With the recent resurgence of so-called meme stocks, it might be a good time to understand the underlying premise supporting interest in these stocks. Specifically, it is the Bigger Fool Theory, which is based on the idea that a bigger fool than me will take these shares off my hands at a higher price than I paid. We previously discussed this folly in our blog “Meme Stock Investing“, posted December 20, 2023.
It is difficult to understand the attraction of meme investing. The companies that have been in the forefront are generally far below investment grade and have questionable business models. One explanation may be the presence of substantial amounts of speculative money in the economy. Too much money in the economy had to go somewhere and it would seem that at least some of it may have found its way into stocks and/or crypto. Perhaps it is foolish to underestimate the lure of “get rich quick” schemes.
Investors should focus on the importance of reasonable estimates relating to potential future earnings and dividends. Investing should be based on rational economic expectations rather than short-term speculation.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
