August saw yet another meme stock frenzy play out, this time in shares of the ailing retailer Bed Bath & Beyond. In the space of about a month, the stock’s price went from around $5 to about $30 and back down to about $7 as I write this. As you can imagine, lots of money was made and lost.
In hindsight, it’s easy to say that this was foreseeable and the right thing to do was to stay out of it. However, as the price was moving up rapidly and I watched people make stupendous amounts of money in a short period of time, it was difficult to avoid catching a case of FOMO (fear of missing out).
I think the best way to deal with FOMO when it comes to meme stocks—stocks that get popular via social media—is to do some research of the company’s business. The economy is projected to slow down, and this is never a good thing for retail businesses such as Bed Bath & Beyond. The company has also been losing money for years. In the last four years, its losses totaled over US$1 billion, which is staggering if you consider that the entire company is worth about US$0.5 billion (at around US$7 per share as I write this). The company also didn’t do anything significant, such as inventing a life-extending bath salt, that could justify the rapid price increase. Logically, there was absolutely no reason for the price movement, and you can be sure that it will eventually crash back to Earth.
Of course, logic rarely trumps emotions, and FOMO is a powerful emotion. If you must get in on the action, then do so with only what you can absolutely afford to lose. Be warned, though: jumping in may calm the FOMO for a while, but you’ll undoubtedly be faced with a new set of problems.
For instance, how would you know when to get out? It’s impossible to know that the price has peaked until well after the fact. What if you had held on and the price falls below what you paid? It’s very easy to start looking for evidence to support your decision to hold on. Just take a look at the Wall Street Bets forum on Reddit and you will see all sorts of theories for why Bed Bath & Beyond’s share price will soon surpass the $30 peak it hit recently.
Ultimately, investing and emotions are a terrible match. Meme stocks, by their very nature, subject investors to making emotional decisions about their money, and that rarely ends well.