¶ Understanding the Meme Stock Phenomenon
Hello and welcome to Skeptic's Guide to Investing . I'm Clem Miller and I'm here with Steve Davenport , and today we're going to be talking about so-called meme stocks . As we know I'm sure you know too meme stocks have a kind of cult following Companies like AMC and GameStop and others and there's usually a what we would call a belief leader .
You know somebody from Reddit or you know somebody who's sort of you know telling everybody what Roaring Kitty , telling everybody what roaring kitty , roaring kitty correct , uh on reddit or somewhere else who's saying , uh , that they should buy , or signaling that they should buy a particular stock at a particular time , and , uh , and really taking their advice readers ,
taking their advice from these characters . So , steve , what's going on here Is this sort of like Berkshire Hathaway , tesla or Nvidia . I mean , these are real companies Berkshire Hathaway , tesla and Nvidia . Should we look at those as kind of semi-meme stocks , or how would you compare these meme stocks to Berkshire Hathaway ,Tesla and Nvidia ?
Well , I started to look at the definition of what people talked about with the meme stocks and they said it was a cult-like following . And I've been out to Omaha for the Berkshire meeting because I had a large client with Berkshire and I would say that is a cult like following . I mean , these people believe in what Buffett does and how he does .
It is the only way to go and in some ways I use that as an example to say there are things out there that we don't understand and I don't understand why there is this effort for meme stocks .
I think that when you look at why we buy stocks at least you and I , glenn I think it's because they have earnings , they have growth , they have a competitive advantage , and I think that those are the things we look at . I don't wait for Roaring Kitty to tell me boy , now's the time to get into some ASML .
I think that the chip manufacturing is going to really take off . If it was that easy , if everybody could do that , don't you think we would all just make money . The question is , who's on the other side of this trade ?
If Roaring Kitty says to buy GameStop , I'm not going to fight GameStop , but I'm also going to look at GameStop and say how much of it is impacting the economy and why do I want to own it if that area of used videos is only going to represent a small part of the economy ?
So I look at this whole meme stock events as I thought they were over and when we go back and look , it was a strange combination of events that created the meme stock phenomenon and I'm asking are we doing this again ? Is now it changed again to a point where we're saying , hey , we're going to redo what we did in 2021 ?
I got a question and say , no , I don't think we can , because that time was very special For a couple of reasons .
Well , I tend to agree with you , but if you look at around Problem is , if you look around now you actually see some Meme stock like behavior , even beyond the traditional meme stocks .
You've got , for example , bitcoin , which was doing quite well a few years ago and has recently done pretty well again , despite the enormous amount of bankruptcies and litigation and criminal convictions that we've seen over the years . And yet Bitcoin is still doing well and , as we know , bitcoin has no earnings .
Bitcoin has no substance beyond just the sentiment of those who buy and sell it .
I'd also point out , without getting into politics , I'd point out that there is what I would call a mega mean stock , which is this DJT or Trump Media and Technology , and yet is buoyed , in terms of its share price and its market capitalization , by those who expect their presidential candidate , trump , to win an election and make it a big platform for everybody .
So , yeah , I think that's a mega meme stock . So you've got all this . You've got the mega meme stock , you've got GameStop , you've got AME , you've got Bitcoin . There's a lot of sentiment out there that is not driven by fundamentals .
Yeah , when I look at what happened in 2021 , we were in a situation where we were still kind of locked down . People had extra time because they weren't commuting . And then also , people had these payments they got from the government and younger people said , hey , I can take that payment and I can double , triple , quadruple it in a couple of weeks .
That's a better use of my time than what else . I could double , triple , quadruple it in a couple of weeks . That's a better use of my time than what else I could be doing . So there was a lot of liquidity . And again , the two names , AMC and GameStop , were both much smaller .
So , when we look at the number of shares , gamestop had 67 million shares in 2021 , and now they have almost 300 million shares . So they've issued more shares . Therefore , the impact that these people are going to have is going to be much different . We don't have as much free cash flow .
We don't have as much individuals who have savings balances because of the government programs . So I think that it's different this time , and it is different because there isn't as much free cash . There isn't as much of an ability to manage some of these . Tesla is too big .
