Silly season is back
Yesterday news came out that a college student, Jake Freeman, had made $110m trading shares in Bed Bath & Beyond. The ailing retailer first became a minor meme stock in early 2021 when traders on reddit forum r/wallstreetbets rallied against the titans of high finance.
Since we first wrote about the meme-stock phenomenon, a lot has changed. Gone are the stimulus checks and loose monetary policy, replaced with inflation and an economy on the brink of a recession. Without the chart above for reference, you might have guessed that GameStop — the original meme-stock — might have completely cratered in that environment, but GME shares have held onto most of their gains surprisingly well.
A theoretical $100 invested in GameStop at the start of 2021 would have turned into more than $1,800 at the stock's peak. Although the shares have drifted lower since then, they remain some 10-20x higher than where they were for most of 2020. AMC Theatres, another reddit fan favorite, has also held onto some of its gains, while shorter-lived meme investments like BlackBerry haven't held up quite so well.
Losing money is (not) optional
Although Jake Freeman just bought plain-old boring shares, the investment instrument of choice for many retail traders investing in meme stocks has been derivatives — with call options the most common. Unsurprisingly, a new study from MIT found that retail investors make a series of mistakes when buying options — paying too much in the first place and being slow to respond to predictable declines in volatility after a company reports new information. Taken together, these lead to losses of 10-to-14% on average for investors trading high volatility announcements.
So if you dipped your toe into trading meme-stocks and didn't make $110m don't worry — you're not alone. Also, never forget that most professional fund managers underperform their benchmarks too.
