Some crazy stuff happened on Wall Street this week. Meme stocks — so called because they represent companies that have attracted cult followings on social media — suddenly soared and then plummeted, leaving wealthy investment bankers in disbelief.
This appears to be a repeat of the 2021 GameStop phenomenon, which prevented Wall Street titans from shorting the company — as depicted in the movie stupid money——Small and medium-sized investors across the country once again pushed up GameStop’s stock price. After rising 70% on Monday, it closed up more than 60% on Tuesday. The increase in volatility triggered restrictions and halted trading across the market. Ailing theater chain AMC is another beneficiary of the vendors’ appeal.
By the end of Wednesday, things had cooled down. By the end of trading, GameStop and AMC were both down about 20%. However, the two stocks are still up roughly 150% and 80% over the past five days. It will be interesting to see if these stocks rebound on Thursday or continue to fall.
As in 2021, much of the early-week rally centered around Keith Gill (aka “Roaring Kitty”). After a three-year absence from X, Gill posted a photo of a gamer leaning back in a chair, which seemed to spark a buying frenzy, although he didn’t specifically recommend investors buy either stock.
Why meme stocks are a bad investment
But what’s the point other than gloating over seeing financial tycoons suffer? Is Meme Stock Day Trading a Compelling Investment Strategy? I do not think so. Here’s why.
Psychological factors, not economic factors
The primary motivation for buying a meme stock is psychological rather than financial, since none of the companies associated with it are performing well.
Additionally, as described in stupid money, meme stocks rely on investors to hold their ground and not sell when stock prices are at their peak—the most obvious way to make money. Instead, the investor surge appears to have taught Wall Street millionaires a lesson: The power of the people is more important than the money managers at any investment bank. Before Roaring Kitty’s reappearance, no news about GameStop or AMC had sparked such a buying frenzy.
“Consider me suspicious given my past experience analyzing cyclical swings in meme stock activity,” Steve Sosnick, chief strategist at Interactive Brokers, wrote in a research note. New York Times.
Although stock prices fluctuate so wildly, it’s impossible to predict how much money an individual low-level investor can make. There is no doubt that Roaring Kitty made a lot of money with the $53,000 invested in 2021. In 2021, he showed wall street journal Screenshots of his brokerage account showed daily gains of about $20 million on one day, while another account showed daily losses of about $15 million. Most of his followers invest much smaller amounts, typically making less than $5,000, while others lose money.
Herd mentality and complex investment strategies
Day trading is not for the faint of heart. This means borrowing or utilizing capital every day while engaging in very sophisticated speculation. The losses can be huge. Essentially, this is another form of online gambling.
However, when the risk is spread among thousands of investors following a cult leader, a sense of euphoria can set in. Because there are larger numbers, the stakes are lower, and like crowds at rock concerts or sporting events, a herd mentality takes over.The most recent rally took place on Monday, with Gill sharing a meme and more than 10 film clips, including X-Men Origins: Wolverine, the Avengersand the 1993 western tombstone.
“The return of ‘Roaring Katie’ should be completely meaningless for the stock market, but it’s not, which is interesting,” Matthew Tuttle, chief executive of Tuttle Capital Management, told Reuters.
Long term investment is best
Equating meme stock investing with real estate investing: Meme investing is like buying a house in a volatile market based on what others are saying and hoping for the best.
Educated, long-term stock investing—as practiced by investing legend Warren Buffett—means taking a long, hard look at certain companies and basing your research and investments on hard facts. It usually involves a long-term play, but in some cases, such as recently with the advent of artificial intelligence (AI), a smart and educated investor who bought Nvidia stock 24 months ago would have tripled his or her money.
Long-term stock market investing is the same as checking the market for potential buy-and-hold real estate investments, looking at new businesses moving there, accessibility, crime statistics, schools, taxes, population growth and any other data that can help you make a wise decision.
final thoughts
The meme stock phenomenon is a fun pastime for many people. The American working class and middle class have always supported the underdog mentality of “us versus them.” However, as a long-term investment strategy, it is not a stable path.
Seasoned Wall Street veterans can potentially make a lot of money day trading if they have experience in options and margin trading. For most people who invest hundreds or thousands of dollars based on the advice of day trading gurus like Roaring Kitty, this can be a fun pastime. However, investing money you cannot afford to lose can have disastrous consequences, leaving you financially ruined.
For real estate investors, stock market trading can help them diversify their portfolios, but only if a long-term strategy is adopted, such as investing in stocks that demonstrate solid consistency or are at the forefront of innovation.
Bottom line: If you need a quick profit, rely on something other than meme stocks to deliver.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
