The “meme stock” mania is at full rage again. While some may say that AMC is democratizing the stock market, others will claim that it’s merely taking advantage of retail investors. Are retail investors holding a $37 billion bag?
2021 was an odd year for the financial sector. First GameStop, then Musk and crypto, and now AMC.
AMC’s stock doubled in price on Thursday (though it gave up some of those gains on Friday.) AMC’s leadership is embracing the situation, seeing it as a boon for the company. In fact, CEO Adam Aron takes his company’s meme status very seriously. This should not be surprising. More than 80% of AMC’s stocks now belong to retail investors.
“These individual investors likely own a majority of our shares, they own AMC,” CEO Adam Aron said on an earnings call.
“We work for them. I work for them. By definition, their interests and passions are important to AMC, their ambitions and passions are important to me.”
AMC’s approach is in stark contrast with that of GameStop.
Even as its shares increased more than thirty-fold in January, GameStop did not capitalize on this until April, when it sold $550 worth of shares.
The company didn’t even acknowledge the meme until May, when it tweeted a reference to the phrase “to the moon,” which is used when expressing hope that the stock is going up.
GameStop has since deleted the tweet, but AMC is doubling down.
The company has announced a shareholder reward program, starting with one free bag of popcorn. This is not a bad deal for the company, which raised more than $587 million in its latest public offering.
But what if this is just a play to get as much money from retail investors as possible? Is AMC taking advantage of vulnerable people?
WBS YOLO’s And Gambling Addiction
There’s no shortage of people that are looking for quick gains in the stock market, often investing money they can’t afford to invest.
Retail investors on WallStreetBets are known to execute extremely risky trades, often at the margin.
There’s even a name for that; YOLO trades or YOLO’s, after the expression “You only live once.”
These YOLO’s are very well documented and legendary on the subreddit, such as trade made by “u/Controlthenarrative.”
The user reportedly exploited a glitch in Robinhood’s app to get past the app’s limits on borrowing. He went on to borrow $50,000 on a margin with only 2,000 in his account, a 25x leverage.
Unfortunately for him, u/Controlthenarrative put all his money in on the money puts on Apple with a one-day expiration date. The company beat earnings estimates, and he instantly lost $50,000 of money he did not have (the exact moment is captured on video).
And anyone that frequented WallStreetBets for some time will tell you that there is no shortage of people with this mentality on the subreddit.
From that perspective, it’s easy to understand why investor Charlie Munger accused Robinhood of taking advantage of people’s gambling instincts.
Many new traders see the stock market as a shot to escape their predicament; being broke, hating their job and losing hope for the future.
Some signs of gambling addictions creeping up in trading may be chasing unrealistic gains or trading for excitement. And there are huge potential downsides, from virtually uncapped financial losses to strains on family and relationships.
Fundamentals Vs ‘Diamond Hands’
There’s a reason why most investors stay away from “meme stocks.” They are highly speculative assets.
When a price of a stock gets inflated, its real returns per share drop; just like in the case of bond yields. Once these stocks get inflated enough, there’s really no financial reason why anyone should want to hold them.
Once an investor starts thinking in terms of realistic gains, it is very difficult to explain a position in “meme stocks.” That’s why these stocks could fall dramatically.
But not all retail investors are just chasing quick gains. In fact, those may be a minority. There are many investors who simply don’t seem to be interested in money.
They are very vocal, often claiming they have “diamond hands,” that they only know how to buy and “HODL.”
Some of them may want to punish hedge funds. Some see their trades as starting a revolution in the financial industry. Others seem to just want to be a part of the community.
While these “diamond hands” usually hold a rather small investment in the company, a large enough community of retail investors can make a huge difference in the valuation of any company.
For instance, even after the crash of GameStop, the company never rebounded to the levels it was at before it was discovered by WallStreetBets.
Evidently, a large number of people continued holding.
As GameStop and AMC discovered, stocks don’t have to be an investment. Some stocks will start behaving more like collectibles. (Funnily enough, the trading card index has outperformed the S&P 500 in the last 12 years).
It’s impossible to predict when WallStreetBets traders will get tired of pumping and holding meme stocks. But until they do, meme stocks (and meme crypto) are here to stay.