The Return of Meme Stock Mania?

Unlock the secrets behind the meme stock madness.  Steve Davenport and Clem Miller take a whirlwind tour through the rise and reign of stocks like AMC and GameStop, dissecting the cult followings these companies have garnered, thanks in part to mysterious Reddit icons such as Roaring Kitty. We contrast these phenomena with giants like Berkshire Hathaway, Tesla, and Nvidia, and ponder whether zeal among their investors brand them as semi-meme stocks. Delving deeper, we discuss how the meme stock surge—propelled by pandemic lockdowns and fiscal stimulus—continues to warp the investment world, weaving in the tales of Bitcoin and the Trump Media and Technology Group to showcase just how sentiment can outweigh solid fundamentals.

The line between sound investment and sheer speculation has never been more blurred than in the era of meme stocks. Amidst our conversation, we tackle the role of social media in steering investment choices and stress the vital importance of grasping a company's core financial health. Steve and Clem discuss the high-stakes game of options and leverage, and how such strategies can shape or shatter the investment outlook of a generation. As we close, we reflect on the uphill battle for credible, sound financial advice in a world where the siren song of swift financial gains echoes across the web, challenging the trust in conventional financial wisdom. Tune in for an episode that promises not just insights but a roadmap through the tempest of today's market trends.

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Chapters

• 0:27 Understanding the Meme Stock Phenomenon
• 9:51 Speculation and Impact of Meme Stocks

Transcript

Clem Miller: 0:27

Hello and welcome to Skeptic's Guide to Investing. I'm Clem Miller and I'm here with Steve Davenport, and today we're going to be talking about so-called meme stocks. As we know I'm sure you know too meme stocks have a kind of cult following Companies like AMC and GameStop and others and there's usually a what we would call a belief leader. You know somebody from Reddit or you know somebody who's sort of you know telling everybody what Roaring Kitty, telling everybody what roaring kitty, roaring kitty correct, uh on reddit or somewhere else who's saying, uh, that they should buy, or signaling that they should buy a particular stock at a particular time, and, uh, and really taking their advice readers, taking their advice from these characters. So, steve, what's going on here Is this sort of like Berkshire Hathaway, tesla or Nvidia. I mean, these are real companies Berkshire Hathaway, tesla and Nvidia. Should we look at those as kind of semi-meme stocks, or how would you compare these meme stocks to Berkshire Hathaway,Tesla and Nvidia?

Steve Davenport: 1:57

Well, I started to look at the definition of what people talked about with the meme stocks and they said it was a cult-like following. And I've been out to Omaha for the Berkshire meeting because I had a large client with Berkshire and I would say that is a cult like following. I mean, these people believe in what Buffett does and how he does. It is the only way to go and in some ways I use that as an example to say there are things out there that we don't understand and I don't understand why there is this effort for meme stocks. I think that when you look at why we buy stocks at least you and I, glenn I think it's because they have earnings, they have growth, they have a competitive advantage, and I think that those are the things we look at. I don't wait for Roaring Kitty to tell me boy, now's the time to get into some ASML. I think that the chip manufacturing is going to really take off. If it was that easy, if everybody could do that, don't you think we would all just make money.

Steve Davenport: 3:13

The question is, who's on the other side of this trade? If Roaring Kitty says to buy GameStop, I'm not going to fight GameStop, but I'm also going to look at GameStop and say how much of it is impacting the economy and why do I want to own it if that area of used videos is only going to represent a small part of the economy? So I look at this whole meme stock events as I thought they were over and when we go back and look, it was a strange combination of events that created the meme stock phenomenon and I'm asking are we doing this again? Is now it changed again to a point where we're saying, hey, we're going to redo what we did in 2021? I got a question and say, no, I don't think we can, because that time was very special For a couple of reasons.

Clem Miller: 4:15

Well, I tend to agree with you, but if you look at around Problem is, if you look around now you actually see some Meme stock like behavior, even beyond the traditional meme stocks.

Clem Miller: 4:31

You've got, for example, bitcoin, which was doing quite well a few years ago and has recently done pretty well again, despite the enormous amount of bankruptcies and litigation and criminal convictions that we've seen over the years. And yet Bitcoin is still doing well and, as we know, bitcoin has no earnings. Bitcoin has no substance beyond just the sentiment of those who buy and sell it. I'd also point out, without getting into politics, I'd point out that there is what I would call a mega mean stock, which is this DJT or Trump Media and Technology, and yet is buoyed, in terms of its share price and its market capitalization, by those who expect their presidential candidate, trump, to win an election and make it a big platform for everybody. So, yeah, I think that's a mega meme stock. So you've got all this. You've got the mega meme stock, you've got GameStop, you've got AME, you've got Bitcoin. There's a lot of sentiment out there that is not driven by fundamentals.

