Last couple of weeks in the markets bordering on lunacy. Certain securities (GameStop (GME), AMC, Nokia (NOK)) defied gravity and posted triple-digit upward movements. On this blog post we explain why investing in such hot names is fool’s gold.
While most of sound investing revolves around selecting a profitable growing company, those tenets were violated several times a couple of weeks ago. But this is the post-pandemic world where neither a good nor profitable business model is a requirement. We can point to several companies whose valuation is detached from their fundamentals and one case where a company got included into the largest US index.
The stock market mania mentioned above was started by an “organized” short squeeze–groups of investors orchestrating massive buy orders in heavily-shorted stocks. This momentary victory carried on as the seeds of greed were disseminated over social media continuing the rally. As the shares took a negative turn, swarms of posts appeared across social media platforms calling for people to hold their shares rather than sell into the bloodbath.
The idea was simple, if you don’t sell, the price can’t go down. However, the stock market is an auction based system and what matters is the marginal transaction, is there more buying or selling orders. It doesn’t matter whether 100 or 100,000 shares trade in a day or whether your hold until kingdom come.
In the original Russian roulette game, you have a 5/6 chance of winning and 1/6 chance of getting wiped out. Investing in an almost bankrupt company (GME or AMC), after their stock has massively appreciated, is similar to loading a few extra bullets for safe measure. Everyone thinks they are going to get out before the fall, it is nearly impossible to time it.
The other aspect of social media whether it be reddit, TikTok, Instagram, Facebook, etc. is that these platforms are not perfect at moderating their content or their users. One independent research found that 97% of posts on the reddit sub-group WallStreetBets were bots (robots). Not only is the information unreliable, the “users” dissipating it are not real.
After reaching their brief peak, shares in the three names mentioned above started to decline, in the case of GME +80% down since its peak. While it feels great to multiply your capital in a few weeks, it is way more devastating to lose it. It can be difficult to stay invested in “boring stocks” when friends/family around you are getting “wealthier” quicker on social media stock tips. We urge investors to stay away from things they don’t understand or at least from failing companies.
If you have any questions do not hesitate to contact us.