The world of finance travels in time. Relive 2021, the moment when retailers put the investments of great Wall Street gurus in check by unleashing the phenomenon of meme stocks, titles that soared day after day despite being companies in difficulty or on the verge of collapse. break. Many were coordinated by what Keith Gill dictated, or Roaring Kitty as he is known on social networks like Reddit, one of his fiefdoms. This 2024 he has done it again.
In January 2021, Roaring Kitty advised his followers to massively buy shares of companies such as Gamestop, AMC, Blackberry or Koss to cause significant losses to the hedge funds that had bet against the shares and profited if they fell, the so-called bears. The result was that in a matter of days Gamestop shares multiplied their value with an avalanche of purchases from the network and the need for the funds to cover their short positions, so they bought shares to cut losses and ended up increasing the value further.
In the world of finance, the movement is known as a short squeeze. Many retail investors made huge profits, but there were also many others who went bankrupt: these episodes last a matter of days or weeks, until everything returns to normal with sharp declines in stocks in between.
Roaring Kitty is back. After years away from the spotlight, he reactivated his X profile (Twitter) and that was seen as a signal to unleash a new madness of purchases and speculation. Gamestop shares soared up to 100% in Monday’s session, with another 60% the next day. New fever?
Not all that glitters is gold. For some to win, others have to lose. In this type of short squeeze, the first to arrive usually benefit. The opposite happens with the later ones, since at one point the buyers are reduced or people are selling to make cash. The latter have possibly suffered the double-digit losses that the stock has had since. On Wednesday Gamestop fell 20%, yesterday another 30%. From Monday’s highs there is a drop of 60%.
“Going in and trying to make a lot of money with all this is very risky, practically like going to the casino,” says Joan Torras, tax advisor and master’s director at EADA Business School. She adds: “Behind all these significant price increases there is nothing more than a rumor, therein lies the maximum exponent of risk. It doesn’t go up because there are good results, it goes up because a man says it should go up as a protest.” Torras refers to the volatility of these phenomena and attributes the merit or the blame to those who encourage thousands of retail investors to put their money for the cause, in which there will be those who multiply it, but also those who will lose everything. “If you had invested at the beginning of the week you would have gained more than 100%, but if you did it later you would lose 30%,” she exemplifies.
This second wave of meme stock trading is significantly lower than three years ago. Many have learned not to fall again because no matter how appealing they may seem, they carry a very high risk of loss. “In 2021 there was not as much awareness and the last to enter were the ones who lost the most money. Now that he knows how this works, much fewer people have come in,” says Torras. Added to this is that there is not as much liquidity as at that time, when the pandemic increased savings or direct aid, especially in the US.
Beyond the risk that these ventures may entail, experts completely advise against them, especially for those who want to get started in the world of stocks and investment. “These are actions that have gone downhill. If you want to play to lose money, it could be a good option… This is not investing, it is speculating. Investing is putting your money in a company that has been having good results. Here you have a lot at stake, the volatility is very high,” explains Torras. “The more profitability, the more risk,” she insists.
While waiting for what may happen in the coming days, the euphoria is going down and it is expected that sooner or later it will recover its own normality. At the end, a few will have profited and many others will have profited. We have to wait and see if there will be a third round.
