It’s a ‘Meme Stock’ world 🌎

We’re just living in it

👋🏽 Welcome to Witty Wealth, a newsletter that makes stocks entertaining.

If you enjoy this post, please share it with a friend. There are now 1050 of us subscribed! 

---

Before we start, a quick note re: the George Floyd protests.

“If you are neutral in situations of injustice, you have chosen the side of the oppressor.” - Desmond Tutu

The structural bias against black Americans is not right, nor fair. I wouldn’t want to be treated that way and I bet you wouldn’t either.

This movement displays that change will only come with action. Action we should all take. Here’s a thread of things I learned we can do to help break the cycle.

---

A Secret

I have a theory. A theory that Witty Wealth is rooted in.

You and I are both interested in the world of stocks. Thing is, that world is too big to keep up with. There are ~4500 companies on the stock market. Following the market broadly brings along a constant barrage of news that makes us nauseous.

Fortunately, I don’t think we should keep up with everything. I believe there are 25, at most 50, (~0.5-1%) stocks that we really give a shit about at any given time. 

These are the stocks that are interesting enough to talk to others about, watch clips of, and follow their developments week to week like a HBO show. 

Who cares about the other ~4450?! It’s like watching paint dry.

(Image source)

Introducing ‘Meme Stocks’

These interesting stocks are loved for a couple reasons. They could have a high quality product like Tesla. They could have a famous (or infamous) Executive like Dave Portnoy of Barstool / Penn. They could be in an exciting new industry like Beyond Meat.

We love them because these stocks are different from regular stocks. We don’t love them for their ability to make money right now. We love them because they allow us to dream. They make for good entertainment. They have the courage to try something new.

Narratives organically build around these companies. These narratives turn into their own subcultures, making them meme worthy. For our sake, we will dub these companies as ‘Meme Stocks.’

What makes a ‘Meme Stock’ a ‘Meme Stock’?

‘Meme Stocks’ have innate characteristics that pull us in. They also have measurable performance that verify their status.

If we learned a thing or two from Robot Warren or Chamath, it’s to make a framework. In this case, a framework on what it means to be a ‘Meme Stock.'

Outside of the noted above (intriguing product, executive, industry), here are the measurable characteristics of a ‘Meme Stock':

• More hype than substance

• Erratic price movements

• Demand by Robinhood users

• Doubled their value within the past 3 years

If a stock has all of these, it’s a certified ‘Meme Stock.’

Let’s dig into each of these characteristics. As we do, we’ll use the poster meme stock, Tesla, as an example.

More hype than substance

As the narratives build, so does the demand for the stock in these companies. This drives up stock prices. Compared to their competitors, ‘Meme Stocks’ are overvalued. They have the hype, but not yet the substance to match. 

How can we measure that?

I try to steer us away from mental gymnastics, but we are going to do a quick, 3-step cartwheel:

1. A way to measure the value of a stock is through a tool called the price to earnings ratio (P/E ratio)

2. The P/E ratio measures the company’s current share price divided by its earnings per share

3. Earnings per share is the company’s profit divided by the number of stock shares it has

You got that?

To see if a company is overvalued, we can compare their P/E ratio to competitors. It gives an apples-to-apples comparison.

As of writing, Tesla has a P/E Ratio of ~198. Ford, GM, and the rest of the domestic industry have P/E ratios of 9.6, 5.1, 25.8 respectively. 

Volatile price movements

Demand for ‘Meme Stocks' is driven more by emotion than rational analysis. This makes their prices more volatile than ‘non-Meme Stock’ competitors.

There’s one last mental gymnastics move for us to do.

If you took a statistics course, you’ll remember this volatility can be measured through a calculation called ‘standard deviation.’ The more spread out the numbers of a set are, the higher the standard deviation.

Historical volatility (HV) is a calculation that measures the standard deviation of a stock price over a given period of time.

As of writing, Tesla has a long term (252 day) HV of 73.1. Ford and GM have long term (252 day) HV’s of 44.5 and 46.1 respectively.

Demand by Robinhood users

Sharing is the gasoline that powers a Meme’s engine. It’s easiest to share something when you know someone else will get it. 

Most of us have heard the names of 100 different stocks over time.

How do we know which companies are the most popular?

