The Puzzling World of Meme Stocks

COVID is arguably the single event with the biggest impact on human behavior since World War II. It reshaped how we live and spun off all sorts of curious little trends. Remote work, video conferencing, and telemedicine are the obvious, well-worn examples — but once something is common knowledge, there's not much money left in it. Take Zoom, the remote-work giant: before 2020 its stock had never topped $70. Once everyone realized video conferencing was the future, the stock spiked as high as $559 — but "everyone knows it" means every big player knows it too, and they all rushed in to carve up the market. Zoom's stock has since fallen almost back to pre-pandemic levels. Making money off something everybody already knows turns out to be surprisingly hard.

What I find more interesting are the small, lesser-known trends the pandemic left behind — the ones people either don't know about, or know about but don't much care for. Those tend to have a bit more gold hidden in them.

One such trend is meme stocks. A "meme" is any piece of playful, remixed content that spreads virally online — most commonly as an image macro. Memes have become such a pervasive global subculture that if you use Facebook or Twitter regularly, you're bound to run into a funny one almost every day.

"Meme stocks" is the umbrella term for shares that become hot topics on internet forums. They tend to be companies with shaky fundamentals and uncertain futures — and, crucially, easy enough to understand that a meme about them actually lands. The best-known examples are GameStop (GME) and movie-theater chain AMC; more recently, home-goods retailer Bed Bath & Beyond joined the club.

Once Everyone Knows, There's Not Much Gold Left

Meme stocks are rarely "good stocks" by any conventional definition. Many have been savaged by short sellers, trade at depressed prices, and leave holders who missed every good exit stuck sitting on the position indefinitely. The online influencers pitching these stocks tend to argue from potential rather than performance — the kind of reasoning that's the financial equivalent of claiming an injured pitcher will throw 100 mph once he's out of surgery. Meme stocks are also frequently overpriced and wildly volatile — closer to a game than to anything resembling fundamentals. GameStop's January 2020 run is generally considered the first true meme stock.

Retail investors buying on bad advice is nothing new — what elevated it into its own named category was the arrival of two technical preconditions: mature social networks, and cheap, easy-to-use trading platforms. During the pandemic, bored Americans stuck at home flocked to semi-anonymous forums like Reddit in growing numbers.

The extra liquidity sloshing around during the pandemic juiced the entire market, drawing in a wave of first-time investors. Plenty of young Americans, figuring the stimulus checks weren't going to change their lives anyway, decided to throw the money into the stock market for fun. Many of them also hung out on Reddit's WallStreetBets, reading stock discussions the way they'd browse a gaming forum — and that's how a critical mass of retail investors with a gamer's mindset came together.

What the Forum Crowd Is Discussing, Fund Managers Now Want to Know

All that kindling still needed a spark — and the spark was commission-free trading apps like Robinhood. Online brokerages had existed for ages, but with clunky interfaces and high barriers to entry. Robinhood and its fellow trading unicorns lowered the bar so far that Massachusetts actually sued the company, arguing it exposed inexperienced investors to excessive risk. How low was that bar? One American college student, after executing a complex options trade, was shown a temporary negative cash balance of $730,000 due to a settlement-calculation quirk — and, not understanding what had happened, took his own life. It sparked national outrage.

"A product so easy to use it becomes dangerous" is a phrase most product managers elsewhere would never dare imagine. For first-time investors, Robinhood's friendly interface and zero commissions amounted to a fun, potentially profitable online game.

So once the population of WallStreetBets users and the population of Robinhood account holders — two seemingly unrelated groups — each crossed a critical mass, and forum influencers happened to be hyping GameStop stock just as short sellers happened to be piling into aggressive short positions against it, a systemic arbitrage opportunity opened up. The perfect storm was born.

The whole episode was extensively covered at the time and is still fresh in most people's minds, so I won't belabor the details. In short: American millennials, flush with stimulus cash, rallied together on forums, piled into GameStop en masse, drove up the price, exploited the systemic arbitrage opening, and forced a short squeeze that took down some of the industry's top-performing short sellers. Institutions hadn't believed a squeeze of that magnitude was even a real systemic risk — coordinating remotely and pumping a garbage stock to absurd heights seemed far too hard to pull off. But because the social preconditions above had all quietly matured, it happened anyway, and the resulting losses topped $5 billion.

The scrappy amateurs knocking out the seasoned pros became a landmark moment after GameStop — Wall Street formally acknowledged that meme stocks were a real phenomenon. So today, in the post-pandemic era, meme stocks are officially a recognized category. Retail investors know full well it's irrational, but plenty are still willing to gamble on these fragile companies anyway. These days, every quarter or two brings another meme stock mysteriously pumped and then just as mysteriously crashing back down.

And now that meme stocks have become their own asset class, some hedge funds shorting stocks have started deploying social-listening systems just to monitor sentiment on Reddit. Being a professional short seller has genuinely become exhausting work. The things nobody knows about, or knows about but doesn't care to watch — yet that can still make you money — tend to live at exactly the intersection where technology and social conditions both happen to mature at once. Meme stocks are the perfect case study.