Meme Investing

A message arrived in my inbox this morning that made me chuckle. The subject was “Investment Tips: Why You Should Invest in Dogecoin”

Dogecoin is the ultimate meme investment, a cryptocurrency created as a joke to poke fun at other cryptocurrencies.

If you haven’t been following the meme investing movement, all you need to do is google ‘doge meme’ and you will see pictures of the famous Shiba Inu dog saying: “Wow, much coin, so crypto, plz mine, very currency”. Memes (from the Greek mimema, meaning ‘imitated’) originated in 1976 describing how genes mutate by imitation. In our modern age, memes take the form of humorous graphics that are copied, edited, and spread via transmission amongst humans. That description pretty much sums up the coronavirus as well.

As far as jokes go, Dogecoin should have ended there and lived in obscurity forever. Instead, Elon Musk intervened. For most of its life Dogecoin’s price was around half a cent per coin, until Elon started tweeting positive Doge messages earlier this year. On 16^th April, Dogecoin gained 178% in a single day to 37 cents. To celebrate this event, 20^th April was proposed as a new holiday to be known as Dogeday.

After this year’s price gain, Dogecoin has an aggregate market capitalisation of around USD50 billion, bigger than most stocks in the world. Dogecoin is now valued the same as DBS Bank, the largest stock on the Singapore exchange.

The article about investing in dogecoin was upfront about it being created as a joke, and that it had no economic value. This lack of economic value argument can be made of bitcoin, as well as gold. But sometimes a big price gain can create a positive self-feedback loop, what Soros termed as reflexivity, which brings us to what was the biggest meme stock of all: Gamestop.

The frenzy around Gamestop started last year as a group of retail investors banding together to punish Wall Street short-sellers. This culminated in a +135% gain on 27^th January. The two-day intraday peak was +225%.

Gamestop’s market capitalisation increased from $253 million to $15 billion in six months. Before conveniently dismissing this rise in valuations as irrational, it has been accompanied by a fully revamped management team, and a plan to turn the company’s business model for the internet age. The thesis of the hedge funds that shorted Gamestop last year was that purchases of electronic games was moving online, hurting Gamestop which sold them via physical stores. The COVID-19 lockdowns accelerated this trend, concluding that the company would be bankrupt within a year.

Gamestop used its high-flying stock price to issue more shares, retire all its debt, and bolster its balance sheet with $771 million in cash. To top it all off, the latest earnings report showed a 25% year-on-year increase in revenue growth. Clearly, the company is now worth far more now than its 2020 market capitalisation of $253 million.

The Gamestop experience emboldened the meme crowd to expand their targets. Below is a partial list of meme stocks’ best one-day performance:

Aethlon: +388% 9 June

Clover Health: +85% on 8 June

Wendy’s: +25% on 8 June

Ocugen: +200% on 8 February

Blackberry: +32% on 27 January

The only ones I’d heard of before were Wendy’s, the hamburger chain, and Blackberry, the mobile manufacturer that was decimated by Apple’s iPhone. Both of these happen to be the smallest gainers in the list, so if I want to profit from the meme stock mania I’m clearly following the wrong stocks.

We close the list with the new king of the meme stocks that have recently inherited the crown from Gamestop: American Multi-Cinemas (AMC), which had a +95% gain on 2 June. AMC’s market cap at $22 billion is bigger than Gamestop’s, up from last year’s $458 million.

AMC was teetering on the verge of bankruptcy from the COVID lockdowns, and has capitalised on the meme frenzy in its shares by continuously issuing new shares to bolster its balance sheet, which at the end of last year had $11 billion in debt.

Buyers of AMC and other meme stocks are hoping for a repeat of Gamestop’s success with a fundamental turnaround story. In reality Gamestop’s fundamental improvement will be the exception instead of the rule. So far AMC has not announced any change in business plan, beyond free popcorn for shareholders who buy a movie ticket.

Some investors are being tempted by these large gains and increased news coverage of meme stocks. If you hold an index ETF that gains 10% annually, it will take you 7 years to double your money. Why wait so long when you see meme stocks double in a single day? Is there any way to identify these stocks before they make their large moves upward?

In tying this back to the original email on whether you should invest in dogecoin, the mistake is referring to this as investing. At a minimum investing requires an analysis of fundamental valuations; everything else is pure speculation. When these large one-day stock moves are driven by online comments that are completely divorced from any fundamental analysis of the company, it is the same as punting your hard-earned dollars at the casino roulette table.

For speculators still keen to try, remember that the vast majority of Gamestop punters bought in the late January peak at prices above $300, and are now sitting on losses of 30% or more. Successful investing is more about avoiding the pitfalls on your journey rather than picking the right stocks. It is best to resist the siren-call of quick money in the current meme frenzy.

By LEONARDO DRAGO

Co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund management services to endowments and family offices, and wealth-advisory services to accredited individual investors.