Millennials and Gen-Z’s are leading the ‘Meme Stock’ charge. We mainly use Robinhood to trade stocks. Fortunately for us, Robinhood makes their popularity data public. They regularly update which 100 stocks are most popular with their users. 

As of writing, Tesla is the 19th most popular stock on Robinhood.

Doubled their value within the past 3 years

If sharing is gasoline, bragging is the nitrous oxide that blasts a ‘Meme Stock’ ahead. As we’ve seen from r/wallstreetbets, investors love to brag about their best bets. 

Fun fact: nitrous oxide was used 9(!) times in the first ‘The Fast and the Furious’ movie

This last measure is more subjective than the others. I believe for a stock to go viral, it needs to roughly double in price within a 3 year period. For it to stay a meme stock, it needs to keep on doing that. 

The share prices of the lasting OG meme stocks, Tesla and Amazon, have roughly doubled every 3 years since 2012.

The current ‘Meme Stock’ class

We’ve learned all about what makes a ‘Meme Stock.’ So what are some of the current batch?

If Myspace were still a thing, here is what the ‘Meme Stock' top 8 would look like:

These 8 stocks meet the criteria we mentioned above.

While this image is a non-exhaustive list, it is representative of the broader ‘Meme Stock’ set.

The ‘Meme Stock' evolution

‘Meme Stocks’ have always existed in some form, but not at this scale, nor this revered.

The popularity of ‘Meme Stocks’ have been driven by three similar forces as r/wallstreetbets.

First, people are seeking out stocks instead of other places to put their money. Since 2009, we’ve been living in a ‘lower for longer’ American monetary era. Interest rates have been lower this decade than any since even our parents have been alive. 

The federal funds rate (rate at which banks borrow money) over time

This means the money in your bank account makes much less than it used to. To make up for this, people have moved that money into riskier, higher returning instruments like stocks.

Second is the emergence of ‘commission-free’ trading. Initiated by Robinhood (founded in 2009), everyday investors can buy and sell stock without fees. Before, each trade would cost you $5-$10. 

At that prior rate, it changed two things. It made stock trading much less viable for the average person. It also limited the frequency one is willing to buy or sell stocks. You are incentivized to take a Warren Buffett approach and hold for life.

Now, under commission-free trading, many more people can trade stock, and they can trade on a whim. This makes speculation more abundant. It changes the mindset from ‘set it and forget it’ to let’s ‘dive in and out.’

Third, the COVID pandemic poured fuel on the fire. 

According to CNBC, “Robinhood — millennial favored stock trading app — saw a mind-blowing 3 million new accounts in the first quarter...Stock positions at the Silicon Valley start-up have nearly tripled since the end of last year.

With the major inflow of new market participants, the market chugged higher, led by the companies young people know and love.”

‘Meme Stocks' are here to stay

The trends that are making ‘Meme Stocks’ go mainstream are poised to persist. It’s leading to changes in how people invest.

First, demand for ‘Meme Stocks' only continues to rise. Trading volumes for ‘Meme Stocks' have been steadily going up, even before the COVID rocketship.

Trading volumes three ‘Meme Stock' favorites over time (bottom row) (Source: CNBC)

Second, ‘Meme Stock' communities are taking off. The most prominent community, r/WallStreetBets, now has 1.2M members, with ~420k of them coming in the last 4 months.

Last but not least, commission free trading is expanding. To keep up with Robinhood, established brokerages like Charles Schwab and TD Ameritrade cut trade commissions to zero in fall 2019. 

Next steps

Overall, ‘Meme Stocks’ are the interesting ones worth talking about. That said, the added hype makes them more expensive, volatile, and in turn, riskier.

I view Witty Wealth as a way to enjoy and learn about the most interesting stuff going on in the Stock World. Now a month into this, that means to dive into the unexplained on:

• The best investors

• ‘Meme Stocks'

• Relevant current events

Within ‘Meme Stocks', I plan to explore:

• What makes each one interesting?

• Which ‘Meme Stocks' deserve the hype vs which are hot air?

• How do important developments (internal or external) affect certain meme stocks?

If you made it this far, I’d love to hear from you: 

• Does the ‘Meme Stock’ space seem interesting to you? 

• If so, what topics would you love to read about?

• If not, what would you rather see from Witty Wealth?

Until I see you again,

Anuj

---

Note: This content is for informational purposes only. It should not be relied upon as legal, business, investment, or tax advice. Your use of the information contained here is at your own risk.