Meme Stocks: All-In or Not So Fast?
As someone who spends their days knee-deep in the markets, I’m always skeptical when financial news breaks out into mainstream fame.
My rule of thumb is this…
If an investment idea comes up at a family dinner, proceed with caution.
So when my brother-in-law asked recently about the merits of “meme stocks,” I took a deep breath and stepped onto my soapbox.
I don’t think he was prepared for my answer…
“BANG” or Bust?
When your best friend’s cousin’s hairdresser starts to get excited about a stock, that industry is likely in a bubble.
We saw it with Bitcoin in late 2017. The woman running the coat check at our holiday party boasted that she had just bought a bunch without fully understanding what it was. She just wanted a quick buck.
We saw it with pot stocks in 2018. On Thanksgiving, my cousin told me he had bought a stock called Aphria. (Yes, I had heard of it…)
And now we’re seeing it with meme stocks. These were the stocks that everyone loved to hate – until they reached internet fame and jumped out of their graves.
At the beginning of the summer, Chief Trends Strategist Matthew Carr wrote that every company wants to be the next meme stock. And that’s true. The craze turns serial underperformers into breakout successes.
But just because their stock prices have skyrocketed doesn’t mean that anything has changed with their business prospects.
This kind of herd mentality – and the practice of following anonymous financial advice on a social media platform – is toxic for all investors.
Novice traders now think making big money is easy. They think you can pick any stock and it’ll return thousands of points in growth overnight.
Even seasoned traders are now questioning their tried-and-true methods. Is it enough of a good recommendation if the company isn’t an internet sensation?
So here’s what I told my brother-in-law…
And I’m telling you now – as if we were sitting across the dinner table from one another…
With meme stocks, you’re not investing based on the value or potential of the company but rather the fact that everyone else is also buying into the hype.
Real money can be made there, but real money can also be lost. It’s only “profitable” if you already own the stock and, all of a sudden, it goes up. Otherwise, you’re likely buying at the top and your investment will only go down.
I would steer clear of meme stocks.
Eeny, Meeny, Miny, Moe
Call me old-fashioned, but I don’t believe meme stocks are the future. I believe they’re a fad.
Yes, you can make money by investing in these companies.
But I’d place this practice in the same risk category as throwing a dart at a list of S&P 500 Index companies and hoping for a winner.
If you’re feeling lucky, buy a lottery ticket instead.
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