Meme Stocks Like GameStop and AMC Reflect Market Reality

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Gamestop  (GME) – Get Report made some investors rich… and then it broke many more. Investing in AMC Entertainment  (AMC) – Get Report did the exact same thing. These two stocks represent, if not failing businesses, at least ailing ones; companies that struggled to keep up with the new economy even before the pandemic shut down large swaths of it. Yet over the past few months they have posted some of the most volatile gains and losses on the market.

How?

It’s down to what Real Money’s Timothy Collins calls the market of “meme stock hyperbole.” But, he writes, is it really all that different from how trading has always worked?

Read more from Collins on Real Money about the meme stock hyperbole and how it messes with our perception of fair value.

Have you ever really thought about the phrases ‘to the moon’ or ‘conviction buy,’ and how they mess with out perception of fair value?

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“Initially, I rolled my eyes at the continued use of the phrase ‘To The Moon,'” Collins says. “It’s not like ‘Strong Buy with a price target of $65’, for instance. ‘To the moon’ is completely arbitrary and open to interpretation, but then again so are most things about valuation, when you think about it,” Collins wrote.

“For instance, when an analyst pounds the table on a stock, how is that different from ‘to the moon?’ Or when someone says, ‘all in.’ Are they really all in? Did they cash in all their assets, pool the liquidity, and buy every share they possibly could? Probably not. Actually, I’d say definitely not 99.9999% of the time. Of course, there’s always that one person,” Collins said.

“But the point is Wall Street has been arbitrary for years. We can’t even have a standard rating system. Is it ‘Neutral’ or ‘Hold?’ And really, do I want to hold something that is only in the middle of your range? No.”

Collins writes, “The system should be ‘buy’ or ‘sell.’ That’s it. Black or white. Own or don’t own.”

Assets like GameStop and even cryptocurrency seem to be selling on nothing more than pure emotion. Investors are taking these products for a joy ride, and that tends to send prices flying up and down the ladder.

That’s confusing, to be sure. Just, before you go throwing your hands in the air, it’s important to remember that the stock market has always been at least a little bit arbitrary. 

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