Meme too? An analysis of whether meme stocks actually make people money

It’s well documented that the massive influx of investors into the markets over the last year has in part given rise to the ‘meme stock’: the phenomenon of a share price skyrocketing due to social media hype rather than fundamentals. Optimistically, some might say this is part of the democratisation of wealth as barriers to trading reduce, but others might say at best it represents misinformation and sheeple behaviour, and at worst potential market manipulation – the old ‘pump ‘n’ dump’. So in June we decided to look at the hard data and work it out; did anyone make money from meme stocks, and if so, who? Or were they all out of (rocket) pocket? Ivan Tchourilov, our CEO, takes a look.

What’s in a meme (stock)?

So firstly, we had to find the meme stocks and work out if they made money.

Step 1: Defining a meme stock

To start with we had to define ‘meme stock’. There were two steps to this:

We searched Reddit, Twitter and trading-focused Facebook groups to find the 12 most talked-about stocks (yes, that included those that came with rocketship emojis… that indicates ‘strong buy’)
Then we cross-referenced them with Google Trends to confirm they were genuinely trending.

We identified 12 stocks. Here they are in order of meme-worthiness:

88 Energy (88E)
Creso Pharma (CPH)
Douugh (DOU)
Lake Resources (LKE)
Brainchip (BRN)
Vulcan Energy (VUL)
Digital Wine Venture (DW8)
Zip Co (Z1P)
Cirralto (CRO)
Mesoblast (MSB)
Latin Resources (LRS)
GME Resources (GME)

Step 2 : Evaluating a meme stock

We then looked at the price of the stock:

One month before the height of their popularity(peak)
At the peak
One month after the peak
Three months after the peak

Results: What goes up, must come down…

Every single one of the 12 stocks analysed dropped in value from the time they became a meme stock, on average by 16 percent and 34 percent after one month and three months respectively.  

The clear finding was that by the time a stock becomes popular online, i.e. when it’s “memeing”, it’s already too late. An investor is likely to buy the stock at a high price which will fall soon after, leaving them in the red and almost guaranteed to lose money. 

But there’s nothing wrong with the stock…

We stress that the stocks themselves are not necessarily bad investments, as some do have the potential to deliver positive returns over the long-term if a responsible and strategic approach to investing was employed in line with professional advice. 

Rather, the process of following “advice” in the form of uninformed social media hype is what can cause investors to lose money.  

As an example, if an investor had managed to buy these same 12 stocks in equal amounts as a portfolio one month before they became memes, OMG also calculated that the portfolio would have increased by 110 per cent by 30 June 2021. 

Are millennials more likely to lose money on meme stock?

We then decided to look at our own market data to understand who were the biggest losers and winners with meme stocks, and whether the newer, younger investors are the ones falling for the hype and paying the price.

Step 3: Comparing Gen X & Boomers vs Millennials

We took an anonymised population of 600 customers from Opentrader (our retail trading platform) to crunch the numbers on exactly when they bought and sold. The split by age was 51% over 40 and 49% under 40. 

We defined Boomers & Gen X as those over 40 years of age, and Millennials as those under 40 years of age.

Boomer or bust

Lo and behold. Based on an evenly weighted basket of the stocks, investors over 40 would have experienced an average gain of 1.29%, with these stocks comprising a total of 3.8% of the share of their total trades.  

This is compared to investors under 40, who would have experienced an average loss of 1.93%, with these stocks comprising 5.14% of their total trades. 

This means that the younger and less experienced traders were acting with 2x as much risk, their return was 2.5x worse and lost them money, and they were generally more likely to be duped and trade on the hyped status of these stocks, compared to their older counterparts. 

Don’t fall for the hype

These findings highlight the risks of investing based on uninformed social media hype. It’s no surprise that millennials turn to social media for information – after all, don’t they do that for everything? But younger traders and investors are getting caught up and caught out.

This is particularly worrying given they are about to receive an unprecedented amount of money from their parents, so while millennials are blessed for they will inherit the earth, their behaviour indicates they could definitely lose it again.

We are currently facing an unprecedented scenario in Australian markets. On one hand, we’re seeing the largest intergenerational transfer of wealth in history. On the other, the financial advice industry is on its way to halving in size by 2023, while quality advice becomes too expensive for many in the wake of new restrictions imposed after the Hayne Royal Commission. 

As a result, more money than ever is hitting unadvised and inexperienced investors in particular, driving them to resort to unreliable and unaccountable sources like online forums. 

Where to from here?

These findings clearly highlight the risks of investing based on uninformed social media hype. Instead, younger investors should take a long-term portfolio approach to investing in Australian equities, and to base that strategy on affordable professional advice. 

This opens up a significant need for scalable online advice solutions that can be provided to online investors in the comfort of their own homes by well-informed and experienced advisers, brokers, and fintechs.

This is perfectly achievable as the fintech ecosystem extends, bringing in better technology and data science, and opening up the market; something we are passionate about and building towards at OMG (you might like to read my other blog on financial advice).

Meanwhile, don’t try this at home kids – you are NOT alright when it comes to meme stocks, it would seem – research, seek professional advice if you can, and gain experience before trying to time the market or make quick gains.  As a recovering day trader myself, I speak from the heart when it comes to recognising the importance of making properly informed decisions.

Ivan Tchourilov is CEO of Openmarkets Group

Hold on a sec! You should consider whether any advice here is right for you. We don’t accept any responsibility for the accuracy of any information, opinions, or predictions we’ve provided, and we certainly haven’t taken your personal financial situation into account. Just a heads-up. 

Originally published on medium.com