Meme stocks are the perfect wealth destroyers

The market has become a little obsessed with a relatively new phenomenon called “meme” stocks. They are companies whose share prices  have risen exponentially on the back of bulletin type board social forums like Reddit and Twitter. Not by any fundamental means. By spruiking the company’s story and letting its users know that the story is a sure thing, the army of bloggers begin buying driving the price higher.

Noob level investors pumping the price to dizzying heights are leaving professional fund managers scratching their heads. And as always, the fear of missing out kicks in, pulling in more and more traders to jump on board. A recent example is Robinhood (NYSE:HOOD) which listed on the market at $38 dollars a share last Thursday. Less than a week later Robinhood hit a high of $85 dollars a share, with many pointing the finger at meme traders. And it was true, as the 50% intra day rally coincided with the release of the first suite of tradeable options on Robinhood stock. The sudden rises in the stock caused the platform to halt trading of its own stock multiple times.

Now we all know how this story ends.

But can you make money from jumping on the trend? Without doubt, the company will fall back to earth as share prices are a function of future earnings. But that’s not to say you can’t make money, it’s all about timing. Which means, making money on meme stocks is akin to gambling. Data from fintech OMG (Open Markets Group) analyses the share price of 12 “meme stocks” and uncovered that every single one of them left investors in the red.

The company said “every single one of the 12 stocks analysed dropped in value from the time they became a meme stock, on average by 16 per cent and 34 per cent after 1 month and 3 months respectively. The biggest losses over 3 months were by 88 Energy, Douugh, and Digital Wine Ventures, with 71 per cent, 50.7 per cent, and 50.3 per cent respectively.”

OMG then went on a witch hunt to find the 12 most gossiped stocks on social media. It came up with the following:  88 Energy (88E), Creso Pharma (CPH), Douugh (DOU), Lake Resources (LKE), Brainchip (BRN), Vulcan Energy (VUL), Digital Wine Venture (DW8), Zip Co (Z1P), Cirralto (CRO), Mesoblast (MSB), Latin Resources (LRS), and GME Resources (GME).

Looking at this list, there are a few familiar names that should be easily recognisable being Zip Co, Brainchip, Mesoblast and Vulcan Energy.

OMG stresses “the stocks themselves are not necessarily bad investments, as some do have the potential to deliver positive returns over the long-term if a responsible and strategic approach to investing was employed in line with professional advice. Rather, the process of following “advice” in the form of uninformed social media hype is what can cause investors to haemorrhage money.”

What OMG found was that by the time a stock becomes popular online, i.e. when it’s “meme-ing”, it’s already too late. Any investor that buys stocks at high prices after they have moved, runs the risk of the stock tumbling soon after, especially if its been hyped even further by social media. A quick and easy way to destroy wealth

OMG CEO, Ivan Tchourilov, urges younger investors “to instead take a long-term portfolio approach to investing in Australian equities, and to base that strategy on affordable professional advice. On the one hand, we are seeing the largest intergenerational transfer of wealth in history. On the other, the financial advice industry is on its way to halving in size by 2023, while quality advice becomes too expensive for many in the wake of new restrictions imposed after the Hayne Royal Commission.”

As this wealth transfer takes place, the risk is that the younger generation will be ill equipped and unadvised to understand investment decisions. They may look to social media for help, which isn’t a long-term strategy by any means.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.