Meme investors realise it hard way profit is just a perception there

The concept, often linked to the millennials, gained currency mainly during the Covid-induced lockdown globally, which saw the arrival of a new batch of young investors in a hurry to make money.

Usually, when a meme stock or asset starts trending, it wins the backing of some celebrity from arenas like sports, entertainment, technology or even business, adding some credibility and raising the pull factor of the online posts.

Recent experiences show meme stocks and assets, like Dogecoin for instance, tend to witness rapid surge in transaction volumes as soon as the hype builds up on social media or online fora. More often than not, such themes have nothing to do with the fundamentals, and tend to trigger purely speculative or rebellious behaviour among the participants, which is why such assets quickly become overvalued, thanks to sharp price increases within a short time.

Meme investing is not restricted to any particular asset or specific geographies. The whole of last year saw stocks like GameStop, AMC, Sundial Growers and BlackBerry create an upheaval on Wall Street, amid a Reddit-born meme investing wave.

While many of these businesses were either on the verge of bankruptcy or were not doing well in recent years, they saw massive stock price increases for many months, forcing short squeezes and causing great loss to some top hedge funds.

In recent months, this trend has been rampant in cryptocurrencies. Dogecoin is an exemplary meme investment, which gained the spotlight when Elon Musk, so-called cult leader of the cryptoland, tweeted about it. In fact, Dogecoin actually started as a meme only.

Indian market, too, has produced its own share of meme stocks. NBFC stock Bombay Oxygen rallied recently simply because of the nomenclature, when oxygen producers were trending amid the health crisis.

Orchid Pharma,

, Alok Industries, Birla Tyres are some of the other names that saw turnaround stories float on social media, causing share prices to soar.

It goes without saying that such investment ideas are generally delusional and carry significant risks; but social media discussions create enough pull factor for investors, only to find themselves trapped.

There has not been a single instance, where such herd behaviour-fuelled rallies have sustained, or created wealth. Instead, such trends have inevitably ended in a crash, resulting in huge wealth erosion.

Dalal Street veteran Sunil Singhania, Founder of Abakkus Asset Manager, calls ‘meme investing’ a new form of pump-and-dump strategy, which involves artificially inflating stock price through false and misleading positive statements in order to sell the cheaply purchased stock at a higher price.

Easy access to financial markets and ready availability of unfiltered, unverified and untrustworthy information on social media have led to the birth of these trends in the financial market.

“New-age investors often tend to show herd behaviour and bet heavily in a particular asset class or equity, only to get butchered when it gets slammed. It is very difficult to escape a massive crash in a risky asset class,” says G Chokkalingam, Founder, Equinomics Research and Advisory.

Such herd behaviour is seen mainly in cheap smallcap and midcap stocks, and can put even veterans and experienced professionals in a soup.

Many hedge funds were hit hard on Wall Street during January’s populist short squeeze after a Reddit group of retail traders put in massive bets on certain distressed stocks in a bid to try and topple the Wall Street.

Data from National Stock Exchange shows retail investors have turned aggressive on Dalal Street, and their market share has risen sharply to 45 per cent since the Covid disruption started.

“Everyone is wanting to get rich overnight, without any sound knowledge of investing,” said Singhania. “This swamp is not investors, they are merely speculators. They boot kick in risky bets, simply based on hearsay.”

The cryptocurrency market showed the pitfalls of such herding behaviour this week, when an off-the-cuff ‘hustle’ remark from Tesla CEO Elon Musk in a TV show caused the Dogecoin to plummet over 50 per cent after it had run up swiftly in anticipation of that show.

The Final Word

In the world of investing, chasing a trend, an investor or momentum is a common symptom among the ‘novice investors’. Herd mentality is the easiest means of destroying wealth. When people treat investment as a casino, where the majority end up losing money, profit is only a perception, cannot be realised.

“If you are in a casino for a while and you win initial rounds, you hold your chips and book profit. The same theory applies for the ‘kachra’ stocks, If you’re lucky enough to make some money, realise it in your bank. Else, you’ll end up losing up every battle in trying your luck to win wars,” Chokkalingam said.

“Control the greed, focus on fundamentals and invest only in an asset class you know,” said Singhania.

Singhania’s son Ujjwal Singhania had bought the now infamous stock pair – GameStop and AMC Entertainment Holdings – at very low prices during the Raddit wave and earned staggering returns on them in January this year.