What’s The Deal with Meme Stocks?
July 28, 2021. By Ryan McLaughlin:
“Meme stocks” are back in the news in the past month, so as Centerpoint’s resident Gen-Z translator, I am here to talk about the latest surge in such securities. Morningstar describes meme stocks as “stocks that see dramatic price increases, mostly fueled by people on social media… [They] rarely have company fundamentals that back the rise in price and are often highly volatile.” The craze started back in January with a Reddit forum known as WallStreetBets. The discussion board aimed to take down a hedge fund that shorted stocks such as GameStop (GME) and AMC Entertainment (AMC), and allow small individual investors reap the benefits. This tactic, known as a “short squeeze,” gained plenty of momentum, and the modern-day Robin Hood script was written.
In the first few days of the surge in January, GME stock jumped over 2,000% to $483 per share. Just two weeks earlier, the stock had a value of less than 1% of that at $20.42 per share. With support from famous investors such as “Papa” Elon Musk and “Renegade Billionaire” Mark Cuban, many of these individual investors urged their fellow Redditors to “hold the line,” but to no avail. The stock price dipped back down and hasn’t come close to its all-time high since, though it has been hovering around $200 recently – up nearly 1000% from mid-January.
Until recently, meme stocks’ incredible surge looked to be out of steam. That changed in June, however, when AMC’s stock price quintupled in one week (almost doubling in just one day, from $32 per share to $62 per share)! The fantastic spike in these stocks may leave some investors curious. You may be asking yourself: should I get in on the fun? Which the next meme stock to invest in?
Anyone can scroll through sites like Reddit in search for the next meme stock and add the risky asset to their portfolio of holdings. Don’t be surprised, however, if some Redditors come after you when you want to sell. Also, be sure to keep in mind that many experts caution this way of making money in the stock market through speculation. “Such surges have rarely ended well,” warns the Economist, who says that Redditors base their picks on “vague future potential rather than concrete financial fundamentals.”
According to the Wall Street Journal, the fuel behind the meme stocks’ fire is what’s called “The Tinkerbell Effect.” The term, coined by psychologist Frank Durgin over twenty years ago, describes a phenomenon in which the more belief in something, the more it becomes a reality. Others attribute the meme rallies to FOMO, a more recent slang term meaning the fear of missing out. With information and headlines at a surplus, and with equal access to investing platforms for novice and expert alike, those wanting to get in on the action can do so in an instant.
Ashley Agnew, Centerpoint’s Associate Director of Relationship Development and financial therapist shares her thoughts on a recent experience:
“Recently I was sitting in a plane on the runway, awaiting a delayed takeoff. Three college-aged young adults were sitting behind me discussing their thoughts on the stock market, most of which indicated confusion. One young man took on the role of “expert” as he walked his two friends through the process of opening an investing app. Before we hit the air, the two young ladies had opened the account, invested in two meme stocks, their favorite apparel company, and a majority of their invested funds in a makeup company that…I quote… ‘has THE best mascara and, like, they are bound to be the next big hit’. This is just one example of the power of the retail investor to move the markets. It was clear that they were uneducated in how the markets work or the risk they were taking. Their fear of missing the next big thing was palpable. While these apps are wonderful for providing access to a demographic who may not trust centralized or traditional financial systems, they are dangerous as users now have no check points to regulate their biases.”
Whatever the psychological phenomenon behind the trend is, the buzz created by these small investors obviously creating tremendous momentum in stock prices. According to Wharton professor Jeremy Michels, when retail investors are purchasing shares near the time of an earnings announcement, “it tends to drive returns up, even if the earnings news [is] relatively negative.”
If you have interest in these types of investments, we urge you to seek council from your investment team to ensure that they are sized appropriately within your portfolio and are held in an appropriate account considering possible tax consequences; unfortunately, these tax consequences which are often overlooked by retail investors, but that is a topic for another blog.
Ryan McLaughlin is an economics student at the University of Wisconsin. He is interning at Centerpoint Advisors for the summer of 2021 and assisting with research, client service, and portfolio management support