When the music stops for the meme stocks, investors could be looking at big losses, warns Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc.
The market veteran told MarketWatch in a Friday interview that the big problem with the so-called “meme”stock revolution, with assets powered higher on social-media sentiment and not on fundamentals, is that novice investors will be saddled with real losses when stocks like AMC Entertainment Holdings
and GameStop Corp.
eventually come back down to Earth.
“There’s a problem with the memes because the people who are investing will lose a very substantial amount of money,” he said.
AMC Entertainment on Friday was down 2.5%, but set for its third-best weekly gain, up around 90%, in its history, according to Dow Jones Market Data.
GameStop shares, the other popular meme stock on social-media sites like Reddit and Discord, was off 3% on the day but up 13% on the week.
By comparison, the Dow Jones Industrial Average
S&P 500 index
and the Nasdaq Composite Index
were up on the day and sporting modest weekly gains, as investors focused on the implications of a monthly employment report that showed the labor market was staging a spotty recovery in May from the COVID pandemic.
In the year to date, AMC is up over 2,200% and GameStop shares have climbed 1,220% over the same period, headscratching moves for fundamental investors who say that the escalation in the values of those company don’t align with their prospects for earnings or revenue in the near or midterm.
Peterffy said that the good thing about the surge in memes is that it will likely bring more young investor into the fold, but they will likely learn a hard lesson in the process.
“The first time I opened a brokerage, I lost all my money and the second time I lost almost all of my money and since I have made considerably more,” Peterffy quipped.
Peterffy owns around 75% of Interactive Brokers and his net worth is $23 billion, according to Forbes.
“They come to invest,” the billionaire said, due to the enthusiasm for stocks “and inadvertently, they will learn how to invest in the market.”
“I always think it better that the first trade [for novice investors] is a losing trade,” he said.
Peterffy estimates that some 15,000 accounts, valued at about $1.2 billion, on Interactive are long for AMC and about 5,000, at around $400 million are held short, meaning investors are betting that the asset will fall in value. He said that the same ratio is likely for GameStop.
The investments in AMC and GameStop originally started out as organized short-squeezes by a clutch of individual investors who had identified that a number of companies were heavily shorted by hedge funds and surmised, correctly, that those stocks could be pressured higher if enough buyers collectively swooped in.
A short squeeze is when many investors looking to cover short positions start buying at the same time. The buying pushes the share price higher, making short investors accelerate their attempts to cover, which sends the shares spiraling higher in a frenzy.
MarketWatch’s Philip van Doorn assessed the merits of owning some of the more popular meme stocks, with the craze that started in earnest at the beginning of this year.