GameStop and AMC are the favorite stocks of a new demographic of amateur traders that congregate on social media like Reddit and Discord. Posts on the r/WallStreetBets and r/Superstonk subreddits show that the group is irreverent, unconcerned with establishment analysts, and motivated by a desire to show up Wall Street.
And now, many analysts are finally reading the writing on the wall and admitting that the “meme market” is here to stay. There is more money in the hands of the average retail investor now than any prior time in American history, and it’s never been easier to buy stocks. How long will this pattern last, and how bad will it be when the bottom falls out?
How We Got Here
The term “meme stocks” received a higher profile in early 2021 when amateur investors on Reddit helped spur an unprecedented short squeeze on GameStop’s stock. Motivated by a desire to “beat” hedge funds, Reddit investors used memes and viral hashtags to convince countless amateur investors to buy up GameStop’s stock, causing it to rally to new heights.
This situation put the WallStreetBets subreddit in the public eye, and a huge influx of new users caused the board’s existing users to splinter into a number of other subreddits, like the aforementioned Superstonk.
Another major stock favored by Reddit users, AMC Theaters, saw a similar short squeeze in February. This squeeze was smaller but established AMC as the “little brother” meme stock. Many establishment analysts at the time were mystified by the situation, wondering how amateurs could have pushed failing businesses’ stock prices so high.
Plenty of Money
The situation was spurred on by a combination of factors. When the meme market was getting underway, many people were still under lockdown and were flush with stimulus check money. Many people had deferred spending from vacations they didn’t take in 2020, leading to a lot of bored people stuck indoors deciding to take a big swing on a chance to get rich. For many, it paid off.
Establishment analysts predicted that meme stocks would cool off as 2021 went on, with lockdowns lifting and stimulus money running out. And, throughout the Spring and early Summer of 2021, this looked to be the case, with GameStop and AMC slipping back toward lower price points. Then, Reddit spurred on another major rally in the two meme favorites.
The Reddit Investor Mentality
Establishment analysts have been mainly perplexed by the situation thanks to the seeming irrationality of Reddit’s amateur investors. GameStop has no real plan to beat digital video game distribution. AMC isn’t poised to make some kind of big comeback this summer. So, why would anyone sink so much money into these companies?
“A lot of these people who go in there openly say I’m not F-ing selling even if it goes to zero,” WallStreetBets founder Jaime Rogozinski tells Yahoo Finance. “It’s somebody who knowingly wants to view the market in a different way, and doesn’t care about losing money. Is this how to build slow wealth for the rest of your life? No. It’s how to buy lottery tickets and hopefully win the lottery. And if you lose, you will buy a ticket next week.”
A peek at the WSB subreddit shows a group that ranges from good-natured and happy to be making some money to truly bloodthirsty for hedge funds that bet against them to fail. Calling each other “apes” and “degenerates,” Reddit’s amateur investors seem to be fully aware of their role in the grand scheme of the market. They’re disruptors, arriving at a pivotal moment to bury the old way of doing things under a mountain of memes.
When the Bubble Bursts
Right now, interest rates are so low due to Fed policy that the only real moves that make any money for financial institutions right now are buying stocks. As such, the market is more highly valued across the board right now than at any other time in history. This is a bizarre situation and one that has to come to a conclusion at some point. The question for retail investors is just how long they should stay in.
The “buy and hold” mentality prevalent on Reddit presents a conundrum, though. People who sell out of their GameStop or AMC positions are ridiculed for having hands of “paper” instead of “diamond.” But, when the bubble bursts — whether it’s next year or five years from now — those who have decided to hold onto their shares until the bitter end could suffer substantial losses.
And, when this bubble does burst, there will be a massive outcry from amateur investors who feel misled. Whether their ire is pointed at the community that convinced them to pour their life savings into GameStop’s stock or at the trading apps, like Robinhood, that facilitate such moves, one thing is certain: it won’t be pretty.
But that’s all theoretical. For now, the advent of fractional shares, fee-free trading, and social media has combined into a nexus of memes and market forces that couldn’t have been predicted even ten years ago. Where will meme stocks go next? According to Reddit, to the moon.