on one stock in particular, GameStop Corp. (NYSE:GME).
I won't get into the reasons behind the fight here or try and determine who's in the right. That has been covered countless times before.
However, what is clear to me is that this battle isn't one of a kind. It's not the final great battle between billionaires and the average person, as some people have decided to paint it. This kind of activity has been seen repeatedly throughout the history of the stock market, and it will be seen again and again in the future.
A lesson from the past
Asset bubbles are a feature of free markets. The first identifiable bubble took place in 1720 in the shares of the South Sea Company.
Strictly speaking, this wasn't the first bubble in history. It has become known as such because this was the first time the world saw a bubble and gave it a name. After the bubble and subsequent crash, the British government enacted the Bubble Act, w
hich forbade the creation of joint-stock companies without a royal charter.
The South Sea Company inspired a bit of a revolution in the financial landscape of Europe. Before its founding, there were only a handful of publicly-traded companies in existence in London. The biggest were the East India Company and Bank of England.
At the time, these investments were the exclusive realm of the rich and upper class. But then the South Sea Company came along. Its management promoted the shares to ordinary citizens, using early forms of margin loans and even options contracts.
As a result, the demand for its shares and shares in other entities boomed. New entities were founded every day, and new investors rushed to get in on the action. Eventually, the bubble burst. The South Sea Company wasn't a complete scam, but its value was vastly overestimated.
There have been plenty of other more modern examples. I wanted to use the South Sea bubble to illustrate these booms and busts have been going on for at least 300 years. They will likely continue for the next 300 years as well.
One of many
The GameStop saga is just the latest development in the financial world. The internet has opened up new ways to invest, and people have taken advantage of that. The new-found sense of community, coupled with outside factors such as the pandemic and monetary easing, has added fuel to the fire.
Would the rush of buying have been so great if investors hadn't been stuck at home? It's impossible to tell.
As I noted above, this is not a discussion of whether what's going on is right or wrong. This discussion is just designed to show that these events will always happen.
Some people will make money, while other people will lose money. It is as simple as that.
One should not rush to get in on the action. There will always be other opportunities to make money.
By the time the rest of the market has discovered the opportunity, it's probably too late.
In the 300 years after the South Sea bubble, a strategy of buying good companies at attractive prices would have worked well. It has certainly worked well for the past 90 years since Benjamin Graham started writing about investing. Based on that track record, I think it's unlikely the world is about to change. The GameStop saga may just be another example of irrational market behavior.
By Rupert Hargreaves
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