How & What Have Meme Stocks Changed In Financial Markets?
The return of Mr Gill and the re-rise of Gamestop leads to the obvious other new change:
The power of online communities now have to be taken into account. But not just the investors.
Yes, as we detail above, as a direct result of the pandemic mania, the actual investing community has had to shift their approach. A previously easier (not the same as easy!) source of profits for some very aggressive investors has become far more challenging and complex.
Very rich and powerful people have to keep an eye on online forums like Reddit and the chatter in places like Twitter, er, X so that they don't get humiliated by average Jill and Joes who, in acting in concert, can derail even the best laid investing strategy.
As RoaringKitty demonstrated though. Even doing so might not be enough!
That has been an epic shift and, as the recent surge demonstrates, also not a one-off back in the pandemic. There will be other Keith Gills and other Gamestops going forward.
But that isn't all. Sophisticated professional investors aren't the only participants in markets learning sone lessons here.
This leads us to the second shift:
The companies themselves have also changed their approach towards and because of these online spaces.
For the first time there is not just value but potentially a company altering opportunity in pitching your company to the online "degens" (for degenerates). There isn't cultural cachet in being a meme stock but also potentially a lot of money.
That money can, of course, be used to turn around the actual business!
THAT is a game changing shift.
A reenergized and capitalized and possible more sustainable business is a far more consequential outcome than an embarrassed hedge fund manager or some jumpy shorts.
This is huge because the single biggest problem for a lot of troubled companies is access to capital. If your business is failing and no one will lend it money or invest then it can become a self-fulfilling prophecy. Today's minor problems can become an existential threat tomorrow.
Today, troubled companies suddenly have another path to salvation. Though it can take considerable skill and cultivating some very fickle audiences, a failing business can try and catch the eye of a Keith Gill or the broader Reddit community.
If they can, then they can capitalize on the online interest by issuing new shares. A lot of them, potentially. Then, with a bit of luck and some serious planning and strategic vision, this can even create a positive feedback loop where it doesn't just stave off bankruptcy and collapse but can also be deployed successfully in a proper turn around of the underlying business.
To be clear, this is difficult! But the nice thing is: no one on Reddit really cares about how awful your business is. The fundamentals are irrelevant.
Salvation is unlikely to happen frankly in Gamestop's or other meme stocks situations but it could! And that is what no doubt keeps people gambling.
It isn't just the WallStreetBets denizens however. It also increasingly the companies as well.
"There is gold in them online hills!" basically.
There are some unpleasant implications here however.
Namely, firms like Gamestop and especially a certain type of executive can now cultivate online communities with the express intent of creating demand to issue more shares and profit. They have discovered that there is a strategic opportunity provided by these - all too brief - moments of speculative excess.
Sure enough Gamestop filed with the SEC to issue as many as 45 million new shares shortly after this pop in their price. AMC did likewise, selling $250 million in new shares to take advantage of investor excitement.
This means why regular people are flooding into these stocks the companies themselves and also their executives will be seizing the moment. It won't end well, of course.
That is sad because it means that regular people are running into companies' stocks hoping to get rich but will likely, in time honored fashion, be left owning the bag of a rapidly depreciating shares. Those people deserve better.
This puts the RoaringKitty phenomenon into a very different light. There is a seedier and perhaps even underhanded aspect to all this. We have no idea if Keith Gill is doing anything improper but it won't matter in the long run. His example will mean that others are definitely trying to repeat his success but with very different ulterior motives. Regardless of the precise details there, we feel very confident that a lot of hopeful people are going to lose money they can't afford to risk.
In that respect, some things never change. The stock market has always been full of people trying to legally exploit and rip off hard working savers. The real innovation here is that online communities can be used for ill as well as good.
The Reddit WallStreetBets hordes may have changed markets but some things never change....
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