Topics: Gamestop, Beta, Modern Portfolio Theory, Risk

Did you know that Gamestop is actually a fairly safe investment?

Of course it isn’t. Buying (or selling) Gamestop is more of a gamble than anything else. Just look at this:

Bruh.

But why would I say that to begin with? It’s because Gamestop’s Beta is negative (and close to zero).

Beta and Risk

What is beta?

Beta = The correlation between one data series to another / the volatility of a data set relative to another data set. In human terms, it’s how closely the returns of a stock match the returns of the broader market (the S&P 500) over a certain amount of time.

Gamestop’s beta is -0.21. That means that Gamestop’s “risk” is uncorrelated to that of the broader stock market, in fact, it’s slightly negatively correlated. Right?

When a stonk’s beta is at, or close to, zero, it means that it “doesn't correlate with an index or market results and is designed to have zero systemic risk.” In human words, it means that what happens to most other stonks likely won’t happen to this stonk.

When a stock has a negative beta, it’s negatively correlated (i.e. it moved in the opposite direction to the rest of the market).

According to Modern Portfolio Theory, which is what all my homies in the investing community use, adding an asset class with uncorrelated or negatively correlated returns (which includes Gamestop) will help increase diversification, thereby reducing your risk. Let’s look to Bard for a more in-depth explanation (when you see “uncorrelated”, think Beta = 0, or Gamestop in our case):

Buuutttt….. Isn’t it still a company operating in the United States, generating revenue, spending money, paying off debt, etc? When you look at its business model, is it really that different from other brick-and-mortar retail stores? How can you tell me that GME’s risk profile is that different from its peer group?

Welp, the beta measurement doesn’t care. It just cares about how Gamestop’s stock line looks relative to the S&P 500’s line.

Don’t Use Beta in Isolation

If you were to pull a slot machine and invest in an S&P 500 index, would the outcome of those events be influenced by each other?

Probably not.

This is the situation with Gamestop. You have the same likelihood of making money off of Gamestop as you do as making money off a slot machine.

In a slot machine, the house has a 10-cent edge against you. For Gamestop, I think it’s even worse.

Determining Risk Outside of Beta

Let me be clear: Only beta males use beta to determine risk.

There are a lot of risks associated with any investments, whether it’s buying a stonk or putting it in a high-yield savings. Beta is only one measurement that has proven to be a “mid” measurement of risk.

I wrote about some of the different types of risk in this blog post. But for now, let’s simplify to determine what types of measurements you should use to determine Gamestop’s “risk”.

• Standard deviation: much higher than market - much higher risk

• Profit: not good - much higher risk

• Cash flow: not good- much higher risk

• Check their liquidity, leverage, commercial property prices, interest rates, and other macroeconomic factors.

I’ll leave it there for now. Go a level deeper and you’ll see just how “safe” an investment is. For Gamestop, take a look at any of the following measurements of “risk” and you’ll get a better idea of how “safe” your money is.

Modern Portfolio Theory

Remember 2021 and how mad you were at your financial advisor because your stonks and bonds decreased in value? Don’t blame them, blame Modern Portfolio Theory (which we talked about earlier).

MPT greatly increased the use of statistical correlations in asset management, which turned creating a great portfolio into a math problem (for my investor friends, I know this is perhaps an oversimplification).

The negative correlation between stonks and bonds, as well as bonds’ lower standard deviation (how crazy their line goes up and down), made them an attractive pair with stonks. Unfortunately, when interest rates go up quickly, the time value of money goes up, which reduces the value of cash-flowing assets (including debt and equity).

I digress.

I trashed a component of MPT earlier (the correlation component), but in full transparency, if you were to include Gamestop’s standard deviation (not good) and expected return (also not good), then MPT would tell you what I’m telling you: it’s toxic.

If you’re a math/finance nerd, I’d recommend you educate yourself on MPT. While I don’t actively use it for my portfolios, it’s a great framework to understand and can be a good tool to structure a stable, long-term portfolio of asset classes.

Summary

Don’t use just beta to determine an investment’s “risk”.

Consider standard deviation, leverage, profitability, interest rates, and macroeconomic factors.

Don’t you dare buy Gamestop unless you are prepared to burn all that money.

Stay synergized.