GameStop Gyrations and the 3x5 Index Card Test

Write it down on paper

You may dismiss the paper 3x5 index card as a Boomer relic, but physically writing something down enhances the way you process, learn, and store information. It deepens our ability to recall the what and why – something that cognitive biases work against. And research has shown that putting literal pen to paper is more effective than tapping keys on a laptop or phone.

The very process of writing down your reason so concisely forces you to think about the merits of the idea. It also helps insulate you from your mind’s cognitive behavioral tricks.

Listing the date and price of your idea prevents you from forgetting how early or late you were to the idea. Too often, after the fact, we think we got the trend and timing right but didn’t. We tend to overestimate our ability and to selectively recall facts.

If you can’t explain it, don’t invest

Detailing your investment thesis or reasoning is the most important part. It forces you to think through what has to happen for the idea to pan out and be able to express it concisely. If you can’t do that – you shouldn’t be committing money to it.

More importantly, it frames your measure of success beyond simply a price move. If your reason is, “The stock’s P/E will expand,” well, that is easily measurable. If it is, “Earnings will grow 20% (and the stock along with it),” ditto.

Stating your reason will also make clear whether you are investing or simply trading.

Many GameStop investors posting on Reddit made it clear they were literally gambling the stock would “go to the moon.” A few offered a rationale: The stock is undervalued, the pandemic is juicing video game sales, and a turnaround is imminent. Some were playing a short squeeze. Still others seemed to be just looking for a greater fool to eventually unload their shares onto or perhaps will be the greater fool when the music stops.

If you know going in that you are wagering money on a volatile supply/demand imbalance and not really “investing,” you won’t or shouldn’t be surprised if things end badly. That especially applies if your strategy is: “Roaring Kitty is in, so I’m staying in.”

The more clearly you can state your reason for buying, the clearer the exit strategy and path to its success.

You need a yardstick to measure success

Your reason for investing should include how you will measure success – ideally, something beyond simply a change in price. If your thesis is that, “Well, the price will go up,” it is difficult to know if you are lucky or a genius when it does.

Having a reason underlying the price change gives you a more objective measure of your investment smarts. It also helps you refine your analytic process: “Sales went up, but not by as much as I thought – I misjudged the situation,” versus, “The overall economic environment hurt the entire industry.”

Your definition of success directly relates to why you are investing. It’s quite different buying a stock for a new management-led turnaround versus wanting to “stick it to the hedge-fund man”:

• The turnaround investor will be watching for signs of sales and earnings improvements that should eventually be rewarded in a higher valuation and stock price.
• The Reddit raider with an “eat the rich” ethos will have won in his or her match trading wits with Wall Street traders when the big shorts unload their positions (as some did already).

If your reason is to “stick it to the hedge-fund man,” do have some idea what that means. When GameStop hit $483 a share and hedge fund Melvin Capital lost 53% of its value and had to be bailed out – that’s a victory.

Without a clear exit point or strategy, your bid at you only live once (YOLO) can easily turn into you only lose money (YOLM).

Source your idea to give credit where it’s due

Knowing the source of your idea is also important. Your mind will fool you into taking credit for something that may not have happened or when or how you think it did.

We all tend to overestimate our abilities and conflate a good idea with it being our idea after it proves successful.

Note where the idea came from or how you developed it – you’ll want to go back to that well if it works out.

Unless you are looking to be “one and done” in the market (good luck!), every time you invest you should hope learn something. The 3x5 card and its information helps. By forcing you to justify the reason for a purchase and set a measure of success, this process and its concise record let you to objectively evaluate your investment thinking and ability.

Whether your hands are “paper” or “diamond,” take a lesson from the GameStop goings-on and put pen to paper before you next commit your capital.

Ted Everett is a CFA and an investment advisor and financial writer in Boston. He helps financial service companies create readable and insightful investment-thought leadership whitepapers and other content. He has edited and written extensively for various investment newsletters and served as portfolio manager and trusted advisor for families, trusts, smaller institutions, and non-profit entities.

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