Meme stocks like GameStop have made countless headlines as retail investors band together to pull off several financial and social objectives.
In this interview clip from Motley Fool Live, recorded on March 21, Dan Egan, Vice President of Behavioral Finance and Investing at Betterment, discusses with Motley Fool contributor Rachel Warren whether we've seen the last of the meme stock craze, what precipitated it in the first place, and why companies might actually aspire to achieve meme status.
Rachel Warren: As a behavioral finance expert, can you share about your view of the meme stock mania as a whole for starters, and do you think we could see a comeback of this craze in 2022?
Dan Egan: Even now I love the perspective of it was, I don't know, a year ago, maybe a little bit more than a year ago. It's a very different perspective. One thing I think is very important to remember circumstantially was that a lot of us were working from home on our screens all the time. We were not able to go out and engage socially with a lot of our normal social teams and for a lot of people, I think meme stocks were not just a case of the possibility of making money. It was also a sense of community, of belonging, of shared purpose or passion on some specific thing. There were cute little in phrases. On a very light level this is a little bit cult-like because there's a sense of us versus them, insiders and outsiders and so on. I think we need to recognize that during the period when it happened, during the pandemic, people were looking for that. They were looking for some sense of social connection.
Looking at meme stocks as purely a financial thing. There are some interesting elements to it. The short squeezes, etc, I think the most interesting elements are that component of putting on a story or narrative about a specific stock that makes you feel good, makes you feel like something is wrong. Not just in a financial accounting sense, but in a moral sense of things should be better. I do think that the environmental circumstances that led to it, isolation, quarantining, pandemic, etc., they'll have gone down. There can come back up, but they'll have gone down right now. This thing that happened is there's thinking about fighting the last battle. When meme stocks were happening, the idea of a short squeeze against the hedge fund or of looking for these stocks that somebody thought was under-pricing, just piling on retail investors to make the price go up. I think both of that can happen here and it's now there's an obvious playbook for it. WallStreetBets, etc. You can say, let's pull another GameStop, let's pull another BlackBerry, however, it's never going to go down the same way because everybody else has seen that same playbook. No investment manager is going to get caught short quite the same way again.
The last thing that I think is really interesting about it is how it can have lasting impacts on those companies. Regardless of any of these companies' actual financials, what they're doing with the money, etc. GameStop, BlackBerry, there's still trading really elevated compared to where they were before they became a meme stock. There's a permanent celebrity effect of having this thing happen to you that changes the way the market engages. Nobody is going to be comfortable going out shorting GameStop, even if it makes complete financial sense again, because there's this, we've seen this play, we've seen this movie and we know how it works, so we're not going to make the same mistake. That idea of there being permanent, long-lasting effects with how the market engages with a stock because of a specific experience it had is really interesting. The idea that once you've had this meme stock thing happen to you, your stock will trade at permanent premium, it makes companies want to be meme stocks. If you can get the Tesla, you can get the GameStop thing. Your price is just permanently elevated compared to other stocks. That's something that if you're running the company you are like, "Yes, I would like that, please." I think that's a interesting almost sociological thing if you are a CFO or a CEO, how do you make your company or stock more meme-like so that you can get the benefit of that permanent elevation?
