It's hard to sit on the sidelines as the relentless rally in meme stocks continues and enriches millions of individual investors. The latest example of this shopping frenzy is AMC Entertainment (NYSE:).
Shares of the money-losing cinema chain, which were on the brink of bankruptcy a few months ago, were up 3000% at the closing bell on Wednesday this year after doubling in a single trading session. With a market value of more than $30 billion, AMC is more valuable than at least half of the companies in the .
Again, this rally is fueled by individual investors grouping on social media channels, such as Reddit's WallStreetBets forum and Discord chat rooms, predicting more profits in the future.
The retail frenzy to buy meme stocks began in January, when millions of internet-savvy investors began bidding for stocks shortened by hedge funds. An abundance of liquidity, historically low interest rates and savings created during the pandemic played a large part in fueling this trend.
As this type of speculative trading becomes more and more popular, it is important for investors to understand that investing in meme stocks is a high stakes game where the chances of getting seriously burned are quite high.
AMC shares traded 30% lower Thursday morning after the company announced a plan to sell more than 11 million shares to take advantage of store interests and bolster finances. In the announcement of the sale, the company also warned that investors must be prepared to lose all their money.
According to the statement:
"We believe that recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlyings, or macro or sector fundamentals, and we do not know how long these dynamics will last."
"Under the circumstances, we caution you not to invest in our Class A Common Shares unless you are prepared to risk losing some or all of your investment."
Hunting for asset bubbles
Wall Street analysts also warn that if you don't have money you can afford to lose, you should stay away from trending stocks, as spikes are usually followed by steep losses.
In a Bloomberg report, Joachim Klement, a strategist at Liberum, said many studies have shown that retailers can disrupt prices for a short time, but lose money on average. According to him:
“Institutional investors should ignore these meme stocks and wait for the stock price to drop. As in any bubble, eventually retail investors will run out of people willing to buy into the hype, at which point the bubble bursts and the last to hold the bag will have to absorb their losses.
"AMC and other meme stocks are a case of people trying to find a sucker to buy into the hype and take your overvalued stocks away from you. Don't be that sucker."
Bottom Line
As long as interest rates are low and cheap money is plentiful, this meme mania will continue. But if you're investing on fundamentals, don't let this market noise distract you. Investing is all about managing your risk. Just buying one or two stocks whose fate is closely tied to speculative calls is a sure recipe for disaster. Seasoned investors work diligently to diversify their portfolios by not over-investing in a few stocks.
