meme-stocks are a new phenomenon in the stock markets, emerging in 2021, also not quite as normal as the previous year. How retail investors can cooperate and beat the hedge funds. Why the securities of GameStop, AMC, and several other companies rose by thousands of percent on a wave of hype and what we can learn from these stories.
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GameStop story and other promo memes
5 Lessons from the GameStop story
- The People’s Pyramids
- The New Reality
- GameStop story and other stock memes
- The pandemic has contributed to a boom in the number of retail investors around the world. Trading on the stock exchange has become cheaper and easier. The GameStop case earlier this year demonstrated that when private players come together, they can make a mess of the stock market.
- In the U.S., with a population of 329 million, 52% of residents own stocks, of which over 13 million have the status of qualified investors. According to Mosbirzhi, in Russia, the number of brokerage accounts by May 2021 reached 12.2 million (unique registered clients in the trading system), or 15% of the economically active population.The GameStop story was far from the only one in which Reddit forum users or social network users tried to “warm-up” the stocks of companies with ailing businesses. But this was probably the most successful and long-lasting example of the cooperation of private investors.
The next to go was the AMC movie theater chain, smartphone maker BlackBerry, and retailer Macy’s. All of them were affected by the pandemic. In early June, a new activity was recorded. Reddit users noticed shares of Lemonade (NYSE: LMND) and Beyond Meat (NASDAQ: BYND). However, it’s hard to call these companies “vapors” of the stock market anymore. The term “meme-stocks” was coined for such stories.
As of the end of June, GameStop stock was up 4500% for the year; AMC stock was up 1160%.
GameStop is a regular seller of game content on physical media and game consoles, which had a developed network of outlets in shopping malls. In January, the company announced the addition of three new managers to its team to reorganize the business. The company’s stock rose slightly. But it was obvious to everyone that because of the decline in demand for its products, the company will suffer serious losses this year and next year.
Not surprisingly, large institutional investors, hedge funds, opened short positions on the shares of GameStop, expecting an imminent collapse. Next on the scene were Reddit users, who nostalgically recalled spending money on school lunches at the vendor’s stores. In less than a month, they were able to run up the company’s stock from $4 to $200.
Something similar happened to the AMC movie theater chain (+230% for one day in January). For a while, the hashtag #SaveAMC even stayed at the top of Twitter trends.
Retail investors managed to save both companies. GameStop and AMC, on a wave of hype, were able to float shares on the stock exchange and raise funds to reorganize their businesses. Of course, they are not worth the money they are currently being paid for. But the goals that were declared on the Reddit forum were achieved: the companies remain in the game, while the Wall Street spin doctors received a painful financial blow.
5 lessons from the GameStop story
The ideological subtext in both cases is the last thing worth focusing on. Perhaps some investors’ sense of nostalgia and desire to help a sinking business was the driver behind the whole movement. But people come to the stock market wanting to make money. Recent stories with meme-stocks are proof of this.
- The cases of GameStop and AMC opened a new reality in the stock markets, which professional investment managers, among others, have to reckon with.
Certain stocks have been overvalued or, conversely, played them down before. The details were found out after the fact. This was the first time this was done openly. Moreover, previously an institutional investor could have been penalized by the regulator for market manipulation. Now the SEC (U.S. Securities and Exchange Commission) doesn’t know how to respond.
- Until recently the institutional investors were in charge of the market. They operated significant amounts of funds. They could easily make money on the upside game if they knew in advance that a certain company was going to be hyped, and then hit it sharply in the opposite direction, leaving the Reddit guys with nothing. Today, a concentration of retail players can successfully stand up to big hedge funds and rob them of billions in profits.
- The emergence of a large number of newcomers to the stock market, willing to get involved in “ideological” stories, to cooperate, and to disregard multiples and business analysis, leads to increased market volatility, especially in low-liquidity stocks.
- Nothing has fundamentally changed for long position players. Yes, there is a small chance to hit the jackpot by guessing and buying shares of an undervalued company that will eventually be dispersed. But picking distressed companies is a questionable strategy.
- Serious consequences await players in short positions. The rules have changed, and they can no longer feel safe. Previously, such traders could do an analysis, realize that a company was rapidly or slowly losing ground in the market, and put on a short. Now there is a chance that a coalition of investors will take notice and strip them of their money.
When we buy shares at a long time, we understand that the company will not go down more than 100%. The price of the securities may go up almost indefinitely. When we short, we can earn maximum 100% if the company will go to zero, and lose much more if someone overpriced it (like in case of GameStop and AMC – thousands of percent). So it has become more risky to engage in shorts
“People’s” pyramid schemes.
Cases like GameStop operate on the principle of a pyramid. And like any pyramid scheme, they are unpredictable, otherwise professional players would be happy to invest in them. Sooner or later such stories collapse. Like a children’s game, while the music is playing, everyone runs around a limited number of chairs. But at some point it stops, and you run the risk of being left with these stocks in your hands, but they’re no longer worth anything.
New meme stocks with similar run-up scenarios shoot up for a short period, then return to their “normal” state. There is no more support like GameStop and AMC, which means there is no longer the money supply needed for a long run upside play.
The chances of getting into such a story in time become less, and the risks of losing increase.
The New Reality
Meme-stocks are not about rational stock market trading. So far, such stocks have two key characteristics:
Significant growth of quotations in a short period;
Absence of reasons for such growth and logic, presence of a hype.
The market has not yet figured out how to behave in such situations. The ball is on the side of institutional investors and regulators. Whether they will find the tools to correct the imbalance that appears in these stories on time, and more importantly, whether they will want to, is currently an open question.
Retail investors with small amounts of funds have felt their strength. They will take advantage of it until they start losing their money. The SEC doesn’t yet see any reason to take corrective action against such stocks. The brokers who tried to limit the trading of meme-stocks (Robinhood, for instance) were even given a warning during the days of especially strong growth.
Is it worth it to buy shares, which suddenly burst in price on a wave of hype? Only if you like taking chances. All the above-mentioned stories say that the rapid growth of share prices does not mean that the company runs a successful business and this attention to it is fundamentally grounded.