Thomas F. from Sacramento, CA asks: Hello Mitch, I’m curious to hear your thoughts about the staying power of so-called “meme stocks.” I have read your columns for some time, so I know you probably advise against chasing heat. But I’m curious if you see something else at work here? A shift toward empowered individual investors?
Mitch’s Response:
Thanks for sending a question, Thomas, and for being a long-time reader. I appreciate it.
For readers who may not be familiar with the concept of a “meme stock,” it is in reference to stocks like GameStop and AMC that have been popularized in online forums like Reddit and on social media. Viral videos, hashtags, and discussion forums have given way to wild volatility in a few of these names. The financial media cannot get enough.
You were spot-on in your question, Thomas – I do not advocate getting swept up in trading mania for a handful of individual stocks. “Chasing heat” is one of the oldest and most common mistakes an investor can make. It’s well-documented. Yet investors keep making the same mistakes anyway.
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This is not to say that there are not quite a few individual investors who have made a pretty penny in meme stocks. I’m sure there are plenty of success stories and overnight millionaires to cite. But for most investors, the risk of trading based on emotional drivers and headlines far outweighs the potential benefit of making trades at just the right time. Over time, there are more losers than winners.
The fundamentals of the two most popular meme stocks today, GameStop and AMC, are just plain bad. AMC lost -$1.42 per share in Q1 2021, which was 10% lower than most analysts expected. Net income fell by -$567 million in the quarter. GameStop’s adjusted EBITDA was ($0.7) million in Q1 2021, compared to a loss of ($75.5) million in Q1 2020. For GameStop, these are sizable losses for a company specializing in gaming, an industry that should have enjoyed brisk tailwinds during a lockdown and economic restrictions.2 Investors truly focused on fundamentals should not go anywhere near these stocks.
Some readers or meme stock enthusiasts may see this position as out of touch, which I’m perfectly fine with. As I’ve written before, I don’t need 100+% gains in a few months to help Zacks Investment Management clients reach their long-term goals. Most investors who are focused on long-term outcomes are not interested in the levels of volatility that come with investing in meme stocks, either. It’s not worth the uncertainty, and it strays way too far from the disciplined approach we employ here.
I do see some positives to the story, however, pursuant to the part of your question about “empowering individual investors.” I think it’s generally good to see more and younger investors interested in the stock market. Investing to build wealth over time is the crux of what we do and what we believe in here at Zacks. That said, Mr. Market has been teaching individual investors – particularly overly confident ones – hard lessons for centuries. The next market dislocation could deliver a hard reality check to heat chasers, which I hope reinforces the benefits of diversification and fundamental investing.
Those are two factors that I recommend for investors who are building their retirement nest egg. In addition, I recommend planning a retirement strategy that takes the “what ifs” into account. Our free guide can help you to prepare for what’s to come as you strive for long-term success.
If you have $500,000 or more to invest, get our free guide, How Solid Is Your Retirement Strategy.3 You’ll get valuable and practical ideas to help build a “weatherproof” retirement strategy that can potentially protect your retirement nest egg from any storm that could threaten your financial security.
Disclosure