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Thursday, December 7, 2023

Memestonks: What’s Different About This Market?

Let’s talk about this whole GME/short-squeezing/meme stock thing. Like many people, you may have a simple question: Is this time different?  Here’s my impression:

Most things are the same…

In many cases, nothing is new about the meme stock circus. Humanity, greed, FOMO, bubbles, mania. Squeezing and vilifying shorts. You can go back hundreds of years and find loads of examples of madness in the marketplace.

Throughout history, the specific game and players has changed, but the desire to win remains the same.

…but not everything.

Here’s what’s different this time around:

Zero-commission trading. We over-consume free things, and that’s particularly true of the no-cost trading platforms that don’t force you to think twice before hitting “buy” or “sell.” There’s often little thought given to something that costs nothing.

Mobile trading apps.  These days, the phones in our pockets offer powerful access to the financial markets. Normal people have greater access to higher risk investments and strategies such as derivatives and leverage (even if some of the pitfalls aren’t clear), and they can coordinate their moves together better than ever (see below).

A pandemic. Social distancing has left many of us with a lot of restless energy and no outlet. We can’t go out and play sports, go to the gym, watch a ball game, go to the movie theater, or have a late dinner and drinks with friends. We’re disconnected from each other — and looking for that connection online.

Social networks. Investing is now a social participation sport: you can actually cause the price to move. You can help your team win!

Social media has monetized and weaponized people’s attention.  These networks tend to direct people’s attention into a very narrow frame — like using a magnifying glass to turn sunlight into a laser. It’s easy to accidentally spend hours diving deeply into a specific topic — and maybe even get sucked in by a conspiracy theory.  Like the magnifying glass, that laser-like focus can have real-world impacts.

How will it end?

I see three scenarios:

Fast and hard: A major regulator only needs to make a somewhat innocuous statement like, “Oh, we’ve seen some concerning things here; we’re going to start looking into specific actors,” and the typical market reaction would be  quick. Back when Hertz was contemplating doing a secondary offering, the SEC spoke up and the Hertz bubble quickly popped. There are also financial requirements with clearing firms that could cause brokerage firms to restrict transactions in these types of situations to ensure that the firm can continue to operate.

Moderately quickly, giving way to the next memestock: It’s hard for meme stocks to keep themselves in focus for long. Novelty fades, and the amount of stimulus (price changes) must rise exponentially in order to keep the focus on.  In this case, options sellers are already beginning to demand higher premiums for new options. It could be a messy unwind.

Slowly and permanently: As vaccines roll out, the pandemic ends, I think we’ll start spending our free hours doing more meaningful things — like spending 3-D time with each other rather than with  strangers on a message board.

What’s the aftermath?

It’s worth remembering that this doesn’t change the underlying companies: no amount of price movement or short-squeezing can turn around a company in a bad business.

Some people will get out near the top. You’ll certainly hear those people talking about it.

The people who bought from them hoping it would go up further — and that there would be  another buyer waiting — will be conspicuously quiet.

We’ve already seen normal investors get burned by memifying trades (see: Hertz, Blackberry). In some cases, an unrelated stock was pumped up quickly by retail investors who didn’t realize they weren’t trading what they thought they were trading.

In every case, someone is left holding the stock when it crashes back to reality.


This kind of trading is like going to Vegas. By all means, go, and have a great time. Just be prepared to come back home with fewer dollars in your wallet and a vicious hangover.

An alternative? Invest in a well diversified portfolio and whenever someone asks if you own the hottest thing, you can say “yes”, regardless of what it is.

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