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In 2018, one among my financial advisory clients asked me a point-blank query:
“Do you think that buying this home is a silly investment?”
He was clearly still troubled by his experience from the 2008 financial crisis — a period where the typical American lost 42% of their homeowner equity. And having lived through the actual estate bust, he wasn’t about to make the identical mistake twice.
It seems that almost every generation goes through these cycles. An extended-term study by Finnish researchers found that the formative experiences of individuals living through the Great Depression affected their future portfolio construction. And even now, most of the older investors I speak with reference the Nineties Savings and Loans (S&L) crisis or another long-past catastrophe to elucidate why they proceed hiding money under their mattresses.
But 2023 has been different.
Despite the huge collapse in meme stock and crypto prices last 12 months, low-quality moonshots proceed to thrive. Firms like electric vehicle startup Mullen Technologies (NASDAQ:MULN) trade at multimillion-dollar valuations, despite having no clear path to profitability. And it’s hard to go every week without some latest NFT project milking investors for his or her hard-earned money. One recent gem includes a group of 10,000 images of feet, available for around $250 apiece. A recent study from FINRA confirms these observations.
Perhaps this newest generation of investors will eventually learn from the mistakes of the 2020-2022 stock bubble. Many threw within the towel last 12 months. But until they stop coming back, certain momentum-based trading strategies will proceed to perform well on the expense of those meme-hungry investors.
Investing within the Era of Social Media
A 2021 investment survey by CNBC found that greater than a 3rd of 18- to 35-year-old investors now receive their investment advice primarily from social media. Among the many younger members of the cohort, that figure is as high as 91%.
It’s hard to overstate its impact. Within the late Nineties, investing groups in AOL chatrooms might need numbered within the a whole lot of members. These forums tended to focus on small penny stocks, limiting the variety of outsiders impacted. One SEC lawsuit in 2000 found that a 15-year-old had generated $285,000 in ill-gotten gains entirely by publicizing over-the-counter stocks on Yahoo Finance bulletin boards.
Today, the GameStop (NYSE:GME) forum on Reddit alone has over 350,000 members. AMC Entertainment’s (NYSE:AMC) fanbase is even larger at a half-million people.
That’s made investing shenanigans far simpler. In December, the SEC announced charges against eight influencers for using social media platforms Twitter and Discord to generate over $100 million in illegal profits. And in 2021 alone, the Federal Trade Commission (FTC) counted at the very least 95,000 individuals who lost money through fraud on social media. Almost a 3rd of all scams on people under the age of 60 now begin on these platforms.
It’s also perpetuated bad investing habits, especially amongst retail-driven names. A 2021 study by European researchers found that meme stocks have unusual levels of momentum persistence — a situation where high-performing stocks proceed to go up, while low-performing ones keep dropping. It’s why my Momentum Master strategy has worked particularly well for smaller cryptocurrencies, and why the system stays a vital a part of my broader Profit & Protection trading system.
Many investors now chase stocks because they’re going up, and for little other reason.
Twitter’s Echo Chamber
Social media has also made it harder for novice investors to interrupt out of their cycles. Dedicated social media forums can essentially double as echo chambers by suppressing negative views. Tesla’s (NASDAQ:TSLA) foremost discussion board on Reddit now actively calls for “standards to crack down on FUD (fear, uncertainty and doubt) posts, as a community.” And the rise of margin trading has made it easier to transact large blocks of shares with relatively little equity; almost 1 / 4 of investors under 35 report trading on margin, in comparison with just 3% of those 55 and older.
Occasionally, these efforts are effective. Meme investors in GameStop have now deposited 71.8 million of the retailer’s 257 million free float to transfer agents, making it harder for brief sellers to drive down prices. The videogame retailer has since used its inflated share price to issue more stock, pay down debt, and keep its doors open.
But the identical aspects also can prop up shares of predatory corporations. In October, I noted how CEO David Michery of meme stock Mullen Technologies had used self-dealing to essentially gain control of his electric vehicle firm on the expense of outdoor investors. The California-based firm has since announced that it lost $740 million last 12 months, which included a $6.3 million compensation package to its embattled leader.
What Should Investors Do?
Some investors have given up for good. Quarterly revenues at Robinhood (NASDAQ:HOOD), a well-liked platform amongst younger users, have declined by over a 3rd from their 2021 peak. And figures from crypto trading firm Coinbase (NASDAQ:COIN) have shown an excellent greater decline in user engagement.
But trading patterns are still moving within the improper direction. Based on data from Refinitiv, the typical holding period of stocks has now shrunk from 8 years within the Nineteen Sixties to lower than six months. Popular Reddit forum r/WallStreetBets now hosts almost 13.5 million members, up from 11.5 million a 12 months ago. And options trading on popular retail names just like the Invesco QQQ Trust (NASDAQ:QQQ) continues to climb.
That means that the meme frenzy won’t disappear anytime soon.
Within the early 2000s, investors learned to keep away from dot-com corporations without strong business models. Even Amazon (NASDAQ:AMZN) would take over a decade to regain its dot-com highs. But with social media hype dominating many stocks today, the identical won’t be true this time around.
On the date of publication, Tom Yeung didn’t hold (either directly or not directly) any positions within the securities mentioned in this text. The opinions expressed in this text are those of the author, subject to the InvestorPlace.com Publishing Guidelines.
Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He’s the previous editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains through the bad.
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