Is the Era of Meme Investing Here to Stay?

It is said that lightning does not strike the same place twice; however, just as that myth has been proven wrong repeatedly, so has meme investing remained persistent throughout 2021; Taking on different forms in meme stocks, meme coins, actual social media memes being sold as NFTs. What a time to be alive!

The question on many people's minds is, how long could this possibly go on?

Short answer, anywhere from a month to forever.

Longer answer, well, let's get into it.

Let's start at the beginning. What is meme investing?

It's simply investing in hype.

Hype is big excitement with emptiness at its core

It's investing in something either because a lot of people are investing in it today or because you believe a lot of people will invest in it in the future. You aren't necessarily interested in the thing itself, just the current hype surrounding it or the future hype it might get. There may not be anything inherently special about a product or the value it brings other than the interest people have in it. Like the banana peel on the wall piece of "art"

To be fair, value is rarely inherent. Value is often agreed. The value of a bar of gold is whatever price the buyer and seller agree upon. It's why the price of anything changes with time.

Why has meme investing come to be?

The 1 main catalyst was COVID. COVID birthed the environment and tools needed to get us here.

The pandemic came with lockdowns which meant more people had more time to spend on social media.

This point goes to the history of meme investing. Some older finance professionals believe this kind of investing behavior was also seen in 1999 before the dot com bubble burst. They believed that people shared investing ideas and encouraged others to buy stocks on different websites, although not to the level of Reddit today.

Before the internet became popular in the 90s, people couldn't gather ideas at scale and act on them with so much ease. If you saw a good stock idea or you wanted everyone to join you for a trade, the opportunity may have fizzled out before you could share it with many people.

Social media has made the accessibility and spread of meme investing happen so much faster. It makes it easier to garner consensus (demand) for something and go and act (buy). As we know, higher demand without increased supply translates into higher price. The pandemic increased the time people spent on social media platforms getting all this info. Coupled with the fact that people were bored and in need of opportunities to make a quick buck, the meme investing bandwagon came just around the right time.

Spending more time on social media is not enough. People need the means (tools) to act.

Then came the excess liquidity that stimulus cheques put in the market. While many people who got the stimulus cheques needed the money, those who didn't got extra cash to play with. Others had extra income to invest from their online businesses that got very profitable during the pandemic.

Is it realistic to believe that retail investors can massively move the price of any asset?

Most of the money invested in markets today is owned by institutions like pension funds, asset managers, etc. So how can retail investors even move the price of a stock?

In 3 ways:

• By using margin accounts: According to Options Clearing Corp, around 39M options contracts were traded daily on average this year valued at over $450B. And retail investors represented more than 25% of total options trading activity, over $100 billion daily!
• It could also be possible that larger market actors bought and used data gotten from free retail trading apps to pump the stock and profit from selling it all the way down, as it's done in the crypto markets
• Finally, if a stock is illiquid, that is, not many people are trading in it, or the company is relatively small, as seen in OTC markets, retail traders can easily move the stock price by making a few trades. See the wolf of wall street.

How to be successful at meme investing?

Game theory emphasizes the importance of thinking about the likely decisions of the other party in developing a rational course of action in a negotiation

To be successful at meme investing, you need to accurately predict how other investors in the market will act in the near future.

The person who really won from Gamestop isn't the person who bought the stock at $90 on January 25th. It's the person who got in at $4 almost 6 months before that. The only problem with this is that you can't reliably predict other people's decisions. So getting in on meme assets long before they take off can burn you if they never end up taking off.

And to be honest, for most people who bought in at $90 without doing any research or having any experience, chances are, they believed the stock could be worth up to $1,000. Why would such a person sell and get a 4x profit when they can hold for 10x?

To be very successful at meme investing, you need to get in before the rocket starts moving towards the moon or get in later but not too late and practice a lot of self-restraint and be able to walk away before it crashes into the sun. If you get in at the peak, you lose.

Is meme investing here to stay?

Probably. But it is unlikely we will see meme investing in stocks to the scale we saw with Gamestop for several reasons. Hedge funds are unlikely to repeat the same behavior that allowed for the short squeeze Gamestop had.

For a meme anything to take off, it needs to get sufficient buy-in. The "meme investment marketplace" is currently fragmented, with everyone wanting to pump where they're at. And when new markets like NFTs come up, it quickly disintegrates because everyone believes their rocket is the one going to the moon, but no one has enough astronauts on it to actually take it there.

Final thoughts

Is meme investing bad?

Like everything, it does have its plus side and its downsides.

A common fear of outsiders looking at meme investors is that everything seems like a pump and dump. The Gamestop and AMC saga has shown that while most meme investments might not sustain their all-time high price because they require too much to sustain, these assets don't crash back down to their starting point. E.g., Gamestop is still trading at about $150 today. So if you bought on January 25th and held till today, you'd still be up almost 100%, which is impressive. But if you got in at the peak, you'd be down over 50%.

A term by Victoria Chiu and Moin A. Yahya of the University of Alberta Faculty of Law that more accurately describes this phenomenon we are now seeing is "pump and hold". These meme investors are not just looking to pass on an empty bag to someone else. Some of them are actually "hodling". For how long? Only time will tell. And because they're hodling, meme investing remains profitable for those who get in early enough but very dangerous for those who join in too late.

For some, like in the case of Gamestop & Dogecoin, it's a form of activist investing. It's the everyday person being part of a movement to take on Wallstreet (Gamestop), or it's just an expensive joke in the face of "serious" (crypto) investing (Doge).

Others argue that it may not be too bad because it gets people started on their investing journeys. They believe that even if meme investing does not reward those new investors, they may learn from the process and ultimately choose to keep investing with better understanding.

One thing is for sure though, people have lost money from investing in memes. I'd argue that there have been more losers, bag holders, than winners. And ultimately, it can be gambling. But it's really just another way for people to come together in groups and put their money where their mouth is.

Should you invest in memes?

That is ultimately for you to decide but know that there is a high chance of losing most if not all you put in, so if you ever decide to do it, invest with disposable income (income you don't mind disposing of/throwing in a trash can).