Start to become sceptical when financial news breaks out into mainstream fame. If an investment idea comes up at a family dinner, proceed with caution. When your taxi driver, hairdresser or waiter in your favourite coffee bar starts recommending a stock, either the entire market, industry or particular stock is likely in a bubble.
We saw it with Bitcoin in 2017, pot stocks in 2018 and now most likely we see it with meme stocks. The kind of herd mentality and the practice of following anonymous financial advice on a social media platform is toxic for all investors. A lot of the novice traders that appeared during the pandemic now think making big money is easy. They think you can pick any stock and it’ll return thousands of points in growth overnight. We saw this in the 2000 tech bubble.
On thing is clear: With meme stocks, you’re not investing based on the value or potential of the company but rather the fact that everyone else is also buying into the hype. The principle of making money in this type of “trading” is very simple: You need a lot of people who are continuously willing to pay more than you did for the stock. You only make money if you already own the stock and, all of a sudden, it is “discovered”, people are buying into it and you are disciplined and lucky enough to take a short term profit. Otherwise, you’re likely buying at the top and your investment will only go down. The chance you will do exactly this or have not sold when the rapid downturn happens, is very high. For me, this is high risk gambling. Stay clear!
Sven Franssen