Should you Invest in Meme stocks?
Short answer: no
Long answer: Still no, at least not with money you don’t mind lighting on fire.
What are meme stocks?
Meme stocks are stocks that gain popularity on social media, which causes their share price to rise astronomically in a very short time. For example, meme stocks can rise over 32,000% in less than one month.
This means a $1000 investment in that stock would be worth over $320,000 in less than one month! That’s a huge mouth-watering opportunity. So if this can happen with a meme stock, why should you not invest in them?
Why you should not invest in meme stocks
You could lose a lot of money
If you get in at the wrong time, you could lose 99% of the money you invested. Recently, a little company named AMTD Digital saw its share price soar from $7.80 a share to a high of $2,555.30 apiece! Today the share is trading at around $160.
Anyone who bought a share worth $7.80 is still sitting on a lot of profit, but anyone who bought in at $2,555.30 is down almost 95%!
By the time a stock reaches meme stock status (high popularity), it’s most likely too late. That price could be the highest price that stock will ever get, and anyone who buys at that point could lose over 90% of the money invested.
So instead of turning $1000 to $320,000 in less than a month, you would turn $1000 to less than $100 in the same time.
You’ll never know when to sell
Suppose you bought some stock before the meme rally began or just at the start, and you made a 1000% profit; it’s still bad for you. Why? Because you’ll never know when to sell.
Knowing when to sell an ordinary stock is incredibly difficult. It’s very hard to time the market. But with meme stocks, it’s even more difficult. You’ll be torn between 2 questions:
“What if I sell now and the rally continues?”
or
“What if I don’t sell now and the stock crashes and never recovers?”
Except you can see the future, you’ll never know the right answer. Do you sell now and risk losing 1000% more gains or do you hold and hope it doesn’t crash 50% in the next hour?
Also, the usual “invest for the long term” strategy will not work here because those gains can quickly disappear and never return if the company never produces enough value to justify the new valuation. For example, if the company cannot generate 100 times the value they are currently generating, it may never reach that high share price again.
So even if you time it right, it’s still probably not a good idea.
Even if you win, you lose
“Making money through an early lucky trade is the worst way to win. The bad habits that it reinforces will lead to a lifetime of losses.” – Naval
Naval meant that even if you are part of the lucky few that successfully 1000x their money from meme stocks, you still probably lost. This is because making that kind of profit brings with it a lot of bad habits that will likely lead you to lose more money in the future.
Two bad habits that could make you lose money include
Confusing luck with skill
Being able to pick the right meme stock to buy at the right time and sell at the right time is not a skill anyone can develop and consistently replicate. However, we, as humans, tend to equate success with skill. E.g., the more successful you are, the more skillful you are.
If you can make enormous returns in such a short time, then you must be skillful at it and can probably do it again and again. So you will probably try to do it again. And this is what will lead to bad habit 2.
Not adequately considering the risk of an investment
Because once you’ve made a 1000x return in 10 days, 8% returns in 1 year simply will not satisfy you. It’s simply too small.
But, you probably won’t consider that high-risk investments come with a high risk of loss. The person who got lucky with one meme stock is unlikely to be lucky with another. And even if they are, eventually, they would likely end up investing in something where they could lose a lot of money.
And because they don’t have the appetite for less risky investments that offer steady returns over decades, they also miss out on the opportunity to benefit from compound interest.
So even when they won, they probably eventually lose.
They are simply overpriced
A stock is not just a bet. It is ownership of a piece of a business. The stock price is the value investors are willing to pay in exchange for the future value investors believe those companies can deliver.
If you were a bread seller, would you buy a loaf of bread that you know is worth 100 for 1,000 in hopes that you can find someone to sell that loaf to at 2,000, or would you buy a more reasonably priced loaf?
If you double as a bread seller and gambler, you might go for the 1,000 option and end up losing all that money. While the bread seller can eat the bread if no one buys it at the higher price, the meme stock investor will not be able to consume their shares any other way.
Buying an overpriced item is only rational if you can find someone to sell it to at an even more outrageous price. If not, it’s not the sensible thing to do.
Conclusion
Meme stocks can be very enticing. While we all wish we could turn $100 into $10 million in ten days or less, that’s unfortunately not how money works. Avoid meme stocks and only put money you can afford to lose if you must indulge.