Don’t Be Fooled by the Meme Stocks
Meme stocks have a way of being in your face.
If, like me, you don’t give much credence to the news or spend much time on social media you might be wondering…
What the bleep! is a meme stock?
A meme stock is a stock that has gone viral online, drawing the attention of newbie investors.
…the reason for the meme stock’s stratospheric rise is not because it’s a great company that’s performing well. Nope, a bit like the Kardashians, meme stocks are famous for being famous.
Hype on social media and forums like Reddit make them famous.
Examples of these that saw loads of hype in 2021 were stocks like GameStop, AMC Entertainment – and even food giant Wendy’s. And in the crypto world, the dodgy Dogecoin.
It can be tempting to try to get in on a stock when there’s hype and seemingly big gains to be made.
Good old FOMO kicks in and this fear of missing out on “big wins” is a powerful psychological incentive that can threaten your wealth creation.
So where did this meme stock mania begin?
Nothing like a pandemic and loads of people stuck at home with time on their hands and, in the US and the UK, government stimulus cheques burning holes in pockets to create a whole new “game” to play.
Day trading surged.
Many people who had never invested in a single stock suddenly opened up brokerage accounts and went wild.
Commission-free apps like Robinhood made this kind of “PlayStation” investing easy – buying and selling stocks with a quick click became a game not unlike online gambling.
But rather than focusing on traditional metrics and solid fundamentals – let alone having any type of investing strategy – many of these “investors” turned to social media sites like Reddit to discover which “exciting” stocks were about to “go to the moon.” As buzz around a particular stock grew, more and more investors would pile in, often sending the stock flying higher.
Don’t fall into the trap… PLEASE!
The meme stock craze has made it seem like it’s easy to make money in the market by buying into each new hyped stock… it is not.
Rather, it is a sure fire way to lose money – and lose confidence in yourself and the stock market – and lose your opportunity to create real sustainable wealth by owning real, solid, successful businesses.
The meme stock trend has divorced many
stock prices from their fundamentals
Fundamentals are the metrics that tell us how strong and healthy a business really is.
GameStop, for example, is a brick-and-mortar video game retailer. The Covid pandemic and the rise of direct downloads for games were both headwinds for the company – its business had struggled for some time. For 12 months up to end August 2020 it traded between $3 and $6 per share. In January 2021 it soared to $300, in February 2021 it crashed back to under $50, in March it soared again and hit $260. It has been massively volatile ever since.
Obviously if you bought GameStop at less than $10 you were smiling. The problem is that most small retail investors only woke up and considered buying each time the stock went above $200, meaning that a lot of people lost money when they sold out in a panic. This is what happens with meme stocks – they draw people in when the price has gone too high. Of course, rumours abounded – how GameStop was transforming its business, and so on – but such rumours always accompany big stock gains. Analysts are forecasting that GameStop will make less profit in Q1 2022 than it did last year and the year before – and the company is posting quarterly losses. In other words, the price is going up because of meme stock mania – and that’s not sustainable.
AMC, likewise, saw attendance at its theatres crash during the pandemic… and it struggled to maintain relevance in a world where more and more people were turning to streaming content. Like GameStop it went up 1000%, crashed, went up again, and has remained volatile ever since. AMC is actually seeing an improvement in theatre attendance, but there is still no good reason for the stock to trade at double the price it did back in 2018 when more people were still going to the movies. The stock is driven by meme speculators; most retail investors will get burned.
Dogecoin was actually created as a joke. Its creators simply wanted to poke fun at bitcoin and other cryptos – it had absolutely no real application and no real purpose. It still has no real-world application – it only has value for as long as speculators think it has value. Which makes it a very dangerous asset.
The run-up in these “assets” was based on pure speculation.
Something as important as your financial well being
should not be based on a gambling game.
Surely each of us deserve to have something as important as our financial foundations be based on a solid strategy?
If you’re basing your wealth creation on what’s trending on social media and public sentiment, you will get trampled when everyone starts rushing for the exit door at the same time.
As easily as these stocks shoot up, they fall. That’s a certainty.
So what should we do instead?
Build your stock portfolio up from the bottom with a proper strategy.
First with index trackers, then top them off with great quality businesses that you buy and hold.
Build your solid base of index tracker funds first. This gives you ownership of a broad set of companies around the world.
Then, on top of this base, invest in a portfolio of stocks that you’ve selected consciously via a thought-through investment strategy.
You must know why you’re buying a stock.
Understanding your stock-picking strategy up front will pay dividends in many ways, and focusing on stocks that have great fundamentals will make it far easier to get great long-term results for your portfolio and ensure your investing success.
A great stock picking strategy includes two things:
- The long-term prospects that will allow a business to become much larger and more valuable than it is today.
- And more importantly, it lets you, as a shareholder, hold that business accountable for its results – it lets you see sales and profit.
If a company whose stock you own fails to live up to the potential you identified in your initial stock picking analysis, that could be a reason to reevaluate your investment. If it starts to move in a direction that differs markedly from the reason you bought the stock, then selling can make sense even if the stock hasn’t performed poorly.
The point is that there are business reasons for holding or selling the stock – it’s not just because Elon Musk makes a tongue-in-cheek comment on Twitter.
Own companies you believe in
FOMO isn’t fun. It’s hard to experience loads of hype and stand around wondering if you’ve missed the boat.
But leaving your financial well being to the whim of the luck-of-the-meme-stock-draw is a recipe for financial disaster.
With a great investment base of index trackers and a solid stock picking strategy, you’ll put yourself in position to reap the much-larger long-term rewards that being an investor brings.
So if you’re looking for a way to make more from your investments… instead of riding the meme stock rollercoaster… then please, click here to get instant access to our 3-part masterclass series.
Keep taking considered steps in the direction of your dreams and give your money great leadership so that it can work hard for you.
P.S. Our three-part masterclass series is a deep dive training into successful stock picking.
It will give you the skills and the confidence to build up a portfolio of great quality companies at the right time and at the right price, on top of your base portfolio of index trackers.
By the end of the three part training you will know:
- How to select individual stocks to add to your equity portfolio
- What information to use to make informed choices
- How to interpret the data the charts give you
- When to buy the shares you have selected, and
- How to buy your chosen shares to increase your returns and dampen volatility
Go HERE to get all the details and sign up to attend.