Meme stock trading ‘is just gambling’

Alarm bells are ringing over the fresh mania around meme stocks, with experts labelling warning of the ‘mass delusion’ among day traders.

Alarm bells are ringing over the fresh mania surrounding meme stocks, with market experts labelling it pure gambling and warning of the “mass delusion” among day traders who have turned investing on its head.

It has also left some questioning the potentially unethical behaviour by management of hot stock AMC Entertainment.

The mania surrounding GameStop, AMC Entertainment and others is reminiscent of the pyramid schemes that thrust Albania into a civil war in the late 1990s, according to short seller John Hempton of Bronte Capital

The difference this time is it is a global frenzy – and it too will end badly, Mr Hempton warned.

“In the 1990s there was a mass delusion and pyramid schemes in Albania where a vast proportion of the population lost money in obvious scams. People knew. They just liked gambling and participated regardless.

A GameStop store in Brooklyn. Picture: Getty Images

“The meme stocks are similar. Some of them are obviously worthless but have more traded volume than the entire Australian Stock Exchange.”

Meme stocks have enjoyed a resurgence in recent weeks after drawing attention earlier this year when day traders inflicted a short squeeze attack by driving up the price of a handful of stocks in the US, most notably GameStop and AMC Entertainment.

Retail traders are now rushing back in to scoop up these stocks despite a lack of fundamentals supporting the eye-watering share price gains.

A month ago, AMC was trading at $US9.70. It closed Monday’s session at $55.

Mr Hempton, who is well known for his role in exposing widespread fraud at Valeant Pharmaceuticals, recently warned that the retail investor revolt against Wall Street was a win for crooks who would now benefit from hedge funds staying quiet on their short positions.

Labelling Reddit forum Wallstreetbets “a crowd full of sharks”, Mr Hempton in February said the instigators of the crowded trade had made life much easier for crooks to cheat investors out of money.

“This is the biggest gift to fraudsters of my lifetime,” he said at the time.

Frenzied trading of cryptocurrency Dogecoin, the joke cryptocurrency created in 2013 that has rocketed more than 10,000 per cent in recent months, also showed similarities to the Albanian Ponzi schemes of the 1990s, Mr Hempton warned.

“Nobody seriously thinks that Doge will be used in 80 years for anything. Doge will have no cash flows for the next 80 years. And yet if you asked Google “how to” it would guess you wanted to type “how to buy Dogecoin”. This has been among the most popular searches globally (in recent weeks).

“This is Albanian pyramid schemes going global. The Albanian experiment with mass delusion ended in civil war. I hope we do better than that.”

Bronte Capital is short a few of the so-called meme stocks, “but tiny bits, and by accident,” Mr Hempton said.

“A typical position is about a tenth of a per cent of the fund – and we have about half a dozen positions.”

The short seller has no intention of rushing out to boost his shorts in the attention-grabbing stocks.

“We are not piling into the shorts even though the stocks are obviously worthless because I don‘t enjoy putting out campfires with my face,” he said.

John Hempton, chief investment officer of Bronte Capital Management. Picture: Bloomberg via Getty Images

The frenzy around these few stocks shows a lack of understanding among retail traders, Munro Partners chief investment officer Nick Griffin said.

“But they’re making money. It’s no different to when you gamble on the horses, and your first horse wins, so you keep gambling. And then you realise there’s a bit more to it than picking the name you like.”

“From here what would be great is that they learn about markets, broaden their holdings and invest more. What we don‘t want to see is people losing a lot of money here and the next generation getting turned off investing for good.”

He sees one big difference between the meme stocks and Dogecoin: AMC is openly selling stock to investors.

A year ago, AMC had 100 million shares on issue. After taking advantage of the rocketing share price with a series of stock issues – the company has raised more than $US1.2bn in this quarter alone – there are now 500 million shares on the market.

“The only way that can create value is if you trust the management team to take the money that they‘re raising and buy something that’s worth more than what they pay for it. The logic is tenuous at best,” Mr Griffin said.

Digital currency dogecoin.

“It’s a highly questionable practice, in my view, but Adam Aron (AMC CEO) has been telling investors he will find something to buy to try to build a story around the movement.

“You are literally putting money in someone else’s pocket. You’re giving these people money for them to spend, either in an ethical or unethical way, but you have no idea where (the company) is going,” he added.

The mania has created some issues around market functioning with derivatives and ETFs, but ultimately it’s a sideshow, Mr Griffin said.

“And it’s unfortunate, because there is some borderline unethical behaviour going on.”

Fidelity International portfolio manager Kate Howitt sees the funds pouring in to the handful of US stocks as little more than gambling.

“I call them pandemic punters: people whose normal form of entertainment/gambling is available to them.

“I don’t get the sense that these are people with a well-thought out plan for funding their retirement. It looks to me like a leisure activity,” she said.

Ms Howitt said she saw no ethical issue with AMC’s recent raisings.

“The fundamental premise of markets is buyer beware. You have to have someone prepared to pay that price for the raising to get away. So if they can sell their equity high, good on them -- and so they should.”