Bed Bath & Beyond was one of the few ventures with GameStop Corp. and AMC Entertainment Holdings Inc. which inexplicably captured the envy of legions of novice traders sitting at home and bored during the pandemic in late 2020 and early 2021 in what became known as the meme trading frenzy. It didn’t matter that a struggling business model plagued Bed Bath & Beyond’s revenues and profits in the latter half of the past decade, sending its stock plummeting from about $80 in 2014 to less than $4 in the past. start of the pandemic. For those who use the Reddit discussion forums and trade uninformed opinions and analysis, Wall Street had it all wrong. These companies were diamonds in the rough, with their true potential overlooked. Shares of Bed Bath & Beyond rose fivefold in a matter of months to $53.90 in January 2021.
But Wall Street was not wrong. In what became one of the worst years on record for the stock market, with the S&P 500 index down 20%, the Solactive Roundhill Meme index fell much more, falling more than 50%.
As the pros suspected, fundamentals finally took over and meme stocks have mostly returned to something akin to fair value. The one thing Redditors have proven is that an army of novices acting in concert can exploit short-term liquidity constraints to move prices, but over the long term, the stock market does an effective job of separating winners and losers. Some people have described the era as a war between Main Street and Wall Street, but the only way for retail investors to win this war is to invest prudently for the long term.
And yet, it seems they are still trying. The self-proclaimed ‘monkeys’ are currently attacking AQR Capital Management founder Cliff Asness for saying he was shorting shares of the AMC movie theater chain. It didn’t matter that Asness went on to say that he was long and short on thousands of stocks and that any position was insignificant, it was enough to simply mention that AMC was one of the many stocks he expected to see decline. AMC Believers are indistinguishable from a cult in that they only seem to get more strident in their bullish stance when AMC’s stock price drops.
My advice to the monkeys would be to pick almost any other stock. Take away the pandemic and the business outlook for AMC and theaters is poor. Sure, there will be occasional hits like Top Gun: Maverick, but attendance has been down for a long time. If the monkeys had chosen an energy store instead, they would probably be much happier.
Frenzies come and go on Wall Street. There were the Nifty Fifty in the 1960s, the speculative craze around a flood of takeovers in the 1980s, the dot-com bubble at the end of the last century and the homebuilders in the 2000s, but no ‘among them – with the possible exception of the dot-com era – never approached anything like a cult.
The reality is that while the meme stock frenzy has created a host of risks for professional investors, it has also presented opportunities. Yes, the sudden and huge rise in GameStop shares due to overwhelming demand from Redditors led to the implosion of Melvin Capital Management, but the hedge fund was simply running out of GameStop shares for its own good. Not having all your eggs in one basket is a lesson even the pros should learn.
The opportunity presented itself in the derivatives market, where retail investors were buying so many call options tied to the very stocks that it induced “gamma compression”, a term that did not exist before the actions themselves. The volatility surface – the option price relationships between strike prices and expirations – has been distorted in ways never seen before. Market makers were able to recognize and take advantage of dislocations, facilitating a huge transfer of wealth from the unsophisticated to the sophisticated.
It could be argued that without social media, the meme stock market frenzy would never have happened. Investors cannot pile on a single stock and move the price in a coordinated way without having the means to communicate with each other. Could we have another meme stock frenzy in the future? It is entirely possible, even probable. But not in the current context. It is only at the top of a bull market that such things are possible.
The Meme stock mania is clearly over at this point, and yet Redditors still cling to hope. I wouldn’t feel too bad for them. There’s no shortage of information available on how to invest responsibly for the long term, like buying and owning index funds, and averaging the dollar cost along the way. Nevertheless, the lure of easy wealth in the stock market may be too great to resist, but the reality is that it is never easy and never lasts. Too often the stock market turns out to be a giant bug killer and novice investors are the mosquitoes.
More other writers at Bloomberg Opinion:
• Matt Levine’s Money Stuff: Meme week was too good for Robinhood
• Gen Z gets a hard lesson on stock market risk: Allison Schrager
• Turn off the memes, this party is over like it’s 2000: John Authers
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jared Dillian is the editor and publisher of Daily Dirtnap. Investment strategist at Mauldin Economics, he is the author of “All the Evil of This World”. He may have an interest in the areas he writes about.
More stories like this are available at bloomberg.com/opinion