By Peter Mastrantuono
Is meme investing “a totally nihilistic parody of actual investing” as one well-regarded Wall Street veteran claimed, or is it the future of investing?
According to a recent survey by Fidelity, over 40% of Gen Zers were most likely to turn to social media influencers to educate themselves on investing—the highest share of any generational cohort.
Illustrative of this new channel’s popularity for investing information and guidance, there have been over 2.8 billion views of TikTok’s #investing hashtag.
Meme Investing Defined
Meme investing refers to investing in stocks that have seen sudden and sharp increases in their prices due to social media hype. This hype often originates on platforms like Reddit, TikTok and YouTube with individuals who have a large and passionate community of followers.
Meme stocks can be highly volatile as they undergo dramatic price increases on a flood of demand and experience equally breathtaking declines as investors take profits or run out of funds to continue to support a stock’s elevated price.
Very little fundamental rationale goes into supporting the purchase of a meme stock. Its valuation level, profits, revenue growth, etc. are typically not a part of the purchase calculus.
It’s all about the story—a new Board director will convert a brick-and-mortar company into an online powerhouse or a dated phone maker will become the next cybersecurity giant. Sometimes it’s about acting on a mission, like squeezing short sellers until they’re forced to cover their short positions.
Making Sense of Meme Investing
Meme stock investing operates on an old principle: The Greater Fool Theory. That is, money can be made provided there remains a bigger fool to buy an overpriced stock. When the population of fools evaporates, some investors will inevitably be caught holding a highly inflated stock that will now move in only one direction–down. So, yes, individuals can make money from meme stock investing, but they have to be sure they are not owners when the music stops.
Investors interested in riding the meme-investing tiger may want to consider these five tips.
Tip #1: Use only money you can afford to lose in its entirety.
Tip #2: Don’t allow meme investing to undermine long-term financial goals. Betting on the horses can be harmless fun, until the betting losses pile up.
Tip #3: Get active on social media investing sites. Don’t rely on reports in the general media since much of the opportunity may have already been missed by then.
Tip #4: Invest prior to the FOMO (Fear of Missing Out) stage. As FOMO grips investors, price increases will sharply accelerate. However, it’s also very close to the profit-taking phase. The distance between these phases may be as little as a few days.
Tip #5: Don’t get greedy. Meme stock volatility means that profits can vanish in an instant. Don’t risk that by trying to squeeze every penny of possible profit. Lock in gains by selling.
Though the vast majority of financial advisors eschew meme investing, an advisor can help create a plan to meet your long-term goals so that meme investing doesn’t upend your future financial security.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.