Social Media Has Birthed Meme Stocks, Should You Care?

Posted by Adrian Dayton on Jul 25, 2021 6:31:19 AM


As originally seen on Forbes

What is the value of a company? For a publicly traded company, the value is determined by what the public are willing to pay for the stock. Benjamin Graham, the Godfather of value-investing, taught that price to equity ratio (P/E ratio) was the key to understanding value. Warren Buffet followed in his footsteps with a similar method and generated over 100 billion dollars for him and his investors. In the last few months however, we have seen the emergence of a new way of valuing stocks: memes. 

 A   meme stock  is a stock that has value, not because of any fundamentals like P/E ratio or strong economics, a meme stock has value because the stock ticker has gone viral on social media and garnered the attention of normal people (known as retail investors).

It is fascinating to see the power of millions of individuals pumping up a stock’s value, just through sharing silly memes. Just look at Dogecoin, a crypto-currency that was started as a joke, but then was pumped up after tweets about it from Elon Musk. Most crypto coins are valued because of their tech, the tangible benefits or uses of the crypto, or other unique characteristics.

Why is Doge successful? Because a Twitter army likes posting silly memes or gifs with pictures of a dog on them. 

Should you care? Possibly.

Warren Buffet famously said, “when the market gets greedy, get scared, when people get scared, get greedy.” The bull market has been going crazy and the amount of money flowing into the market is unprecedented. When you invest in stocks or crypto that are propped up only by retail sentiment, especially if you buy after these vehicles have had major growth, you have the potential for massive losses. The market and apps like Robinhood are suddenly making stock trading super accessible, and this is encouraging uneducated investors to take huge risks.

Sure, you could become a Dogecoin millionaire, but you are much more like to become a Dogecoin candidate for bankruptcy if you overextend yourself.

I’m not an investment advisor, and this is not investment advice (the lawyers made me say that), but the one suggestion I will make is to treat meme stocks like you do your trips to Vegas. Remember the saying, “for entertainment purposes only?” Feel free to get out there and have some fun, but don’t invest money you can’t afford to lose.