Tesla can't be a meme stock , because you can't influence Tesla that quickly or that easily by just saying on Reddit hey , I think we should buy Tesla . There just isn't that much individual retail liquidity that is going to push that up .
Look at some of the names in a smaller space and , yes , we will see stuff , and DJT is a good example , bitcoin , a little bigger example , and I would say that Bitcoin is partially about meme and partially about this idea of safety , as inflation and other things cause people to lose respect or confidence in US dollar and large governments and establish currencies .
I think there's a lack of respect or a lack of understanding that some of these people buying these alternatives really don't have a full understanding of what's going to happen .
When there is a liquidity crisis and people need liquidity , they're going to sell the things that are going to be more volatile first , because they want to stabilize and bring down their volatility and their overall portfolio . But is the meme period back ?
I think it could be for period of time where you have sort of a youth protest you know unrest in this country and of course we see that with respect to the Gaza situation . But you know , in a way , with these meme stocks , this is sort of a way to go after Wall Street , sort of like Occupy Wall Street was . Those protests were a number of years ago .
This seems like a way of being able to use the system against the system . Do you agree with that ?
Yes .
I think there's a lot of .
¶ Speculation and Impact of Meme Stocks
I hate the man . The man makes the money and I want to do things to hurt the man , right ? So I I believe that when you look at these things , there's usually more than one motivation , right ? I think that some people like the idea of earning money , but they also like the idea that somebody else is going to help them to do it .
And so when , when I look at this , I'd say , well , how do I know ? When I bought it , I made money . Now , when do I sell ? And that's that second part that doesn't seem as democratic . We all say , hey , we can all do this together . We all get online , we all fight the big man , wonderful .
But then I say , well , when do we stop fighting and just take our money and go home ? Is that the you know ? Is that the objective ? I think it should be , because you can .
You can take your profits from the man for a period of time , but eventually , you know he might start to take some , some back from you and real , real investors both real investors and gamblers need to know when to cash in right . I look at this and say this is speculation , this is an investment .
We're just speculating that we think gamestop is going to keep going up and my question is what ? What's that based on what ? What are the fundamentals behind it and how do you know that you're right ? And I would look at people and say I don't think you can really tell me there's a system here .
So therefore I don't think you can say there's an investment here If it's not based on something that we can track , understand and monitor , then we're just doing something based on an idea or an image . And I love the Roaring Kitty and I love some of the TikTok videos and I love some of the crushing of the hedge fund people .
I mean , who doesn't like a good cartoon ? Everybody likes a good cartoon . Everybody likes a good meme . And therefore we should celebrate this as entertainment . We shouldn't celebrate it as investment .
If we give more attention to it , what we're doing is we're diverting ourselves from the real work of trying to understand how to add value and how to pick the best companies . How to pick the best companies . These are not the best companies . They just simply are not .
So I look at it and say our job is to come up with better companies , not come up with better means .
So , steve , that's right . So , steve , how do options play into this ?
So there's a lot of small individuals who , when they got their 1,400 , 1,500 from the government , they started to use options because of the leverage involved . If you look at a stock that's a $600 stock you need to spend $600 to buy a share .
If I look at the option which is a three-month or a six-month option for $6 , $12 , $18 , I can get exposure to that upside of that individual company . So the people in the meme frenzy are not just going to do things that are mildly effective . They're looking to speculate and they're looking to make as much money as they can as fast as they can .
So what do you think they use ? They pull in that old steady force called leverage and when you add more leverage , guess what ? You make more money when it goes up , but when you use more leverage , you lose more money when it goes down . There is no free lunch and what I'd say is that options have been used in this space before .
Options overall are improving the use around the world . Option usage has increased . People have taken more short-term views with options than with stocks and therefore the market has changed . I don't like this change .
I don't think this change is good for the average investor , but we got to report on , understand and use what we know in order to do the best we can for clients .
So , Steve , has this spoiled markets for an age group ? And by that question I mean we've got a generation now of folks who understand investing through the lens of meme stocks . Are these folks ever going to learn about real investing , or have we lost a generation to something that's really just gambling ?
