How to Think About the Market When It's Going Bananas

If you've been watching the investing headlines this week, it's been hard to ignore the news about the short squeeze on GameStop (GME -26.97%) and AMC Entertainment Holdings (AMC -21.16%) stocks. The shares have rocketed up and the trading volume has gone through the roof. This activity and the resulting press may have you a little shaken up. As long-term investors, we tend to tune out the short-term noise and focus on investing in great businesses. On the Jan. 27 "Mindset" show on Motley Fool Live, Motley Fool analyst Tim Beyers and Fool contributors Asit Sharma and Brian Withers discuss how to put these crazy market moves in perspective. 

Tim Beyers: We could call this any number of things, friends. This could be the crazy hour. This could be the nonsense hour. Let's just validate what's happening right now. It is bananas! It's bananas what's happening in the market right now!

I want to talk about today, and I want you guys to reflect on this. What we're going to talk about in this mindset hour is the danger of living on dopamine and adrenaline when you are an investor. I'm very worried, I'm really worried, guys, about particularly new members, and if you are a younger investor and you happen to be tuning in, first of all, welcome, we love you and we want you to succeed.

I am really nervous for you, because the moment that we're in right now, the dopamine starts hitting, you feel like you're invincible, and you lose your discipline and you start learning habits, that will utterly destroy you as an investor over a long period of time.

Asit, I'm worried about it, and maybe I shouldn't be, but I'm genuinely worried for our people. I do not want this for you. A couple of reflections from you guys, start with you, Asit.

Asit Sharma: This is one thing we have to be careful about terminology, because some of this comes down to investing versus speculation. For those of you who watched our earliest Mindset sessions, I did a few with Tim before we made this a regular thing. I used to talk about Victor Niederhoffer, who's a great speculator. He has made and lost [laughs] several fortunes.

You can approach this as something that's in a different box, if you like. Placing in a different box may help you dial down some of that fear of missing out. It may also give you the impulse to say, I've got this itch, I have to scratch this itch, but since I understand this is speculation, I'm going to take a very very small amount of capital to scratch that itch. That's human. I remember David Gardner talking about this last year, that if you really want to, he doesn't feel that he should stop people from trying to chase ideas that may be exploding in the market.

But on the other hand, this is also a distraction. It's a huge distraction from all the good principles you can employ to build wealth over the long term. Building wealth versus engaging in speculation, two vastly different things. They just happen to be in the same big bathtub we call the market, but one is like a very small rubber ducky that's just floating on the surface.

I hate to create metaphors on the fly, because I think about them later, they come out so bad, but the other is something more substantial. Picture a small sailboat that the kid will play with, a little bit bigger than a rubber ducky. Not as nice as Tim's example here, of which quarterback do you want to be, but the same principles apply.

You have to understand that these are two different games. On GameStop, we can break this down and talk about it if viewers have interest. I do want to point out that this is a stock that fundamentally disconnected from its investment value by any measure. I tweeted this out today just to look at the company's cash flows versus its market capitalization. Now we won't take the time to share the image, but when I froze this image in YCharts today, the trailing-12-month free cash flow for GameStop, which is not going to change from a two minute ... Tim, Brian. $150 million.

Beyers: A hundred and fifty million dollars.

Sharma: Market cap is now approaching $26 billion, so there is a fundamental disconnect there, but I'll pass this on to Brian for some comments, and I'm sure a lot of Slido questions to address as well. We will be flexible for wherever you want to go, viewers today.

Beyers: Brian, any reflections on GameStop or where we are today before we get into some of the details here?

Brian Withers: I think you've talked about beginning investors and being distracted by things in the market like GameStop going up. I mean, it doubled from yesterday to the day, and misunderstanding, as Asit said, speculation or a bet on GameStop yesterday and then it doubling, getting that confused with investing.

When I was early on as an investor and even five or six years in, I was still chasing the big win. It's difficult to be patient and find great companies. We invest in companies, we invest in businesses, and we don't invest in tickers. GameStop, what it's done over the last month or whatever is speculation on a ticker where the underlying business is really poor and degrading.

Isn't going to go to zero tomorrow, but it's a struggling retail chain. That is going to be outdone by technology and direct downloads into your Xbox at home and you're not going to need to go to the store. So they're struggling to have an identity, figure out what they want to do, do they become viable? Do they continue to close stores?

When you look at the business and disconnected from what the stock has done over the few days, you get a reality check on what's really going on. I'm worried that as a new investor or even a couple of years in investor is this fear of missing out on, hey, whether it's bitcoin or AMC did a crazy thing today too. So feel like you're missing out and missing out on that big win. That's a challenge.