Meme stocks
These stocks were propelled by a new class of investor with unconventional motivations and processes. These mostly younger, social media-obsessed “stock memers” pursued risky investments, not due to their potential future growth, but because they seemed to promise quick profits while at the same time allowing them to, in the jargon of an earlier generation of rebels, stick it to the man.
It started as a digital grassroots activist investing movement around the start of 2020. Instead of looking at dry data to provide a thesis for action, participants posted emotional, attention-grabbing narratives about particular stocks on social media message boards in order to drive up the price of the — until recently — doomed stocks they had just purchased. Pushing the price of these stocks up caused the institutional investors who had been shorting the stocks to cover their shorts and lose money.
A mystique grew up around these “kids,” namely that they were making money while watching the rich hedge funders suffer. Of course, by that point, the same rich hedge funders had already started manipulating the movement to their advantage.
Most Americans probably weren’t even aware of the phenomenon until it became headline news when meme stocks like GameStop in January of 2021, and then a few months later AMC, shot up. By that time, both the early adopters of the strategy and Wall Street were relying on the “greater fool” to come in and continue to pump up the prices to their advantage. Of course, the last dollars thrown onto the pile were the first to blow away when sentiments changed, and their investments tanked.
Ironic investing?
Investors who participated in this trend looked past the obvious risk of investing in a dying mall chain store like GameStop. They weren’t concerned with the store’s value; rather it was more like tongue-in-cheek investing, buying with a wink or the equivalent of sarcastic aside. And it was kind of funny — until the stock crashed and a lot of people lost significant amounts of money.
What motivated them? Put yourself in the shoes of many of these young adults for whom many of the traditional paths to success felt out of reach due to the cost of higher education. Then COVID-19 hit and they had extra time on their hands and, in some cases, extra money due to the combination of stimulus funds and unemployment insurance. These new investors now took an alternative path. With great numbers of relatively small-dollar investments, they looked for ways to ”pants” an older generation still flummoxed by crypto.
The initial success of the meme stock strategy happened to a generation that hadn’t fully experienced a true bear market. Winning is the worst thing that can happen to a gambler on their first trip to a casino because it fools them into thinking they can create a sustainable winning strategy. But for stock memers, the hot streak has long since ended, and I don’t see it reviving anytime soon.
Client ‘play’ time
Yet these aren’t the only investors who like to live dangerously. As advisors, you may have clients — and not just the younger ones — who are looking to see what the “cool kids” will do next. After all, establishing goals and a strategy to achieve those goals and then religiously sticking to that plan through challenging times is boring and may feel like leaving money on the table. Why do that when meme stocks — or the next hype trade — promise quick profits?
While we know that the slow and steady path is still likely the best way to reach one’s financial objectives, we also know that people have urges that need to be satisfied. If a client really feels the desire to partake in more speculative assets, then let them — on a very limited scale, of course, by giving them a small “play” account.
The amount in this account should not be based on a percentage, but rather on how much the owner can afford in dollars. For example, 10% of a portfolio may not sound like a lot but if that portfolio is $1 million, then $100,000 is a significant amount of money to most people. If whatever the dollar amount gets invested in something like Dogecoin/AMC/GameStop at the peak and then it drops, will the account owner still be OK with losing so much? The funds in the play account should be treated like the money you bring to a casino — only bet what you’re willing to lose.
Any profit generated by this account should be considered a bonus and not a component of your client’s overall portfolio performance. If the play account does well, great. If it doesn’t, your client’s wealth will be minimally impacted.
When talking to clients about where they plan to invest the money from their play account, ask where their ideas are coming from, and be careful how you express yourself if they are way off-base, because it could risk the relationship. But you can suggest reasonable sources of information that you know offer a balanced approach to research — or just let them have fun in the sandbox while you take care of the serious business of their future.
Additionally, having your clients share their play account statements will enable you to see where they are looking for financial love as well as providing an invaluable window into their psyche. Whether they are searching for the next stock rocket to the moon or hoping to inflict just a tiny bit of pain on the fat cats, the better you know where your clients are coming from, the better chance you have of guiding them through the long haul that is the still mostly boring world of long-term investing.
