Opinion: Meme stocks: A costly lesson in speculation

Richard Baker

I bought a fishing rod from an infomercial when I was a teenager. It sounded like a great rod and reel until I got it in the mail. It was cheap, bent and a waste of my hard-earned money. Sadly, meme stocks are popular again, and I’m afraid they will take a lot of hard-earned money down the drain with them.

The 2021 meme-stock darlings GameStop and AMC Theatres are at it again, and I’m afraid it will end just as badly. GameStop soared on May 13 to finish up 74% for the day, and its cohort, AMC, ended the day up 78% after a social media post by an account named “Roaring Kitty” posted a cartoon picture Sunday night. The image was viewed over 26 million times.

GameStop’s main product is physical video games, and AMC is a movie theater company that was hammered in the pandemic and hasn’t yet recovered.  The problem with these two companies is they are the modern version of the buggy whip after cars were invented. The two young adults in my family, the prime customers for both companies, buy games online and rarely go to movies because they can stream them at home.

Stock analysts rarely cover these stocks because they are such non-players. Yet, GameStop and AMC stocks are on another run. Let me make this clear: They aren’t on a run because of any earnings report or merger announcement but because of a picture on social media. Many speculative investors interpreted that picture to mean that something was about to happen.

How big was the frenzy? On May 13 and 14, the New York Stock Exchange had to halt trading on the two stocks a combined 38 times. These halts kick in automatically when a stock starts moving extremely fast. For example, GameStop shares were halted May 13 whenever their price went up or down more than 5% in a five-minute window. It’s hard to imagine a company’s value going up or down 5% in five minutes. The problem is that the stock price can sometimes outpace the company’s actual value, which sets some investors up to lose a lot of money quickly.

Some stocks are speculative, which means they are extremely risky. The problem comes when investors who rarely invest start jumping into a stock, not knowing it is speculative. Generally, people invest in profitable companies. In this case, GameStop isn’t killing it as a business. Its last financial report shows it has gone in the hole each month after paying its bills and is in deep debt. Its next earnings report is on June 5, but I doubt it’s doing much better.

In 2021, GameStop was trading at $20 and shot up to $483 in the middle of a trading day, only to fall to $40 a few days later. Many bought on the way up and sold at a huge loss after it crashed because the company’s profitability didn’t justify such a high stock price.

Money is hard to come by. In my life, I have dug ditches, hauled hay, built fences and even cleaned hotel rooms in Branson as a teenager. Making money is hard work, and money is valuable. I highly recommend you stay within your normal risk tolerance.

If I remember correctly, that fishing rod broke the first time I used it. My dad tried to warn me that it was junk, but I wouldn’t listen. I learned my lesson through a telescopic fishing rod that quality matters. Quality matters even more with investments.

Richard Baker, an accredited investment fiduciary, is the founder and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at richard@ferventwm.com.