Wait – what’s a meme stock?

Let’s recap. A meme stock is one that, thanks to huge attention on social media sites such as Reddit, jumps in value. As evidence of sizeable gains is posted online, others buy in. The fear of missing out (FOMO) then prompts even more people to do the same. Those betting against the company (short-sellers) are also forced to close their positions, further increasing the price. It’s really that simple.

So far, the most high-profile meme stocks have arguably been US video games retailer GameStop and cinema chain AMC Entertainment. Both have helped many readers of WallStreetBets become rich over the last year. If I’d bought the former on 28 December and sold exactly one month later, for example, I’d have made 22 times my money.

What happens from here?

What happens next is a great question. It’s also one I can’t answer with any real certainty. No one can. This is unchartered water.

That said, the performance of GameStop shares since January does tell us something. In February, they tumbled to $45. By March, they were back to $260. In May, they had fallen to $145. In June, they had climbed back over $300. 

Depending on your particular strategy, this volatility is either a gift from the market gods or the sort of nerve-shredding experience that puts some people off ‘investing’ for life. Regardless, I think it sends a clear message about how volatile meme stocks might be going forward.

So, would I buy?

Based on the December to January returns, you’d likely think me mad to reply in the negative. Who would turn down such an amazing performance in such a small space of time? Nope, not me!

The problem is that hindsight’s a wonderful thing. Investors need to consider not just how they might feel if they’d invested in GameStop last year, but how they’d feel if they bought at the peak and then saw the value of their holding plummet. I reckon the fear of missing out would quickly become the fear of still being in. 

Looking ahead, I’d still struggle to buy a meme stock. As a quality-focused investor, I’m hooked on businesses and/or investment themes that should last. Are GameStop or AMC quality stocks? Nope, not on any metric. Will Reddit readers be looking at them in a year? Probably not.

The really interesting thing about all this is that, because business fundamentals are irrelevant, anything could potentially become a meme stock. Unfortunately, this also makes it hard to know which will be next to gain sufficient traction on social media. It’s fascinating stuff… from a distance.

Ready to gamble?

Meme stocks clearly have the potential to generate big profits very quickly. However, this is risky stuff and not something most Fools would be comfortable with. Anyone entering this arena needs to know they’re at the mercy of the crowd. A love of rollercoasters is essential. 

If my reluctance ever wavered, I’d only ever play with money I could afford to lose. Without an edge, the latter’s likely.

The post Where next for meme stocks? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.