Meme Investing is Game that should Stop

It’s hard to believe that four years have passed since the Covid-19 pandemic shut down our economy and confined us each to stay home in seclusion. At the time, 2020 seemed unprecedented; in retrospect, it was quite a surreal experience.

While in lockdown, something called “meme investing” was born through Reddit, an online community. Stocks that were heavily shorted became a target by the Reddit community, who were normal, everyday people that are not from the financial world. (Note: short-sellers make money as a stock declines in price).

The most popular stocks that the group targeted to buy were GameStop, AMC Entertainment, and Bed Bath & Beyond. By purchasing a heavily shorted stock, the short sellers were “squeezed out” of their position as the price rose, causing the shorts to cover their trade in order to avoid further losses, which resulted in propelling the share price even higher.

When someone writes a book about the most bizarre events during the pandemic, there might be a chapter on meme investing. A movie – called “Dumb Money” – was even produced that chronicled these events.

Last April, we considered writing a blog about the return of meme investing. The idea came to mind as Trump Media’s share price roared higher. Even though the company’s revenue was less than US$1M last quarter and it ran a multi-million dollar loss, the stock price tripled and its market capitalization is almost US$8B today.

After years of silence, a post was made on May 13th by Keith “Roaring Kitty” Gill, the man responsible for driving the GameStop (“GME”) euphoria via Reddit during the pandemic. GME subsequently rallied over 100% the next day. Gill hosted a YouTube livestream on June 7th that almost 600,000 people tuned in to watch. During the livestream, Gill drank beer, mused about the NBA playoffs, and reiterated his bullish Gamestop thesis. As he did so, the stock was halted due to price volatility a full 11 times. That day, GME traded 278 million shares, which was almost seven times more than its average daily volume.

Wild swings in stock prices – particularly those that lack solid fundamentals (GME is one of them, as is AMC, and Bed Bath & Beyond has declared bankruptcy) – are likely to end in losses for most of the retail investors that participate in the volatility. This is bad for the integrity of capital markets. A person that loses money of any denomination, particularly at a young age, will shy away from investing for many years. Following the dot com crash in 2000 and the financial crisis in 2008, many investors went on hiatus from owning publicly traded stocks for years.

We recommend that anyone who manages their own money undertake due diligence before making a trade. At a minimum, it’s always a good idea to write down your reason for buying a stock. Sometimes seeing your rationale on paper provides another perspective that your emotions might have ignored.

Our research process follows these steps.

1. As we comb through information, we keep a ledger with the “pros” on the left and the “cons” on the right. After everything is documented onto this sheet, we have a very balanced view.
   
2. We read as much information about the company that we can find. We read the annual report, its most recent quarterly earnings, any analyst research that has been published, and many online articles.
   
3. We listen to the most recent quarterly conference call to generate our own assessment of its management.
   
4. We review the financial information, which includes the company’s cash flow, debt situation, profitability, and certain financial metrics we find helpful.
   
5. We then estimate what we think the future entails by calculating our own financial forecast for the next few years. 
   
6. If the future valuation looks compelling compared to today’s stock price, we’ll buy the security for our clients.

If meme investing is good for one thing, it should be that it ends the debate that markets are “efficiently priced”, meaning that no person can ever have an edge. Anyone that has an idea, conducts their own research, and stands by their conviction in volatile markets has an edge over other speculators that buy and sell tickers based on another person’s recommendation. 

Because of speculators, stock prices swing to many extremes. Sometimes a stock becomes too cheap while other times it can become far too expensive. As a firm, we look for these price disparities for our clients.