Cult Stocks
Why the meme stock frenzy is here it stay
The major indexes continued to trade relatively flat in recent days. The vast majority of Stocks struggled to eke out gains as a lack of clear market catalysts kept institutional investors on the sidelines, while retail traders fuelled the ongoing meme stocks rally.
As social media hype pushes the likes of AMC, GameStop and Bed Bath & Beyond 'to the moon,' the crypto market continues to trade in the opposite direction, with all major crypto names recording double-digit losses early in the week.
The short squeeze is back.
Earlier this year, GameStop saw its share price run from $19 to $483 as the Reddit retail traders banded together to punish the wall street speculators. In recent weeks, the short squeeze is back in fashion. The new king of meme stocks is AMC Entertainment. Recently on the brink of bankruptcy, the movie theatre chain's stock jumped 95% yesterday alone and is now up more than 2,900% this year.
While this phenomenon is hard to comprehend at times, in simple terms, the internet has brought forth the age of virality, and the stock market isn’t immune.
Younger generations who grew up on the internet are now having a significant impact on specific companies. Their risk tolerance seems to be much higher than previous generations, and their willingness to band together to support a viral trend knows no bounds.
While these short-term individual stock surges may not significantly impact markets over the longer term, the meme stock craze is here to stay as the gamification of investing becomes a powerful force in an era of social media dominance.
All this speculation raises a lot of questions from investors. Nervous onlookers wonder if markets are broken, worried about how such 'mindless risk' can undermine the validity of the market as the 'meme stock vigilantes' blatantly disregard traditional valuation metrics.
All this recent 'mispricing' has highlighted one of the most common investing misconceptions.
To understand markets, you first have to realise that 'Price' and 'Value' are not the same thing.
Value is driven by cash flows, growth and risk. Of course, you can disagree about what those cash flows look like or how they are calculated, but the fundamental drivers of value remain the same.
Price, on the other hand, is simple economics 101. Demand vs. Supply. What drives demand and supply is typically mood and momentum. As a result, stock prices do not have to make rational sense at any one moment in time as they are driven by a myriad of human emotions.
For me, the current market conditions are reflective of a pricing market being driven by mood and momentum. That isn't to say that this is necessarily a bad thing. Markets will always reflect human behaviour in some form, and sometimes this behaviour will be more pronounced as price and value push in different directions.
This recent price volatility doesn't mean you have to change to momentum and memes as your indicators of choice when selecting your next investment. While the FOMO can be unbearable at times. The truth is, the value factors of cash flows, growth, and risk are what ultimately drive markets over the longer term.