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financial planning for 2021

How the GameStop Situation Could Influence Clients


Among other things, the recent situation with GameStop stock showed it's possible for regular people to successfully play the stock market. While some money-making schemes are great ideas, others aren't. As their accountant, you can help your clients determine which category their scheme falls into and whether the investment they want to make is smart.

Feb 22nd 2021
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Lately, everyone's been talking about GameStop. Here's a quick recap of the story: During the week of January 25, GameStop, a stock selling for a $18.84/share on 12/31/20, was suddenly trading as high as $483 on January 28. You know the rest: A grassroots online campaign was driving the stock up with the apparent objective of punishing institutions shorting it. Your client hears the news and wants to join in and make their own investment. How would you advise them?

Rule #1: Get on the same side. Start by saying congratulations. Your client was prudent enough to seek your advice before making a decision. This could lead to financial planning, retirement planning and other advisory services you could provide as a fiduciary. Answering their question is free advice at this point. Congratulate them on calling you first.

Rule #2: Don’t be the stern parent. Do you have young children? What happens when you say, “It’s a stupid idea. Absolutely not. I forbid it”? It emboldens them and creats an adversarial relationship. You need to bring them down to earth, looking at the big picture in a logical way.

Rule #3: Let’s be calm. It’s not an emergency – yet. GameStop was used as an example, but there are plenty of other scenarios. Clients watching late-night TV infomercials might get excited about buying gold coins. A friend of a friend might want to open a restaurant. Your concern is they go into the situation with their eyes open.

Sit your client down and talk with them. The following are nine possible discussion points you can use to find out how much thought your client has put into their plan. These points are like clubs in your golf bag. You will determine which ones are right for different situations.

1. Tell Me All About This Idea. Probe for details.

Good: The friend of a friend might be a chef who recently won a TV cooking competition. They might be a successful property developer with a demonstrated track record, looking for investors to put money alongside theirs. These might be opportunities.

Bad: “Everyone I know is buying this stock. I don’t know what they do, but I want in, too.”

2. What’s the Logic, the Path to Success? Why will this idea work? What has to happen?

Good: There’s a trend towards renewable energy and away from fossil fuels. The government looks like it will support their transition. This investment involves new battery technology.

Bad: I have no idea. I’ve been told we buy and keep buying. We ride it up. As long as we don’t sell, we’ll all get rich.

3. It’s Not a Game. Everyone has apps on their smartphone. Many are games. Remember when you played Monopoly? Everyone starts out with the same amount. At the end of the game, you haven’t lost or made any real money. If you use an investing app, you are putting real money at risk.

Good: I’m buying the shares through my small online account. It’s connected to my brokerage account at [major firm]. My advisor knows I play the market now and then.

Bad: It’s just a game! All my friends are playing. I’m not putting any real money at risk, am I?

4. Play Money is Small Money. There are different kinds of investors, differentiated by risk tolerance. Generally speaking, most people can put a small amount of money at risk without jeopardizing their livelihood. Clients buy lottery tickets all the time. They accept the $2.00 a ticket they shell out will likely be lost.

Good: I know I’m taking a flier. I’ve got $100,000 in liquid assets. I think I can risk $1,000.

Bad: The money in my retirement account is doing nothing. This is my chance to bet it all and make a killing.

5. Can They Handle Potential Losses? Your client is likely using after-tax dollars for this speculative investment. If a stock declines 50 percent, it must double in value for them to come out even.

Good: I know it’s a risk, but it’s one of several. Hopefully, one or two will work out.

Bad: There’s no risk. I’ve been told it’s a “can’t lose” proposition.

6. Saving is Hard. What does it take for your client to earn an after-tax dollar? Every dollar they earn at work has a portion set aside for federal taxes, state taxes, Social Security, their 401(k) and health insurance. They might be seeing 60 cents in their paycheck.

Good: I know I’m taking a risk, but it’s only a small amount.

Bad: I don’t care.  Easy come, easy go.

7. Will This Put a Relationship at Risk? Great ideas often come through in-laws and close friends. If it doesn’t work out, will this put strain on a friendship?

Good: My brother-in-law told me about it. He also said I should talk to my accountant first.

Bad: My brother-in-law is going all in. He said I’m an idiot if I don’t join him.

8. Investing vs. Gambling. One is similar to saving. You are putting money away for the long term. You are diversified. The other holds the possibility of losing everything you wager.

Good: I’ve done some research and looked at the fundamentals.

Bad: I’m going all in on this one. It just feels right.

9. Selling Requires Buyers. When you buy volatile stock, there always needs to be fresh buyers willing to take it off your hands at the current price. The person who told you to buy might be using this opportunity to sell their own shares.

Good: I’m thinking of this as a long-term investment. I won’t need to touch it for another ten years.

Bad: Sell? I’m never going to sell. That’s the beauty of the strategy. As long as no one ever sells, it keeps going up.

If your client can explain why their idea will work out, they've thought it through. If they are buying on hearsay, risking too much or going along with the crowd, it’s a bad idea.

One final thought: It’s their money. You can advise them, but you can’t forbid them to take action.

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