Meme Stock Lies

George Soros once said:

Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.

In other words: find the lie in the market and exploit it. However you may feel about his politics, this is a powerful insight. Because there are always lies in the market.

You will see variations of the “Find the Lie” theme a lot here at Outsider Club. It’s a critical part of the skeptical mindset every investor needs in order to make good decisions.

One market lie I’m really enjoying right now is the meme stock lie.

Hammer wrote about meme stocks yesterday when meme-king stock GameStop (NYSE: GME) was trading around $30, up a cool 65% from Friday’s close.

But I couldn’t resist wading in when Gamestop opened at $64.83 – a 113% gain from yesterday and 271% higher than Friday’s close.

My day typically starts around 7:30, I’ll sit out by the pool and peruse my news feed while I enjoy a couple of iced coffees. Of course, I ran across a lot of chatter about meme stocks and GameStop.

But what really got me was the number of hedge fund manager-strategist types that keep calling these people who buy meme stocks “dumb money.”

Dumb? Really?

Well if you were dumb enough to buy GameStop on Friday at $17, you had nearly tripled your money as of 9:31 AM today. If you were maybe a little less dumb and waited for Roaring Kitty to post this picture:

meme stocks

Then you’d only doubled your money this morning.

On the other hand, the traders who shorted GameStop yesterday after Roaring Kitty’s weekend post, your combined losses were $1.5 billion yesterday, according to Bloomberg.

And the losses are even worse today.

So I ask you:

Who’s Dumb Now?

So this is one of those stock market lies, that there is “dumb money” and “smart money.”

A smart investor might’ve looked at GameStop and its Price-to-Earnings ratio of around 900, the 20% drop in annual revenue, and negative -$200 million in cash flow and think “huh, this company is not doing well at all, it’s probably going out of business.”

A really smart investor might think a bet that the stock goes lower would be a good way to make money and short the stock.

I wonder how the smart money feels, being so smart and getting absolutely steamrolled by the dumb money?

The meme stock thing exposes several stock market lies, in no particular order:

Stocks have intrinsic value. A company is only worth what someone else will pay to own it. And that number changes all the time. Yes, there are rules of thumb for deciding what someone might pay, but that’s no guarantee. We could go a step further and explore the value of GameStop the company and GameStop the stock. I’d guess that the value of GameStop the company is effectively zero. Revenue is falling and it’s burning through its cash reserves. But the value of its stock? A stock that can triple or more in a matter of a couple of days? That’s obviously worth something…
The stock market is rational. Built by humans to allow humans to buy and sell from other humans – no way that’s going to be a rational or predictable system. Even when most of the trades are executed by machines (programmed by humans), there is a reason it is said that the stock market can remain irrational longer than can remain solvent. The GameStop shorts should heed this advice.
The smart money is actually smart. Remember at the beginning of 2023, when every talking head on the planet was predicting a recession for the U.S. economy? Just because somebody talks with confidence about the market or a particular stock, that doesn’t mean they are smart or that they will be right. In fact, I’d say that anyone who’s been around the markets for a while has probably had their butt handed to them enough times to speak with a little humility.

Fidelity’s Peter Lynch advised individual investors to just buy what they know. That is to say, invest in companies whose products you use and whose business you understand. It’s good advice and if you stick to it, the stock market lies won’t affect you…much.

Godspeed,

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

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