Steve Davenport: 6:08

Yeah, when I look at what happened in 2021, we were in a situation where we were still kind of locked down. People had extra time because they weren't commuting. And then also, people had these payments they got from the government and younger people said, hey, I can take that payment and I can double, triple, quadruple it in a couple of weeks. That's a better use of my time than what else. I could double, triple, quadruple it in a couple of weeks. That's a better use of my time than what else I could be doing. So there was a lot of liquidity. And again, the two names, AMC and GameStop, were both much smaller. So, when we look at the number of shares, gamestop had 67 million shares in 2021, and now they have almost 300 million shares. So they've issued more shares.

Steve Davenport: 6:54

Therefore, the impact that these people are going to have is going to be much different. We don't have as much free cash flow. We don't have as much individuals who have savings balances because of the government programs. So I think that it's different this time, and it is different because there isn't as much free cash. There isn't as much of an ability to manage some of these.

Steve Davenport: 7:21

Tesla is too big. Tesla can't be a meme stock, because you can't influence Tesla that quickly or that easily by just saying on Reddit hey, I think we should buy Tesla. There just isn't that much individual retail liquidity that is going to push that up. Look at some of the names in a smaller space and, yes, we will see stuff, and DJT is a good example, bitcoin, a little bigger example, and I would say that Bitcoin is partially about meme and partially about this idea of safety, as inflation and other things cause people to lose respect or confidence in US dollar and large governments and establish currencies. I think there's a lack of respect or a lack of understanding that some of these people buying these alternatives really don't have a full understanding of what's going to happen. When there is a liquidity crisis and people need liquidity, they're going to sell the things that are going to be more volatile first, because they want to stabilize and bring down their volatility and their overall portfolio. But is the meme period back?

Clem Miller: 8:53

I think it could be for period of time where you have sort of a youth protest you know unrest in this country and of course we see that with respect to the Gaza situation. But you know, in a way, with these meme stocks, this is sort of a way to go after Wall Street, sort of like Occupy Wall Street was. Those protests were a number of years ago. This seems like a way of being able to use the system against the system. Do you agree with that?

Steve Davenport: 9:48

Yes.

Clem Miller: 9:48

I think there's a lot of.

Steve Davenport: 9:51

I hate the man. The man makes the money and I want to do things to hurt the man, right? So I I believe that when you look at these things, there's usually more than one motivation, right? I think that some people like the idea of earning money, but they also like the idea that somebody else is going to help them to do it. And so when, when I look at this, I'd say, well, how do I know? When I bought it, I made money. Now, when do I sell?

Steve Davenport: 10:20

And that's that second part that doesn't seem as democratic. We all say, hey, we can all do this together. We all get online, we all fight the big man, wonderful. But then I say, well, when do we stop fighting and just take our money and go home? Is that the you know? Is that the objective? I think it should be, because you can. You can take your profits from the man for a period of time, but eventually, you know he might start to take some, some back from you and real, real investors both real investors and gamblers need to know when to cash in right.

Steve Davenport: 11:01

I look at this and say this is speculation, this is an investment. We're just speculating that we think gamestop is going to keep going up and my question is what? What's that based on what? What are the fundamentals behind it and how do you know that you're right? And I would look at people and say I don't think you can really tell me there's a system here. So therefore I don't think you can say there's an investment here If it's not based on something that we can track, understand and monitor, then we're just doing something based on an idea or an image.

Steve Davenport: 11:36

And I love the Roaring Kitty and I love some of the TikTok videos and I love some of the crushing of the hedge fund people. I mean, who doesn't like a good cartoon? Everybody likes a good cartoon. Everybody likes a good meme. And therefore we should celebrate this as entertainment. We shouldn't celebrate it as investment. If we give more attention to it, what we're doing is we're diverting ourselves from the real work of trying to understand how to add value and how to pick the best companies. How to pick the best companies. These are not the best companies. They just simply are not. So I look at it and say our job is to come up with better companies, not come up with better means.

Clem Miller: 12:23

So, steve, that's right. So, steve, how do options play into this?

Steve Davenport: 12:31

So there's a lot of small individuals who, when they got their 1,400, 1,500 from the government, they started to use options because of the leverage involved. If you look at a stock that's a $600 stock you need to spend $600 to buy a share. If I look at the option which is a three-month or a six-month option for $6, $12, $18, I can get exposure to that upside of that individual company. So the people in the meme frenzy are not just going to do things that are mildly effective. They're looking to speculate and they're looking to make as much money as they can as fast as they can. So what do you think they use? They pull in that old steady force called leverage and when you add more leverage, guess what? You make more money when it goes up, but when you use more leverage, you lose more money when it goes down.

Steve Davenport: 13:32

There is no free lunch and what I'd say is that options have been used in this space before. Options overall are improving the use around the world. Option usage has increased. People have taken more short-term views with options than with stocks and therefore the market has changed. I don't like this change. I don't think this change is good for the average investor, but we got to report on, understand and use what we know in order to do the best we can for clients.

