Key Takeaways

Meme trading is back, with stocks like Opendoor (OPEN), Kohl’s (KSS), and GoPro (GPRO) suddenly spiking in value largely, if not completely, due to online hype.
A quick recap of AMC and GameStop (GME), while some people made money, a lot of investors who got in during the hype would be sitting on losses from -70 to 95%.
But it’s not just online forum hype this time; some data suggests that AI trading models might be partly to blame as they scan and aggregate social media chatter, forums, and the news for spikes in specific stock mentions to decide what stocks to punt on.
Remember that buying stocks is buying a piece of ownership in companies. It’s important to invest your hard-earned money in stocks that appreciate in underlying value. Unless you’re in it for the game

One of the important factors behind the fluctuation between bull and bear markets, between booms and crashes and bubbles, is that investor memory has to fail us – and fail universally – in order for the extremes to be reached.

— Howard Marks

It might have faded into the background for a few years but it appears that

Meme stock investing is back

Back in 2021, GameStop (GME) and AMC Entertainment (AMC) were the toast of Reddit and online investing forums. Stocks that had barely any research and were previously mostly ignored by investors suddenly skyrocketed in value, all without any meaningful change in their earnings or corporate situation.

The latest batch of meme stocks includes companies like Opendoor (OPEN), Kohl’s (KSS), and GoPro (GPRO). Like the earlier meme stock craze, the share prices of these companies have suddenly spiked in value (seen below), not because they have suddenly initiated a turnaround in earnings, but completely due to online hype.

It is likely that some people have made money from these stocks. But —

before trying to chase them, remember that it is a form of stock picking and market timing; you’re throwing the dice and taking a gamble. Sometimes it works, but more often than not, it fails.

Looking back to the original meme bunch of AMC and GME, investors who got in during the hype and bought not even at the peaks would be sitting anywhere from a -70 to -95% loss. (Stock prices during that saga pictured below)

Meme ETF?

In 2020, Roundhill Investments actually launched an exchange-traded fund (ETF) to capitalize on the meme-stock craze. Unfortunately, the Roundhill MEME ETF (MEME) — yes, that was what it was named — has shut down and has been liquidated about two meagre years after its launch. Although lack of investor interest was cited as the primary cause of its closure, it is likely that its lackluster performance was the main driving force (show below):

-53% since inception

But why are there periodic episodes where there is a sudden explosive interest in some off-the-beaten path names? The fear of missing out (FOMO) is one cause. The irresistible urge to jump on the bandwagon when you see your friends making a quick buck is another.

When looking at irrational herd-like behaviour, psychoanalysts refer to a process called “splitting” — where individuals, unable to cope with their own good and bad qualities simultaneously, “split” the bad ones off and attribute them to other people. What emerges is an exaggeration of one’s own virtue and innocence, and a similarly exaggerated picture of the selfishness and corruption of others.

So for the first meme run in 2021, the underlying narrative was compelling — a big group of retail investors organised through an online forum to buy up shares of companies like AMC and GME in order to bankrupt billion-dollar hedge funds who had bet the opposite way. A classic tale of ‘good’ vs. ‘evil’, supported by… Elon Musk?

The Role of AI Trading Models and Trends

This time round, meme stocks like OPEN, KSS, and GPRO aren’t rocketing higher only due to online forum hype. AI stock analysis website AInvest suggests that artificial intelligence models are partly to be blamed for this mania, noting in an article that AI-powered stock-tracking tools scan social media, forums, and news headlines for spikes in specific stock mentions or unusual trading activity. In addition, these retail investors use platforms like Quiver Quantitative and AltIndex to aggregate social media chatter, options volume, and sentiment scores in real time, to decide what stocks to punt on.

Statista data also shows that AI models tend to take a lot of their info from online sites such as Reddit, Wikipedia, and YouTube, where information trawled is often unverified and subject to discrepancies from user input.

Consider The Value Proposition

Before even thinking about jumping into the fray, take a step back and consider what caused the phenomenal price appreciation of these companies, especially when there is no significant news or change to their fundamentals. People tend to forget that what they buy on the stock market is actually ownership in companies — it is nothing like a Toto ticket or other gambling mechanism.

As the graphic above suggests, prices reflect expected future cash flows of these companies. If a stock’s price goes up, it means the expectations of future cash flows have increased. In the event that these expectations are irrationally/erroneously justified, the stock price moving higher would actually mean lower expected returns as the likelihood of future negative returns is elevated.

Markets have rewarded investors (not speculators) who take a long view and follow empirical evidence-based concepts when investing. Setting clear investment goals, ensuring that your portfolios are well-diversified across asset classes and regions, and targeting the drivers of returns will ensure you achieve investment success. Speculation has destroyed many more fortunes than it has created. The shares of the current meme trio have shot up so quickly that they will eventually find their equilibrium and come back down to earth — much like their counterparts in 2021.

Such fluctuation and volatility are no way for you to invest your retirement savings, or the money you’ve set aside for a home or a child’s education. To ensure that you are investing in the right manner, or to simply have a second opinion on your finances, come and speak with us.

There is no ‘I’ in ‘Meme’, but there may be ‘AI’