Caveat Emptor: What Millennial Investors Should Understand in the Age of Meme Stocks

By The ArborCrowd Team
Aug 18, 2021

The Rise of Meme Stocks and SPACs for Short-Term Investments

In the midst of the COVID-19 pandemic, retail investors, sitting on increased household savings, unexpectedly found new power through commission-free trading platforms and piled into what have become known as “meme stocks” as a protest of sorts against institutional short sellers.

These securities, which include video game retailer GameStop Corp. (NYSE: GME) and movie theater chain AMC Entertainment Holdings (NYSE: AMC), have seen meteoric increases in trading volume this year not because of the performances of the underlying companies, but because of retail investor hype generated primarily through social media platforms, such as Reddit, Twitter and TikTok, and the allure of making a quick buck.

Additionally, special purpose acquisition companies, or SPACs, have become a popular way for private companies to go public as opposed to the traditional initial public offering (IPO). SPACs have less stringent requirements on financial reporting, allowing some startup companies to raise money from inexperienced investors in the stock market by painting rosy pictures of their future growth and financial prospects.

The accessible nature of meme stocks and SPACs, empowered by technology and commission-free trading platforms, have made it easier for the average person – particularly younger generations – to jump in. For instance, Robinhood Markets Inc., a pioneer in commission-free trading, recently revealed in its initial public offering that its users had more than doubled to 18 million from the previous year by the end of March, according to The Wall Street Journal. And in just the first quarter of 2021 alone, the trading app added 5.5 million users as meme stocks gained popularity. Meanwhile, 50% of its users identify as first-time investors.

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Of great concern is that inexperienced investors have lost sight of one of the fundamental principles of building long-term wealth – slow and steady wins the race.

Balancing Short- and Long-Term Investing

Due to the volume of retail investors that have driven up the price of meme stocks, some lucky investors have been able to realize huge profits. However, others – including novice investors who dove in as the stocks skyrocketed – have also been subject to gigantic losses. This is an inherent risk with seeking short-term financial gain in the public markets, which can be very volatile.

To balance the volatility, many experienced investors diversify riskier growth vehicles in their portfolios with investments that are more stable and resilient over the long term. Since these investments are likely to be supported by strong fundamentals, they may experience less volatility, blunting the impact to the overall portfolio when risky short-term bets lose steam.

Private real estate is one such investment that is longer term in nature and backed by tangible assets. It is also largely uncorrelated to the public equities market, meaning that the temporary volatility experienced as a result of outside influence (i.e., social media platforms or even a pandemic) may not affect private real estate investments the same way as public securities. In fact, the apartment, single-family rental and industrial asset classes performed extremely well throughout the pandemic, even when stocks initially cratered.

Similar to how commission-free trading platforms made stock market investing more accessible, crowdfunding platforms have done the same for real estate by granting individual investors access to institutional-quality assets that previously would not have been available for them to invest in. Crowdfunding allows investors to build their own commercial real estate portfolios and target specific asset classes, by providing access to vehicles that can appreciate steadily over the long term.

Fundamentals Matter for Selecting Successful Investments

Rigorous vetting of investment options is imperative to any successful investment. Meme stocks are highly speculative and extremely volatile, exhibiting shaky fundamentals that are not based in actual value. In the case of GameStop, for example, scores of retail investors were driven by a social media buzz that encouraged them to invest their money in order to “squeeze” larger, institutional investors and hedge funds that were attempting to short the stock. While the stock exploded in value as a result, it subsequently crashed and left thousands with material losses. Similarly, investing in SPACs is essentially betting that a given entity’s management team is capable enough to generate long-term profitable growth with disruptive technology or ideas, and is not based on rigorous financial due diligence. This has sparked heightened regulatory scrutiny from the SEC as it seeks to force companies to better define their growth projections.

In comparison, the apartment and single-family rental asset classes in the multifamily real estate industry reflect strong fundamentals and sustainable value. While many people have been disproportionately affected by the pandemic, everyone ultimately needs a place to live. This has resulted in consistently high occupancy and collection rates (and in the case of single-family rentals, even rising rental rates) throughout 2020 and into the first half of 2021. Moreover, due to the ongoing shortage of housing and rising home prices, younger generations are choosing to continue renting longer than their predecessors did, another tailwind for the multifamily industry.

If the pandemic has shown us anything about investing, it’s reinforced the importance of extensive due diligence and solid fundamentals. The amount of activity and capital flowing into the stock market has been supported in part by multiple stimulus payments made directly to consumers by the federal government, and supplemented by people being stuck at home looking for new activities. Many inexperienced investors ignored fundamentals and committed capital to risky stocks, realizing heavy losses as a result. As technology continues to become more sophisticated and makes investing more easily accessible than ever, investors must understand the relationship between risk and reward and the benefits of a balanced portfolio.

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