Opinion | Require financial literacy courses at the UI
The consequences young adults are facing with the GameStop saga proves why Iowa needs to require a financial literacy course.
February 11, 2021
The sheer absurdity of the GameStop saga at one point convinced the world that Reddit users managed to outsmart Wall Street as the company’s stock price shot up to $347.51. Unfortunately, reality eventually kicked in.
GameStop lost 80 percent of its value as amateur investors — including college students — bought into the hype, and most people saw their money go down the drain.
To better educate students on how to invest in the stock market, the University of Iowa needs to make financial literacy a Gen-Ed requirement.
Because it’s a dying company, GameStop became a favorite target of short seller-investors looking to profit off a declining stock.
Melvin Capital — a hedge fund that managed nearly $13 billion in assets — announced that they took a short position against GameStop.
Little did Melvin Capital know that traders on the popular sub-Reddit Wallstreetbets decided to squeeze, or drive up the price of GameStop to make Melvin Capital’s short unprofitable.
And by God, did it almost work.
Half of Melvin Capital’s fund disappeared. For a brief moment, it seemed like the Reddit users won. Everyone, from Chamath Palihapitiya to Mark Cuban hailed this as a seminal moment and encouraged hundreds of thousands of people to invest in GameStop.
After hearing about the incredible rise of its stock price, UI students Blake Hohman and Omar Mustafa — who both recently got into trading — bought GameStop shares looking to make a quick buck.
However, they weren’t aware that investing in a company that has steadily been losing money for the past few years was never going to be a good long-term investment.
Both students bought a couple of shares of GameStop and ended up losing a few hundred dollars. The experience still scares Mustafa as he’s contemplating quitting trading. And Hohman plans on staying out of the markets for a while.
Hohman and Mustafa’s experience shows the dangers of students being poorly informed about how markets work.
The aftermath of the GameStop bubble also provides us a reflection on the market and the broader “pandemic bubble” — or how investor hype around a few tech companies is what is driving the market to new record highs.
In the past 50 years, the average price-to-earnings ratio for stocks in the S&P 500 has been 19, which contrasts with the companies driving the stock market boom.
What broader market trends show is that stocks are currently overvalued and trading at unsustainable prices. When these stocks cannot hold up anymore, the market will crash.
The last notable time a market bubble burst because of rabid investor enthusiasm was the “dot-com” bubble of the late 90s and early 2000s.
The fallout from that bubble burst can be characterized by one number — $5 trillion — or the amount of money that hundreds of millions of investors lost seemingly overnight. Because investors had driven the stock of Pets.com to ridiculous unsustainable highs, some people’s parents’ and grandparents’ retirement plans probably derailed.
What a financial literacy class at the university can do is teach students how to properly play the market and invest their hard-earned money responsibly. Students need to be educated and make smart choices so that they will be able to protect themselves from the next market bubble.
Columns reflect the opinions of the authors and are not necessarily those of the Editorial Board, The Daily Iowan, or other organizations in which the author may be involved.
