‘Meme stocks’ and investment hype – When it sounds too good to be true, it probably is

The internet is infinitely expansive, but if you only socialise with like-minded people, it can also be a small place.

Counter argument, and inconvenient facts all can be set aside, and more easily so, if you are in an echo chamber. More importantly, if you are not careful, you can make yourself believe in any suggestion.

GameStop Corp, AMC, and Bed, Bath & Beyond are three of the more prominent stocks that experienced a dramatic increase in their share prices in early 2021. Individual investors, fuelled the price increase by talking up the stocks in social media and focused online forums, and these stocks became known as “meme stocks”.

A big part of the zeal associated with these meme stocks, especially GameStop, is the idea that collectively, long powerless retail investors have an opportunity to stick it to the big, bad, hedge funds.

According to SEC, the securities regulator in the United States, the media characterised “trading in GameStop as an act of rebellion intended to humble short-selling professional investors who had allegedly targeted the stock”. The SEC further observed that the price and volume movement of GameStop “coincided with substantial interest expressed in certain online forums devoted to investing, including YouTube channels and the subreddit WallStreetBets”.

Fast-forward more than two years later, ‘Dumb Money’, a movie about the GameStop meme stock craze is now out in theatres in the US (I have not found information on when it will be shown in Malaysia).

According to the plot summary, “‘Dumb Money’ is the ultimate David vs Goliath tale, based on the insane true story of everyday people who flipped the script on Wall Street and got rich by turning GameStop (the video game store) into the world’s hottest company”.

You can watch the trailer here (warning, a lot of swearing). The last lines in the trailer are telling. “A lot of people feel the system is broken … there’s no hope for the little guy.”

Well, I don’t know. If you have the means to be involved in financial market speculation with your own money, maybe you’re not a little guy.

Little or prudent guys, mostly invest in their retirement and children’s education through long-term investment in diversified portfolios, usually managed by professionals.

The UK Financial Conduct Authority (FCA) seems also wary of the David and Goliath premise of the movie. It is running advertisements at the beginning of the theatre showing ‘Dumb Money’, which aims to raise awareness of the risks associated with investment hype, by taking an innovative approach to cinema advertising.

It has commissioned a unique advert linked to ‘Dumb Money’. The FCA’s advert has been created to help consumers understand the impact that hype can have on investment decisions and encourages them to carry out careful research if tempted by an opportunity they find online.

It is an innovative tactic by the FCA – buying a premium time slot for an educational/warning advertisement prior to the showing of a movie about exactly what the warning is about.

In the digital world, regulators and consumer advocates are always a few steps behind digital adverts and outright solicitation delivered directly to personal devices. Outside regulated activities, promise of investment opportunities often go unchallenged, so it is nice to see this for a change.

On the last day of 2020, AMC closed at US$8.25. At its peak in June 2021, it was trading slightly above US$230. GameStop price action was more dramatic – from about US$5 to US$81 in January 2021.

In the first days of this month, AMC is trading slightly above US$8 while GameStop’s stock price is about US$15. Bed, Bath & Beyond initiated bankruptcy proceedings late last month, and if you are one of those meme stock buyers still holding on, you will get zero of your money back.

It’s evident from the current stock prices that many of the meme stocks purchasers have relinquished their positions. Some probably made tidy profits, but what happened to the followers who bought at higher prices, or worse, those who are still holding on to the stocks?

The SEC report on the meme stock episode concluded: “Underneath the memes are actual companies, with employees, customers, and plans to invest in the future. Those who bought GameStop became co-owners of a company through a system of mutual trust and participation that sustains our economy. People may disagree about the prospects of GameStop and the other meme stocks, but those disagreements are what should lead to price discovery, rather than disruptions”.

The capital markets might have some unsavoury aspects, especially to the untrained, so don’t be too quick to believe that people, mostly anonymous, have your interest at heart when they share once-in-a-lifetime investment ideas, or claim to be fighting ‘the power’.

The views expressed here are the personal opinion of the writer and do not necessarily represent that of Twentytwo13.

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