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When the music stops, someone may still be sitting on the chair.

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Ever played the game of musical chairs? What happens when the music stops? The winner is the one who managed to sit in the last chair in the game. It’s not the same with investment. Buying at the highest point may have less desirable effects.

Recently, we have many people talking about how when we are united, we could beat anyone with more resources. Yes, we are talking about GameStop and Reddit. Details here. It has shown that in the stock market, when combined, a super big group of small-time traders or even non-traders before they joined this group could cause huge losses to super huge traders who short the market or what they call as manipulating the market? Apparently, the losses to these huge traders were in billions of US$.

As usual, when something happens in some advanced markets, it may also come to Malaysia too. Whether it arrives, arrived, thrives or whether it is successful or not, we need to understand 3 important things.

when the music stops
Photo by Sora Shimazaki on Pexels.com

#1 – Someone must have bought at higher and higher and highest price as well.

In the musical chair game, the last person to get a chair is the winner. In the stock market, the last person or last big group of people who bought the stock at the highest price will be the one holding that stock at the highest price point. If it’s a fundamentally sound company and the profits from its business are going to be increasing tremendously, then these people who’s holding the stocks should be just fine even if they bought at the highest price possible.

However, if the stock price has been pushed up to a level of unbelievable height and the valuation is nowhere near any fundamental, then I do worry for these people who bought into the stock at the highest price.

#2 – Depends on whether they could hold on

Perhaps because of the high stock price, they could have only bought a very small quantity. Perhaps this is the money they could afford to lose and not lose sleep. If this is the case, then I guess everything should be fine and they just need to hold on… It’s like this, if a stock is worth RM50 and we bought 1,000 units, then our exposure is RM50 x 1,000 units = RM50,000. This is NOT a small issue.

However, if the stock price was RM350 and they bought just 1 unit, then it’s RM350 exposure. For many people, they can choose to forget this amount of money for some time. Just have to wish everyone who bought were all buying in amounts they could hold. The strength of the strongest chain is at its weakest link.

#3 – Depends on how many more of these cases

In the economics theory of demand and supply, there’s this story. Someone just out of the dessert and was very thirsty would be willing to pay anything he could for a glass of water. He is willing to pay a lot (but not as much as the first glass) for second glass because he may fear the times when he had no water. However, he will only be paying lesser as the number of glasses of water increases.

GameStop was the first case. If there are the 2nd or the 3rd, perhaps it’s possible to do it again successfully. Just note that the number of people who has the financial strength to keep doing this for more and more companies will get fewer. If the number of small time traders and non-traders are no longer significant enough, then this combined group will not have enough financial strength to ‘fight’ the ones with much deeper pockets whom they wanted to engage in the beginning.

Regulators do play an important part

No one wants to see a stock rise 100% today and drop 90% tomorrow. There will be chaos in the market. GameStop is a very good case study if they (the regulators) did not anticipated this earlier. There will definitely be more measures to also protect all stakeholders because it’s very easy to lose everything if one was buying because one was influenced to buy and understood nothing about the stock which one is buying or even whether it’s actually a fundamentally sound company. I know, sometimes these regulators got too conservative too. However the alternative is not to have a potentially chaotic marketplace as well.

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Next suggested article: Why buy and why not to buy for stocks

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