#Stonks, diamond hands, wallstreetbets, and dogecoin. If you have an awareness of the stock market you’ll be aware of at least some of these terms.

    This recognition will most likely be due to the widely publicised ‘short squeeze’ of Gamestop, which saw its per share value balloon from £13 to £352 [1].

    The Oxford Dictionary defines a ‘meme’ as ‘an image, a video, a piece of text, etc. that is passed very quickly from one internet user to another, often with slight changes that make it humorous’. This is a word that on face value doesn’t appear to go hand-in-hand with the traditional definition of the word investing, but ‘meme investing’ is a thing, and it’s been around since well before gaining notoriety via Gamestop.

    Meme investing is buying a stock (or, stonk) not because of a company’s fundamentals or growth prospects, but because of internet hype and the ‘meme’ going viral. I want to explore the potential impact this type of ‘investing’ could have in the long-term.

    Technology and collaboration

    Most people only require access to a smart phone to open an account and start investing in securities, ETFs (exchange-traded funds), FX (foreign exchange) markets, options (retail investors having access to complex derivatives is a topic for another day) and more.

    Investment information and opinion – true and false – is available in an instant to be viewed, or more pertinently, shared. More commonly people are turning to internet forums such as Reddit or Instagram as sources of financial information, and for stock advice.

    The FCA recently found that investors with less than three years’ experience were more than twice as likely to rely on YouTube or other social media for their investment research. Only two in five believed that losing the money they invest was a genuine risk [2].

    On the face of it, this level of access and collaboration is a wonderful thing. More people should learn about and discuss the stock market, economics and personal finance. The wealth of information available at people’s fingertips is indispensable in helping them do so. Increased engagement is vital to improving stewardship within the industry.

    However, the issue lies where uninformed speculation becomes untethered and waves of people rush into frenzied trading that is driven not by a spectacular earnings release or a ground-breaking new discovery, but by internet hype.  

    180° impact

    Retail investors now account for almost a quarter of total trading volumes, accounting for more than mutual funds and hedge funds combined [3]. The consequence being that the potential market impact and volatility has vastly increased. 

    A question worth asking is, would this mindset also lead investors to pivot 180° should one of the many risks to the market (inflation, rising bond yields, geopolitical and trade tensions resurfacing etc) begin to come to fruition? A larger than ever proportion of household’s wealth is held in equities - approximately 27% of US household wealth is held in equities, with the previous high of 25% in 2000 [4].

    If investors exit the market with the same fervour that they enter, we could see a domino effect occur where the value of a high proportion of investors’ wealth plummets. We saw this price volatility play out over a condensed period with Gamestop, amongst others, so it’s not an unrealistic assumption that the effects could become more widespread.

    Impact on the individual

    To contextualise the impact this mindset can have on an individual, imagine an impressionable teenager inherits £50k. Instead of consulting with a qualified financial adviser or an investment professional, they read about a stock called Gamestop on the way ‘to the moon’ on a Reddit forum and decide to invest. Their £50k purchases 141.8 shares on Thursday, 28 January. One week later, when the markets closed on Thursday, 4 February, their investment would have dwindled to £5.5k. [1]

    Source: Morningstar Direct, converted from USD

    Admittedly a simplistic example, but similar situations played out on the Robinhood trading app throughout January. For instance, a Dallas physicist’s Gamestop shares decreased in value by $220k in just one day [5] or founder of Barstool Sports, Dave Portnoy who lost $700k [6].

    The real winners

    To a large portion of meme investors, the perceived ‘bad guys’ are large institutions and hedge funds. Ironically, they have started to take advantage of meme investing, developing algorithms that track social media and forum chatter, to move ahead of the curve.

    The four largest asset managers in the world together owned over a third of Gamestop, collectively gaining roughly $1bn in value [7]. In fact, amid the market turbulence created by the retail trading mania, short of being squeezed, hedge funds outperformed the global equity market at the start of the year [8].

    With the ease of access to the market and the wealth of information available today it’s imperative that people develop a healthy relationship with investments and the markets. For the vast majority of people investing should be for the long-term.

    Various studies [9, 10] have proven the value of being and remaining invested in the market or in high quality businesses for the long-term. It should be stressed that stocks that become a meme shouldn’t be chalked off and high growth, speculative investing shouldn’t always be classified as meme investing.

    The key takeaway however is that inexperienced investors should do their due diligence and truly believe they’re purchasing a company with a solid business model and strong growth prospects. Being compelled to buy shares of (or options in) a company solely because of a meme, a Twitter post or because someone on an internet forum told you to is not investing. It’s akin to placing a bet on a horse because you like the name or the jockey’s jumper.

    The title of this article shouldn’t be the long-term potential impact of meme investing, it should be the potential long-term impact of meme gambling.

    Daniel Boyd
    IMX Investment Analyst

    References:

    1. Morningstar Direct
    2. FCA chief warns social media firms on risky investments - FTAdviser.com
    3. Rise of the retail army: the amateur traders transforming markets | Financial Times
    4. Global Equities: Reviewing the Risks to Recovery - AllianceBernstein - Commentaries - Advisor Perspectives
    5. Reddit Traders Have Lost Millions Over GameStop. But Many Are Refusing To Quit. (forbes.com)
    6. Barstool sports founder Dave Portnoy lost $700K in GameStop frenzy | The Independent
    7. Winners of the GameStop rally included wealthy Wall Street hedge funds - The Washington Post
    8. Hedge fund managers returned 1 in January 2021 says Eurekahedge - Opalesque
    9. The data that shows a case for long-term investing - Private Investor - Schroders
    10. Microsoft Word - Lydenberg _Long-Term Investing_Revised_20080225 GW.doc (domini.com)