I feel like we've got people who are going online looking for solutions and I think when you look at what's written online and it's not official , it's not a person who's qualified to comment , it's just an individual saying what they want .
And when you look at doing it on a platform where you don't really identify the individual , it's just based on a name Roaring Kitty and you don't know how qualified Roaring Kitty is versus Warren Buffett . So it's a strange world where we can , all of a sudden , we go to a doctor , we look and say where did he go to school ?
How long has he been doing this ? And yet , when we look for investment advice , we go to a Reddit platform or we go to social media and we expect if somebody's writing something there , it's legitimate . It's no longer legitimate than anything else that's written . So therefore , how do we get people back to what I'll call qualified advice ?
And I think that it's a matter of trust . I think that we've , as a unit , the American people have started to not trust what's going on in other parts of their lives , and I feel like that lack of trust has a lot of reasons for it , but it is impacting investing .
In my mind , it is allowing more people to just follow the herd , and I think there's some wisdom in the herds , but I also think there's some evil and some mistakes that are going to get made when you follow the herd .
So I think social media has helped create a mind that's more chaotic and invested and that ultimately , more chaos and more volatility and more people making irrational decisions ultimately will lead to lower results and a bad feeling about the market .
That bad feeling of the market will mean people distrust it and they might not follow and invest in it the way that you or I did when we just said okay , I get paid twice a month , I get money put in twice a month and over time , I believe it will work .
I'm starting to feel like that type of investor who's going to look to facts and information to solve the problem is going to be lost going forward , because those type of people won't tell their kids to do this .
I feel like we've got now a gap in our education because of I would say we didn't do a good job starting out to educate everyone and now we've started to see financial literacy get more widespread , but we've still got a big problem there's still a lot of people who aren't being educated , and ultimately that leads to more people following meme-like ideas .
So , steve , let's turn to the mailbag . Have either of you bought AMC or GameStop ? I have not . How about you , steve ?
I'm also a no on that . I think that for me , it comes down to the same question of crypto . Do you understand why the price is the way it is ? What are you investing in , what advantage or why this particular investment ? And all of those questions for GameStop don't come up with the right answer .
So I would say no . So another question here in the mailbag what do meme stocks tell you about science and the art of investing ?
you about science and the art of investing . I would look at this and say there is no science , because people are basically doing these things on emotion , uh , and on speculation , not on information . Um , I like to think that when you think about great art , it's hard to increase that great art to . It's hard to trace that great art to cash flow .
So there are things that you do buy based on instinct and based on the idea that it has some beauty or some value , and so I don't want to say that I would never buy anything unless it has cash flow .
But I do think that it's hard to identify that intrinsic value and benefit for meme stocks , because I do like the idea of hey , the hedge funds lose a billion dollars in their shorts .
I think it's a drop in the bucket , just like you talked about with the Fed , where there's a lot of other factors as to why hedge funds lose money , and I don't think you can really it's kind of an illusion to tell people hey , what you did by pushing the price up , that really hurt the hedge fund .
That hedge fund has no relations to understanding that you were the one who was buying all that game stuff caused this rise to occur , your impact is less .
With more shares , there is not as much cash on hand from individuals , so I would say your impact in hurting that hedge fund is much less than it was the original time , and every time thereafter it's going to be less . Therefore , this isn't something that I think has room to grow .
I think this is something that is going to get more and more regulated and more and more squeezed out so that it will be harder and harder to achieve , and I think , ultimately , that's probably good .
Yeah , I mean , I think I totally agree with you , steve , and I would say that the challenge for regulators and for institutional investors is to somehow manage to control this herd of meme investors , because that's essentially what it is . It's a herd , it's behavioral finance run amok . They've got to do something to control it more .
I don't mean squash it necessarily , but to squeeze out some of the excesses , just like they've squeezed out excesses in other areas over the last few decades . So I think with that unless , steve , you have anything more to add I would say that we appreciate everybody listening to the podcast Skeptic's Guide to Investing .
We appreciate any comments you might want to make to us over email or text or whatever , and we look forward to our next podcast . I hope you do as well . So thank you everybody for listening to us . Bye-bye .