Here we go again?
In March, Truth Social began trading publicly under the ticker “DJT.” On the backs of the former President’s ardent supporters, the Special Purpose Acquisition Company (SPAC) that purchased Truth Social soared from a low of $16.90 on January 12th, 2024 to a high of $71.93 on March 27th, 2024. That is a more than 425% increase in value. This is a company whose 2023 revenue of $4 million resulted in a $58 million loss.
Is this sane investor behavior? We’ll need to travel back in time to gain perspective.
The Rise of Meme Stocks
It was early 2021. COVID vaccines were still just a glimmer of hope, and we were all doing our isolated best to stay healthy and sane. Amongst that social and sensory deprivation, investors became transfixed with “meme stocks.”
Gamestop (GME), a company with deeply troubled economic prospects, became the poster child for this phenomenon. From a low trade of $0.64 per share on April 3rd, 2020, just two weeks prior to California Governor Gavin Newsom issuing a statewide stay at home order, Gamestop rallied to $4.31 per share on January 4th, 2021. That’s a more than 673% gain.
The company had tapped into a compelling narrative: the power of the individual investor. This storyline, amplified by social media and on subreddits like WallStreetBets, suggested that anyone can score big financial wins overnight. By late January, GME traded as high as $120.75 per share. That is an additional 2800% gain. That was a nice distraction from the doom loop of the day.
However, the reality turned out to be far less rosy for investors who bought during this price spike. They learned that meme stocks are extremely volatile and can shift dramatically based on public sentiment, making them an extraordinarily risky bet. Those who didn’t learn this lesson rode successive waves up and down only to see their shares settle in at less than $11 per share, an approximately 90% loss.
GOD HELP SANE INVESTORS, in May of this year, Keith Gill, known on X (formerly Twitter) as Roaring Kitty, whose account has been dormant since 2021, posted a picture of an online gamer going from a reclining to an alert position. GME soared to nearly $65, and as of writing this article on May, 15, 2024, it is down to just over $27.
Other company shares that fell into the meme stock phenomenon include: AMC Entertainment, Blackberry and Bed Bath & Beyond. Those links do not lead to happy stock charts. BBBY has no chart. It went bankrupt. Feel sorry for those who bought it at the high of $53.90 on January 21, 2021. AMC also received a bit of a boost from Roaring Kitty.
Speaking of the prices some investors paid, the high trade for Truth Social (DJT) was $71.93 per share on March 27th, 2024, roughly three times its low close on March 16th, 2024. As of this writing on May 16th, 2024, the stock was trading over $52 per share.
Why We Steer Clear of Meme Stocks
Investing in meme stocks like DJT does not align with Abacus’ investment strategy for several reasons. Firstly, their price movements are often disconnected from underlying business performance, making them speculative and unpredictable. Secondly, for those who prioritize ethical considerations in their investment choices, the political implications of investing in a company like DJT might be inconsistent with personal values. That said, even if Mother Teresa was a meme stock, we would not speculate by investing in her.
Understanding Risk and Return
In our investment approach, we focus on academically robust principles that, historically, offer better returns than the market (which is pretty darn good in and of itself). When invested in a highly diversified manner, our approach has delivered a degree of long term predictability that we utilize to create effective financial plans. Stocks of smaller companies, stocks priced lower relative to their intrinsic value (value stocks), and firms with high profitability are central to our strategy. These ‘tilts’ tend to outperform because they compensate investors for taking on greater risk. It’s a calculated trade-off, where informed decisions lead to potential rewards over time.
We believe in the efficiency of the market to most effectively price stocks based on available information, over the long term. This approach isn’t about seeking the spotlight with quick gains; it’s about steady growth, minimizing unnecessary risks, and aligning with our investors’ broader financial goals and values.
The investing landscape is dotted with trends and fads, but we remain committed to a strategy that respects both risk and return. While meme stocks offer the allure of quick profits, we focus on generating consistent, reliable returns that align with our investors’ long-term financial and personal goals.
If you’re interested in building a thoughtful, well-structured financial plan and investment strategy that evolves with you, reach out to us. Let’s craft a plan that not only aims to reach your financial goals but also fits your vision for the future.
Sources:
NYSE – Nasdaq Real Time Price – GameStop Corp. (GME). Yahoo Finance.
NYSE – GameStop Corp. 5 Year Data from 5/15/2019 to 5/15/2024. Google Finance.
NYSE – Nasdaq Real Time Price- AMC Entertainment Holdings, Inc. (AMC). Chart. Yahoo Finance!
Disclosure:
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