January saw one of the most widely covered stories for years in financial markets after a group of online retail investors clubbed together to, in their own words, “take on the hedge funds”.

The story goes like this: A retail investor and some like-minded fellow traders got chatting on popular internet chat forum Reddit, and noticed that a number of hedge funds were betting on the price of a retail business’ shares falling (a process known as “shorting”).

The retailer in question, GameStop, is a little-known business outside the US. The firm has been suffering the same as many retailers in the pandemic, with a huge reduction in customers in its stores.

The traders, fuelled as much by boredom as anything else, decided to start buying up as many shares as they could in GameStop, in one of the very few incidences ever of co-ordinated retail investor behaviour.

As the shares started to soar, more and more people flocked to join them but, crucially, the vast majority of them held on to their shares rather than sold them as the price started to rocket.

On the other side of the equation – the hedge funds that had bet on the company’s shares falling -started to lose millions of pounds as GameStop’s share price rose more than 800% in a week.

GameStop was not the only company under the microscope, with other businesses, and even commodities shorted by the assortment of hedge funds then targeted by this same army of retail investors, with similar outcomes.

Did the retail investors win?

The saga continues. Following the huge rise in share prices of these businesses, regulators stepped in to monitor the situation. The ability of retail investors to actually trade the shares via popular US platforms such as Robinhood was then curtailed as the firms halted trading of GameStop and its peers for a time.

The outcome of this was swift. From its peak price, GameStop shares crashed back down to earth, losing around 80% of their value.

However, whilst that sounds like the end of the story, a week or more on the situation is not yet resolved. Trading restrictions have been lifted on a number of platforms, and while share prices are back near where they began, there are some renewed signs of activity as traders locked out of the market are allowed back in.

Lessons learned

The big lesson here is about trends and hype. It can be tempting to jump on the bandwagon when it comes to investing, buying something because it is soaring in the hope of making a quick return.

However, the whole event flies in the face of long-term wealth building. The actual true valuations of these businesses have not been contemplated by the retail investor army buying up shares – everyone was simply jumping on the bandwagon to push the price higher.

There are examples of this time and again across markets, and more often than not the end result is the same.

The best way to approach investing is to have a clear plan, make sure your investments are aligned with your end goals, and to avoid making short-term decisions.

Your money is typically invested for the long term, and your investment approach should reflect this. Otherwise, you can end up like those unwitting buyers of GameStop shares just before they collapsed.