Mama Meme!

Meme stocks are soaring to the moon as diamond hand traders place concentrated bets on a handful of companies. Meme traders scour the internet looking for stocks to buy and promote to more traders. The meme stocks are rising because, well, they’re rising.

My wife asked me what a meme stock was at dinner last night, and she rarely asks me about stocks, so I knew the trading frenzy has gone viral. I gave her a short answer with little detail, but I told her I would do a deeper dive to answer her question. So here we go.

A group of traders identifies meme stocks through social media sites like Reddit and WallStreetBets. Reddit describes itself as the front page of the internet, while WallStreetBets is a forum for stock and option trades to pump, er share, ideas. The traders typically target companies with high short interest, like Bed Bath & Beyond or SoFi Technologies.

Why would a company with a high short interest be an attractive target? When traders short a stock, they expect the price to fall, so they sell first, hoping to repurchase it later at a lower price – the short seller profits when stocks drop. Most individuals who short stocks are professional traders, whereas meme traders are primarily retail investors. It’s David vs. Goliath. When meme traders start pumping up a stock price, the short sellers must buy back stock to limit their losses, so trading volume explodes as retail traders and short-sellers buy stock. For example, the 10-year average trading volume for AMC Entertainment (AMC) is about 13.5 million shares per day. The trading volume for the last five sessions averaged 571 million shares per day, and it traded more than 750 million shares on Thursday!  AMC has 117 million shares outstanding, so it traded nearly five times the number of shares available every day last week.[1]

Meme traders use rocket emojis to inform other traders they expect their stocks to go to the moon. Another symbol for these traders is diamond hands. If you have diamond hands, you’re a strong trader with the courage to hold your stock while it’s falling. Diamond hand traders unite to try and hold the line as their stocks get battered. On the other hand, if you’re weak and sell your stock, you have paper hands, according to the meme traders. I own index funds, and I rarely sell, so I guess I have diamond hands.

However, it’s hard to argue with the meme traders because their stocks are soaring. AMC is up 2,160% for the year. GameStop is up 1,220%. BlackBerry and Bed Beth and Beyond are only up 109% and 78%, respectively. Several firms offer zero commission trading like Robinhood and Schwab, which added to the speculation, and the Federal Reserve has been accommodating with a near-zero interest rate policy. If we add COVID, boredom, and a lack of sports to the mix, then you have a perfect cocktail for a trading bubble.

Another characteristic of meme traders is they don’t care about a company’s financial statement, and it’s a good thing because the balance sheets for AMC, GameStop, BlackBerry, and Bed Bath and Beyond are horrible. Here are a few of their combined financial metrics.[2]

  • Return on Invested Capital = -43.4%
  • Annual Revenue Growth = -32.5%
  • 5-Year Revenue Growth = -12.2%
  • Profit Margin = -197%
  • Operating Margin = -104%
  • Employee Growth = -24%

I give credit to the meme traders because they’re leveraging the power of social media through Reddit and WallStreetBets to promote their ideas. As a result, social media has leveled the playing field. Before the internet, Wall Street firms like Morgan Stanley, Goldman Sachs, and Merrill Lynch used the press to promote their stocks and offerings. The analyst would promote their ideas on CNBC, Bloomberg, or Fox Business News. Likewise, money managers and professional traders regularly talk their book to sell their ideas. It’s not uncommon to watch a segment on CNBC where a trader tells the viewers they bought stocks or options during the show! I used to call this front running, but maybe the rules have changed.

Should you buy meme stocks? If you want to speculate with a small portion of your account, and you can afford to lose the money, then give it a shot. If you decide to trade a few meme stocks, limit your investment to 1% to 3% of your capital. And don’t use margin! If you currently own meme stocks, sell some shares to lock in your profits because this won’t last.

If you don’t want to believe me, here is what the management of AMC recently said about their stock:

“We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last,” AMC said in the filing. “Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”

Caveat emptor.

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” ~ Jesse Livermore

June 5, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] YCharts

[2] Ycharts Comp Tables

Red 32

I like gambling – always have. My high school was located across the street from Santa Anita Race Track in Arcadia, and my friends and I often went after school to bet on a race or two. On some Saturdays, we’d spend all afternoon at the track. In college, my friends and I traveled to Las Vegas or South Lake Tahoe to play blackjack, craps, or some other games. It was fun and exciting; however, I never risked more than I could afford to lose, which wasn’t much.

