Meme Stocks: Opportunity Or Insanity?

Should I invest in meme stocks?

I have a close friend who had purchased some options on GameStop and ended up selling them for a loss just weeks before the GameStop meme hype launched. His profits would have been upwards of $500,000! It's this type of "fear of missing out" (FOMO) that often fuels users to partake in the meme stock hype. 

There are, however, stories of investors becoming millionaires overnight by investing heavily in meme stocks - this doesn't mean you should join the FOMO group, the "diamond hands" "HODL" investors (more on this below). Should you invest in Meme stocks? If so, how? Let's take a look with my opinion and strategy towards the end.

What is a Meme Stock?

A "meme stock" is a stock that has seen a significant amount of trading volume and price movement - not necessarily because of the company's underlying fundamentals - but rather due to social media hype and individual retail investors banding together. Often, these movements can be driven by discussions on online forums and social media platforms such as Reddit's r/wallstreetbets, Twitter, or other online communities.

With the rampaging trend of meme stocks came popular acronyms and sayings such as:

• Diamond hands: This slang term refers to individuals who hold onto their investments, particularly stocks or cryptocurrencies, even in the face of potential losses or high market volatility. The term suggests that the person has the strength and resilience of diamonds in their commitment to not selling their position, even under pressure. This became especially popular in 2021 during the GameStop surge amongst the r/wallstreetbets community on Reddit.

• HODL: "HODL" is a term used that means to keep and hold onto an investment rather than sell it. It's often interpreted as "Hold On for Dear Life." The term "HODL" originated from a misspelled word in a post title on the BitcoinTalk forum in December 2013. The user wrote "I AM HODLING" instead of "I AM HOLDING" in a post expressing his decision to keep his Bitcoin instead of selling during a market downturn. The humorous typo caught on, quickly becoming a meme within the cryptocurrency community and later in the meme stocks uprising.

• To the moon: "To the moon!" is commonly used in investment and trading communities. It signifies the belief that the price of a particular asset, such as a stock or cryptocurrency, will experience a significant rise in value. Essentially, it means that the price will rise "to the moon." This is another term that gained substantial recognition during the surge of meme stocks.

Meme Stock Examples

Several stocks have been characterized as "meme stocks" due to their popularity within online communities and rapid, often volatile, price movements that seem detached from traditional market fundamentals. Here are some notable examples:

GameStop (GME):

• The story: GameStop was one of the most prominent examples of a meme stock. It caught the attention of retail investors on Reddit's r/wallstreetbets in late 2020 and early 2021. Many users believed the stock was undervalued and began buying shares and options. They also noticed a high level of short interest in the stock, which meant that many institutional investors were betting against it. This led to a massive short squeeze in January 2021, causing the stock to surge from around $20 to over $400 in a matter of days.

• The outcome: The rapid rise and subsequent volatility caught the attention of the media, regulators, and the broader public. It sparked debates about market manipulation, the role of retail investors, and the practices of modern trading platforms.

AMC Entertainment (AMC):

• The story: AMC, a movie theater chain, faced challenges due to the COVID-19 pandemic. Like GameStop, it was heavily shorted by institutional investors. In 2021, it became another target for retail investors from online forums, leading to a significant surge in its stock price.

• The outcome: AMC capitalized on the interest by issuing new shares and raising capital, which helped its financial position.

BlackBerry (BB):

• The story: BlackBerry, once known for its smartphones, transitioned to software and services. While its business model had changed, it became another favorite among the meme stock crowd, driving its price up.

• The outcome: The stock experienced increased volatility, similar to other meme stocks.

Nokia (NOK):

• The story: Nokia, the Finnish telecom company, was grouped with other meme stocks during the January 2021 frenzy. It saw a spike in its stock price, even though the company itself announced that it wasn't aware of any material developments that would account for the sudden interest.

• The outcome: After the initial surge, Nokia's stock price settled as attention from retail investors waned.

Bed Bath & Beyond (BBBY):

• The story: This retail company was another target of the meme stock phenomenon. Like others, it had a high short interest and became popular among online retail investor communities.

• The outcome: The stock witnessed heightened volatility during the meme stock craze.

These are just a few examples, and the meme stock phenomenon is dynamic, with new stocks occasionally garnering attention from online communities. 

What Fuels Meme Stocks?

How does a company become a meme stock? What fuels the unorthodox growth? Here's a breakdown of why and how mem stocks become popular:

1. Internet Communities & Social Media: With the rise of online platforms and communities, large groups of people can congregate and discuss specific interests. In the case of meme stocks, platforms like Reddit provided a venue for retail investors to discuss and rally behind particular stocks.

2. Narrative and Pop Culture Fusion: These stocks often have a compelling narrative behind them that can catch the imagination of the general public. This can be a perceived injustice, like hedge funds shorting a beloved company or simply the thrill of banding together to move markets.

3. Retail Trading Platforms: Modern trading platforms like Robinhood, which offer commission-free trades, have democratized stock trading. With the barriers to entry lowered, many new retail traders have entered the market, and they can be more influenced by social media than traditional market news.

4. Short Squeezes: Some meme stocks became popular targets for short squeezes. A short squeeze occurs when short sellers (who bet against a stock) are forced to buy the stock to cover their positions due to rising prices, pushing the price up even further. In some cases, online communities have targeted stocks with high short interest intentionally, trying to trigger a squeeze.

5. COVID-19 Pandemic: The increased time people spent at home and the stimulus checks provided in some countries gave many the time and extra cash to start trading. This influx of new retail traders played a role in the rise of meme stocks.

6. Media Coverage: As events like the GameStop short squeeze in early 2021 gained momentum, they caught the attention of mainstream media. This coverage further amplified interest in meme stocks, drawing in even more participants.

7. FOMO (Fear of Missing Out): As stories of individuals making significant profits from meme stocks spread, others wanted to join in, fearing they might miss out on potential gains.

Should I Invest in Meme Stocks?

Most of the time, investing your time, money, and effort in meme stocks results in loss or negligible gain. That said, trying to time the market and win big with meme stocks is almost pointless. Remember - stocks are volatile and unpredictable in the short term but very predictable in the long term. If you think you can time a meme stock and win millions on your ability to predict the short-term movements of a stock, you're on rocky paths. 

However, there is a world in which some of us like to test the waters and see if the fate of a million-dollar profit is staring us in the eyes. If you need to scratch that itch, then only invest an amount of money you are okay losing completely - usually only between 1% - 5% of your overall portfolio.

The Bottom Line

Meme stocks are exciting to the natural man - meaning that people don't like to miss out on a growing trend and want to get in on the action. However, jumping in without proper research is a formula for disaster. Having said that, investors wishing to invest in meme stocks should do so cautiously. I don't see any problem with dipping your feet in the water with a VERY small percentage of your portfolio. 

However, betting your life savings on such a speculative strategy may cause major heartache and stress, to say the least. I plan on sticking to long-term stock-picking strategies rather than betting on unpredictable investments.