Yahoo Finance 'More gambling than investing': How Canadian investors should approach meme stocks
Meme stocks began trending again earlier this month, with the unexpected return of influencer “Roaring Kitty,” whose account on social media platform X posted a cryptic image after three years of inactivity. The tweets sent companies like GameStop (GME) and AMC Entertainment Holdings (AMC) soaring with triple-digit gains over a two-day period.
The rally was short-lived, and most of those gains quickly reversed. But it sparked a renewed discussion about the wild world of meme stocks and how Canadian investors should approach them – if at all.
Yahoo Finance Canada spoke to three financial experts about the idea of investing in meme stocks. Each say it’s not something they’d recommend.
Investing in meme stocks a risky game
While the opportunity exists to make a lot of money with meme stocks, “the risks absolutely outweigh the benefits,” says Matthew Kempton, portfolio manager at Verecan Capital Management in Halifax.
“The biggest opportunity is you get very lucky and get in and get out with a positive balance,” Kempton told Yahoo Finance Canada. “The biggest risk is that you’re everyone else, and you ultimately lose money.”
And lose it fast.
“In less than a day, with the way this price action has occurred, you could be down in a very substantial way,” Kempton said.
Ty Cooke, an investment advisor and portfolio manager at Richardson Wealth, says meme stock increases aren’t driven by technical analysis or fundamentals. As the name suggests, they’re driven by social media.
Just look at AMC, Cooke says. The movie theatre chain got caught up in the meme stock craze of 2021, which came during the middle of the pandemic when very few people were attending movie theatres. The rise in the stock price “didn’t make sense,” he notes, considering the revenue it would be generating.
“So, there’s definitely a much higher risk associated with a meme stock trade than there is with fundamental, blue-chip companies that have strong track records and strong balance sheets,” Cooke told Yahoo Finance Canada.
'Be ready to lose it all'
Grant White, portfolio manager and investment advisor at iA Private Wealth in Winnipeg, agrees investing in meme stocks is dangerous. But if someone wants to do it, he won’t tell them not to.
“We know human nature, people are going to do these things,” White said in an interview with Yahoo Finance Canada.
Instead, White says it’s OK to take a small position in meme stocks, provided it’s money you can afford to lose. Both he and Cooke say their firms employ a core-and-explore investing philosophy. If a client is keen on meme stocks, they can be put into the explore basket.
White generally recommends allocating no more than two per cent of a portfolio to meme stocks. But the dollar amount is also meaningful, because two per cent could be a significant amount of money. Most importantly, “you have to be ready to lose it all,” Cooke says.
“I know an investor who put $500 into GameStop,” White added. “And that was nowhere near two per cent of their portfolio, but they just kind of wanted to be part of the story, they wanted to know what it was all about.”
White went as far as saying that taking a small position in meme stocks can be healthy, because it keeps investors engaged with their portfolio. And if things go south, which he acknowledges they likely will, it reinforces a more disciplined investment approach.
“I just don’t want anyone to lose the shirt off their back over it,” White said.
Be ready to lock in gains
If you are going to pick a meme stock, White says you could look at a company’s governance and decide which management group you have faith in. Another strategy is to monitor Reddit to see which stocks are gaining momentum, which is a big part of what this is all about, he notes.
Cooke adds that since these are publicly traded companies, their financials are easily accessible. But he says it’s not easy to correlate those numbers with the stock price.
Ultimately, White concludes there’s nothing that will justify the purchase.
“This is more gambling than it is investing,” he said. “If you’re looking to do this, you’re really just kind of going in and hoping for the best.”
If you get lucky and see some growth, White and Cooke suggest triggering any gains right away, because with meme stocks, the fun doesn’t usually last long.
“If you make any sort of money, I’d get out,” White said.
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.