Since the start of COVID, investors have been gambling on stocks buying speculative names, or using options to leverage their bets. Options volume on the CBOE for calls has increased 247%. To add fuel to the fire, speculators have leveraged their accounts with margin. Since last March, margin debt has increased 63% to a record high of $778 billion!

The trading activity in speculative names and options has increased because of the Robinhood traders, Reddit, and WallStreetBets. John Marshall, head of derivatives research at Goldman Sachs, said, “For the largest online brokers, the number of daily trades has tripled since 2019. But this has mainly been driven by a small portion of their customer base. These day traders are less than 10% of their customers, but they represent more than half of their trades.”[1]

Sundial Growers (SNDL) is the latest example of this craze. After the social media crowd said to buy the stock, it jumped 144% in a few days, and volume spiked 730% as traders poured into it at the top before falling 32%. Dave Portnoy said on Twitter, “Back in $sndl cause I love the rush.” He added: “The $SNDL saga has convinced me you should have to pass an intelligence test to use Twitter.”

So far, GameStop is the poster child for speculation rocketing from $18 to $483 in two weeks before crashing. It’s now down 90% from the high, and the volume in the stock spiked 489% as speculators chased returns.

Here a few suggestions if you want to speculate.

  • Limit your speculative capital to 1% to 3% of your taxable investment account. Do not use retirement funds to buy penny stocks, call options, or meme stocks.
  • Do not use margin.
  • If you make a quick buck, take your gains and count your blessings.
  • If you’re losing money, cut your losses. Do not average down.
  • If a stock has risen 500% or more in a few days, wait for it to pull back before you decide to take the plunge. Stocks can’t remain vertical for long, and beware of parabolic charts.
  • Do your own research. Ignore your brother-in-law’s advice.
  • Only speculate with money you can afford to lose.
  • Beware of the wash rule.
  • If you suffer losses, you can write them off your taxes indefinitely until absorbed. The IRS allows you to write off $3,000 per year if you don’t have any capital gains. You can offset your losses dollar for dollar against any capital gains.
  • John Maynard Keynes said, “The market can remain irrational longer than you can remain solvent.”
  • You’re competing against Goldman Sachs, Morgan Stanley, American Funds, Dimensional Funds, BlackRock, Vanguard, Fidelity, Schwab, TD Ameritrade, Renaissance Technologies, and several thousand professional investors with deep pockets. Plan accordingly.

Happy trading and good luck.

“Gambling has brought our family together. We had to move to a smaller house.” ~ Tommy Cooper

February 12, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://markets.businessinsider.com/news/stocks/retail-reddit-robinhood-trading-boom-means-for-stocks-goldman-sachs-2021-2-1030051688, By Isabelle Lee, February 7, 2021

Is This Time Different?

GameStop stock soared to all-time highs last week on the wings of social media traders. The Reddit traders put the short squeeze on GME and almost destroyed two high profile short-selling firms. At one point, GameStop had risen more than 1,600%! On Twitter, Reddit Investors said, “It is the common man vs. the suits.” They added, “I’ve talked to a lot of suits this weekend, and 90% of them are extremely concerned this debacle with meme stocks is going to blow up the market in the near-term.”

As the social media warriors tried to “stick it to the man,” trading on the Robinhood app exploded, and  Wall Street made even more money. Citadel is the primary trader for Robinhood and other firms, and last year they made $6.7 billion trading “free” stocks.[1] The more individuals trade, the more money Wall Street makes. One former Wall Street veteran told me: “We are in the moving business, not the storage business.” Wall Street loves activity, and it doesn’t care about your moral victories or if you want to “hold the line.” Since GME peaked last Thursday, it has dropped 80%. John Maynard Keynes said, “The market can remain irrational, longer than you can remain solvent.”

Is it true? Will a group of day trading, social media experts bring down Wall Street? Let’s review some history.

The Crash of 1929

The roaring twenties was a decade of excess, showcased by F.Scott Fitzgerald’s The Great Gatsby. The era was ripe for speculation following the Spanish Flu, and traders bid up stocks by leveraging their accounts ten to one. According to Macrotrends, the Dow Jones Industrial Average climbed 449% from 1921 to 1929.[2] Towards the end of the bull market, several high profile stocks like Anaconda Copper, GE, GM, Montgomery Ward, New York Central, RCA, Westinghouse, and Woolworth rose an average 158% from March 3, 1928, to September 3, 1929. Less than two months later, the group fell 73% as the stock market crashed on October 29, 1929.[3] After the crash, the government established the Securities and Exchange Commission to protect individual investors. The Dow Jones did not breach its pre-crash high until 1959, thirty years later!