Clem Miller: 14:08

So, Steve, has this spoiled markets for an age group? And by that question I mean we've got a generation now of folks who understand investing through the lens of meme stocks. Are these folks ever going to learn about real investing, or have we lost a generation to something that's really just gambling?

Steve Davenport: 14:39

I feel like we've got people who are going online looking for solutions and I think when you look at what's written online and it's not official, it's not a person who's qualified to comment, it's just an individual saying what they want. And when you look at doing it on a platform where you don't really identify the individual, it's just based on a name Roaring Kitty and you don't know how qualified Roaring Kitty is versus Warren Buffett. So it's a strange world where we can, all of a sudden, we go to a doctor, we look and say where did he go to school? How long has he been doing this? And yet, when we look for investment advice, we go to a Reddit platform or we go to social media and we expect if somebody's writing something there, it's legitimate. It's no longer legitimate than anything else that's written. So therefore, how do we get people back to what I'll call qualified advice? And I think that it's a matter of trust.

Steve Davenport: 15:48

I think that we've, as a unit, the American people have started to not trust what's going on in other parts of their lives, and I feel like that lack of trust has a lot of reasons for it, but it is impacting investing.

Steve Davenport: 16:06

In my mind, it is allowing more people to just follow the herd, and I think there's some wisdom in the herds, but I also think there's some evil and some mistakes that are going to get made when you follow the herd.

Steve Davenport: 16:21

So I think social media has helped create a mind that's more chaotic and invested and that ultimately, more chaos and more volatility and more people making irrational decisions ultimately will lead to lower results and a bad feeling about the market.

Steve Davenport: 16:42

That bad feeling of the market will mean people distrust it and they might not follow and invest in it the way that you or I did when we just said okay, I get paid twice a month, I get money put in twice a month and over time, I believe it will work. I'm starting to feel like that type of investor who's going to look to facts and information to solve the problem is going to be lost going forward, because those type of people won't tell their kids to do this. I feel like we've got now a gap in our education because of I would say we didn't do a good job starting out to educate everyone and now we've started to see financial literacy get more widespread, but we've still got a big problem there's still a lot of people who aren't being educated, and ultimately that leads to more people following meme-like ideas.

Clem Miller: 17:42

So, steve, let's turn to the mailbag. Have either of you bought AMC or GameStop? I have not. How about you, steve?

Steve Davenport: 17:52

I'm also a no on that. I think that for me, it comes down to the same question of crypto. Do you understand why the price is the way it is? What are you investing in, what advantage or why this particular investment? And all of those questions for GameStop don't come up with the right answer.

Clem Miller: 18:13

So I would say no. So another question here in the mailbag what do meme stocks tell you about science and the art of investing?

Steve Davenport: 18:27

you about science and the art of investing. I would look at this and say there is no science, because people are basically doing these things on emotion, uh, and on speculation, not on information. Um, I like to think that when you think about great art, it's hard to increase that great art to. It's hard to trace that great art to cash flow. So there are things that you do buy based on instinct and based on the idea that it has some beauty or some value, and so I don't want to say that I would never buy anything unless it has cash flow. But I do think that it's hard to identify that intrinsic value and benefit for meme stocks, because I do like the idea of hey, the hedge funds lose a billion dollars in their shorts.

Steve Davenport: 19:13

I think it's a drop in the bucket, just like you talked about with the Fed, where there's a lot of other factors as to why hedge funds lose money, and I don't think you can really it's kind of an illusion to tell people hey, what you did by pushing the price up, that really hurt the hedge fund. That hedge fund has no relations to understanding that you were the one who was buying all that game stuff caused this rise to occur, your impact is less. With more shares, there is not as much cash on hand from individuals, so I would say your impact in hurting that hedge fund is much less than it was the original time, and every time thereafter it's going to be less. Therefore, this isn't something that I think has room to grow. I think this is something that is going to get more and more regulated and more and more squeezed out so that it will be harder and harder to achieve, and I think, ultimately, that's probably good.

Clem Miller: 20:13

Yeah, I mean, I think I totally agree with you, steve, and I would say that the challenge for regulators and for institutional investors is to somehow manage to control this herd of meme investors, because that's essentially what it is. It's a herd, it's behavioral finance run amok. They've got to do something to control it more. I don't mean squash it necessarily, but to squeeze out some of the excesses, just like they've squeezed out excesses in other areas over the last few decades. So I think with that unless, steve, you have anything more to add I would say that we appreciate everybody listening to the podcast Skeptic's Guide to Investing. We appreciate any comments you might want to make to us over email or text or whatever, and we look forward to our next podcast. I hope you do as well. So thank you everybody for listening to us. Bye-bye.