The thing that really bugs me about meme (popular “story” or “theme” stocks) stocks is that shorting (betting against) is a good mechanism or at least was a good mechanism for keeping stock prices reasonable. Short sellers are often made out to be terrible people, and sure maybe some of them are, but the simple fact is that if no-one can exist to bet against an overvalued stock, if no-one can question “is this price correct”? Then yes the sky is the limit. Insolvent firms don’t go bankrupt, instead these “Zombies” rise in value. Defying any type of logic right? Markets stop acting efficiently or correctly.
The market no longer prices stocks correctly with its “invisible” collective knowledge, because everyone or almost everyone is involved in this heightened, gluttonous, impassioned, frenzied state. People who are not feel pressure, maybe they are wrong? And there will be pressure from investors to not miss out on the action and potential profits. So everyone buys in. The market no longer thinks clearly. At least, for a time. Eventually however, what happens is that reality hits home, and everyone begins to question prices, but no-one is quite sure, some people start to sell, which leads to contagion selling, which leads to people in highly leveraged (borrowed-money-to-invest) positions having to sell “good” stock to cover their losses, leading to much broader forced sell-offs indiscriminately of both good and bad “zombie” stocks, and we will have a massive market crash, aka 1929. A good analogy I read recently (I think it might have been Robert Shiller, Nobel Prize winner) was that the mania of buying stocks and the subsequent sell off is much like the spreading of a pandemic, something we all can understand quite well now.
The type of behaviour going on in markets is uncannily similar to the madness in markets described in John Kenneth Galbraith’s “The Great Crash 1929”, a must read for anyone with an interest in economics, financial history, or investing in the stock market. For now, I am interested in the amount of leverage involved in the buying of meme stocks, including Tesla and Cryptos.
Bloomberg article 12 June 2021 “Zombie Stocks Defy Bankruptcy Logic as Meme Traders Bid Them Up” by Katherine Doherty and Tom Contiliano