The Nifty-Fifty

The nifty-fifty was a group of large companies that investors loved to own during the 1960s and 1970s. These momentum stocks were made popular by the legendary investor George Tsai who managed the Fidelity Capital and Manhattan Funds.[4] The nifty-fifty stocks traded to excessive valuations, and the PE ratio for these stocks climbed to more than 100. A few of the names included Coca-Cola, IBM, Polaroid, and Xerox.[5]The party ended during the market correction of 1973 and 1974 when stocks fell more than 40%. The Dow Jones declined 71% from 1965 to 1982, and It would take fourteen years for the Dow to eclipse its 1965 top.[6]

The Tech Wreck

Technology stocks soared during the mid-nineties as the internet brought elaborate trading tools to the masses. The internet turned individuals into trading machines with access to websites managed by E*Trade, Schwab, and TD Ameritrade. If you need proof of the excess, please Google E*Trade investment commercials.  From January 1995 to February 1, 1999, the Dow climbed 144%, and the NASDAQ soared 233%. Stocks like Qualcomm, Enron, Iomega, Worldcom, Global Crossing, and pets.com mesmerized day traders. A new paradigm arrived until the market corrected. The NASDAQ tumbled 70%, and the Dow Jones fell more than 32%. The tech-wreck brought the party to a halt. It took the NASDAQ more than fifteen years to recover its all-time high!

Today

Boom and bust cycles are part of investing. Pursuing quick riches through day trading is fleeting, and it only lasts a few years, at best. It took the stock market an average of nineteen years to recover the losses from the Great Depression, Nifty-Fifty correction, and Tech Wreck.

Is this time different? I doubt it. Individuals who trade without a plan to chase short-term riches will suffer when the market corrects. Long after the GameStop fiasco is over, large Wall Street firms like Goldman Sachs, Morgan Stanley, and Citadel will still be standing.

Be careful. Trade lightly.

“The four most dangerous words in investing are: ‘this time is different'” ~ Sir John Templeton

Book Recommendations

This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff

Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger

Irrational Exuberance by Robert J. Shiller

Against The Gods by Peter L. Bernstein

Barbarians at the Gate by Bryan Burrough

The Big Short by Michael Lewis

The Panic of 1907 by Robert F. Bruner

February 2, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.wsj.com/articles/gamestop-frenzy-puts-spotlight-on-trading-giant-citadel-securities-11612089000?mod=searchresults_pos4&page=1, Alexander Osipovich, January 31, 2021

[2] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

[3] Only Yesterday by Frederick Lewis Allen

[4] https://en.wikipedia.org/wiki/Gerald_Tsai

[5] https://www.investopedia.com/ask/answers/08/nifty-fifty-50.asp ,Barclay Palmer, March 24, 2020.

[6] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

A Melt Up

Gamestop, AMC, and a few other highly shorted stocks are melting up, soaring to giddy heights. The ten most shorted stocks are up 159% this year. By comparison, it took the Dow Jones ten years to rise 155%! At some point, these companies will correct and fall back to earth like Enron, Worldcom, and Iomega did several years ago.  

If you missed the launch or takeoff, be careful investing in these names because most of the returns have already materialized. An airplane requires major thrust to take off and reach its cruising altitude, and when it does, the pilot throttles back the engines and settles in for the long haul, and when it starts to run out of gas, it will land. Stocks, like airplanes, can’t maintain vertical lift for long.

During speculative phases, investors will sell good companies to chase returns. The ten most profitable companies are up a mere 2.25% this year. The NASDAQ is up 1.8%, the S&P 500 is down .97%, and the Dow Jones has fallen 1.82%. High-quality names are a source of funds to pay for margin calls or cover losses. In 1999, investors sold blue-chip names to speculate on dot.com stocks. It worked for a while, and then the market crashed. Do you remember pets.com? As quality names trade down, use it as an opportunity to add great names to your account.

Eventually, markets correct, and speculators will get torched. Shooting stars fade. Cycles of fear and greed have been around for thousands of years, and it is not different this time.

If you own a few of the dangerous names, take your gains and lock in your profits. If you want to join the party, limit your purchase to 1% to 2% of your portfolio. Do not use margin. Do not buy options.

Be careful and tread lightly.

“You know somethin’, Robin. I was just Wonderin’, are we good guys or bad guys?” ~ Little John

January 29, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Data Sources: YCharts