By: Nik Aamlid, Wealth Advisor
With the gales of the so-called “meme stock” phenomenon having largely subsided, it’s appropriate to reflect on these recent events and relate them to our own respective situations.
Any time there is volatility in the stock market, investors see a hike in heart rate — whether they have cards in the hand or not.
It’s riveting. When’s the bubble going to pop? Who’s winning and losing? Is that another gray hair?
The problem occurs when this excitement distracts investors from their long-term goals.
At Pinnacle Wealth, we believe one of our biggest value drivers is our ability to coach individuals through economic storms and keep their ship headed in the right direction.
For the lone investor, wise decisions are only made more difficult as the media hurries to publish stories of big-time winners and losers. This stirs all sorts of emotions, from fear of loss to fear of missing out.
It’s my hope in this article that we accurately evaluate the recent events around these “meme stocks,” but more importantly discuss how you, the common investor, can navigate erratic market volatility to keep your eyes focused on the mission: True Wealth.
But before we go any further, let’s look at what went down in layman’s terms.
Okay, what really went on with meme stocks?
In case you’ve missed the water cooler talk of late, “meme stock” companies saw massive swings in share price, largely due to a coalition of retail (i.e., individual) investors hailing from an online forum.
Why did this happen?
It started with some big Wall Street firms. They saw these companies as ones with outdated business models and decided to “short” their stocks — essentially a bet that their stock prices will trend downward in the future, hoping to profit if they do.
Cue our band of online forum members. Once they recognized these heavily shorted companies, they leveraged the power of the internet to persuade a massive amount of retail investors to purchase stocks like these.
This event led to two things: 1) Explosive growth in share price for these companies, and 2) panic purchasing by the short sellers (which only continued to drive the price higher).
The result was extreme volatility with these certain stocks over a relatively brief period of time.
For the rational investor and wealth manager, it felt like witnessing a train wreck; you don’t want to watch the result but can’t turn your eyes away.
What do these events mean for the future of the broader market?
The quick answer is nothing, really.
While this phenomenon served as an exciting news topic, we believe there is no serious risk to the broader market.
For one, retail investors do not have enough money and power to irrationally and significantly move share prices across the broader market. They showed some firepower with the upswings in these meme stocks, but that firepower caused no shift in the average person’s retirement portfolio.
We sometimes categorize the investment philosophies from this phenomenon and that of the traditional, stable investor as “momentum investing” and “goals-based value investing.”
Momentum investors thrive on volatility and are particularly concerned with investor psychology. Rather than evaluating balance sheets and growth prospects, they focus their attention on the suspicions of the masses.
By nature, this type of investing is much riskier than goals-based value investing, which focuses on long-term stability and the broader fundamentals of a company.
Money can be made in momentum investing, but timing becomes important. There are inherent risks anytime one attempts to time the market.
By subjecting oneself to potential damage to their long-term goals, the question must be asked: “Is the juice really worth the squeeze?”
Can I throw some “fun money” in these types of trendy stocks?
The key here is our definition of “fun money:” Any amount of money that wouldn’t cause a flinch if it caught on fire.
Through this lens, momentum investing for the individual may be best understood as an alternative form of entertainment.
I must reiterate that this type of investing should be done with caution and weighed in recognition of your known risk tolerance. A momentum investor has the potential to win, but one must determine if the gains are worth the risk.
The emotional investor will be more easily influenced by the sensationalist news stories (and perhaps even their own firsthand experiences) to make an irrational decision with their investment. Fear of missing out (or “FOMO” as the kids say…) may cause one to fund their “fun money” account with an unhealthy balance.
I do not wish to discourage people from taking the leap into investing if they have not already done so. It’s encouraging to see more individuals take interest in companies via stock purchases — We just don’t want to see people buying bananas for $50 a pound.
I’ve said it already, but I’ll say it again: A fundamental to success in investing is remaining consistent in your strategy. If trendy securities cause your eyes to wander from the goal, it may not be wise to pay them attention. For every story of exorbitant success with a volatile stock, currency, or otherwise, there are ten stories of the inverse.
It’s paramount to first answer the question, “Why am I investing?” before you answer the question, “What should I invest in?”
Why leads you to your goals. Why leads you to your personal definition of True Wealth.
At Pinnacle Wealth, we’re passionate about helping people find True Wealth throughout their life journeys. We know that finances are not the sole indicator of one’s health and wealth, but rather a single pillar of the entire structure.
Perhaps you have a less thrilling story to tell at the water cooler by steadily contributing to your retirement plan instead of attempting to time the market.
But our experience has shown that the realization of a harvest nurtured through years of consistent and conscious planting can be just as (if not more) fulfilling for one to experience.
That’s life by design. Sound design.