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Why I Won't Buy Into the GameStop Frenzy

By Maurie Backman - Feb 1, 2021 at 8:36AM

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GameStop rallied in a very unsustainable way.

Last week, GameStop (GME 6.81%) not only blew up the stock market, but the internet on a whole, as shares of the company skyrocketed in the course of a single week. And it's not because the company released solid earnings or did something to specifically lend investors to believe in its stock. Rather, it's because a group of savvy Reddit users effectively forced a group of Wall Street pros to close out their positions in a tactic known as a short squeeze.

Of course, anyone sitting on non-shorted shares of GameStop before the recent frenzy clearly made out like a bandit this week. But alas, I didn't own GameStop before its recent rally, and I have no plans to buy it right now. Here's why.

Man and boy on couch holding video game controllers

Image source: Getty Images.

Sticking to my strategy

A big part of being a successful investor is establishing a strategy that aligns with your goals, investing horizon, and tolerance for risk. And my general strategy is to buy stocks with added value or growth potential and hold them for a long time without taking on more risk than the general risk that comes with buying stocks.

Since I'm nowhere close to retirement, I have no plans to cash out any of my investments anytime soon. That extends to investments in my retirement plan as well my brokerage account. As such, I prefer to concentrate on stocks with the potential to do really well in the long run. And to me, GameStop Doesn't fit that bill at all.

These days, a lot of physical retailers are struggling in the wake of competition from online giants like Amazon.com (AMZN 3.66%), Walmart (WMT 1.97%), and Target (TGT 2.41%). GameStop is no exception. In December, the retailer announced plans to close over 1,000 stores by March, and that's on top of the 783 stores it shuttered over the past two years.

All told, GameStop is likely to grow increasingly obsolete in the near term in an age where video game downloads are not only more convenient for consumers, but in many cases, more cost-effective. And while GameStop could clearly shift its focus to digital sales, it will then have to duke it out with the likes of the aforementioned online giants.

It's for this reason that GameStop stock doesn't interest me at all right now. I think it's risky, and I think it has nowhere to go but down.

Of course, there's a lesson to be learned from the events of the past week, and it's the importance of staying true to your investing strategy. And my personal strategy also involves not shorting stocks. I know a lot of people have success in it, but shorting is something I'm just not comfortable with, so I don't do it. Had I shorted GameStop, I'd be in the hole right about now.

I may not have profited big time this past week like many GameStop holders did, but the way I see it, my portfolio is in no worse shape, and I'm good with that. I'd rather lose out on a little near-term glory if it means doing well in the stock market in the course of a multi-decade investing career.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$137.21 (6.81%) $8.75
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,302.93 (3.66%) $81.38
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$128.48 (1.97%) $2.48
Target Corporation Stock Quote
Target Corporation
TGT
$167.14 (2.41%) $3.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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