The rise of the meme investor
Many of them know me just as a musician. Only a few of these friends know that I work in finance as well. Whenever people learn about my day job, I immediately get all sorts of market-related questions. They want to know which stocks to buy, what I think about cryptocurrencies and NFTs (non-fungible tokens). They tell me all the stocks in their portfolio and the popular high-profile investors they follow. I quickly learn how interested non-finance people are in the capital markets.
The financial advice I give is usually lackluster for their curious minds: work with an advisor, create a financial plan, build a diversified portfolio aligned with your goals, stay invested for the long term and so on. It is met with yawns and disappointed looks that seem to say, that’s it?
What about crypto, NFTs, blockchain, dogecoin, Reddit threads, YouTube personalities and on and on? That’s what everyone seems to want to know about. The standard financial advice I give them is not appealing to many investors who have grown up on the internet, social media and reality TV.
Rise of the meme investorMany could say the markets today are a popularity contest. Don’t believe me? Let’s take a look. Tesla’s market cap is greater than the market cap of next top 10 car manufacturers combined¹, yet it sells much fewer cars. GameStop surged more than 760% in 2021, while AMC gained 1,253% in the year because a group of investors on a Reddit channel decided to short squeeze Wall Street hedge funds. At the end of 2021, the top 10 companies in the S&P 500 comprised more than 30% of the weighting of the index, an eerie reminder of a similar environment in the late 1990s (see chart below). Dogecoin is a cryptocurrency that so far has zero utility purpose, and yet it rallied more than 12,000% in 2021² as billionaires like Elon Musk took an interest in it.
Narrow market leadershipClick image to enlarge
Source: Russell Investments. Stocks represent companies in the S&P 500 Index on 12/31/2021. Russell Investments does not provide research on Microsoft, Apple, Alphabet, NVIDIA or Tesla, nor do we recommend individual securities. Past performance is not an indication of future opportunities/performance. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.In NFT land, people are buying digital pictures of apes and flipping them for extraordinary profits. NFTs stand for non-fungible tokens. This is an emerging technology that allows investors to buy ownership of digital goods or assets. Investors today are speculating on a lot of new assets and so far, these gambles have been paying off, handsomely.
Meme stocks are any companies that have cult-like followings online through social media platforms. GameStop and AMC are great examples. There are many cryptocurrencies like Dogecoin and Shiba that also have cult-like tribes. These stocks have come to characterise a type of investor who joins in with the herd for fear of missing out.
Have we seen this before?
Irrational exuberance“Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and, in the process, amplifies stories that might justify the price increase and brings in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”³
A lot of the bizarre things happening in markets today feel ominously like irrational exuberance. Many young investors (and even seasoned investors) are getting sucked into the market euphoria and speculating on new investments they don’t fully understand. These investors are throwing the proverbial dart at the board in the hopes of getting rich quickly.
So far it is working, but will it last?
The gaping need for evolved advice – Your client’s capital is at riskIn the eyes of the younger investor, the traditional financial advisor in a suit is outdated, antiquated and irrelevant to them. The world is embracing evolving technologies and newer investors believe they need to climb aboard as fast as possible for fear of missing out. In a world where you can Google anything and watch YouTube videos to get educated on financial matters, why would you pay for an advisor? At least, that appears to be their thought process.
But the meme stock community may be living dangerously. While their self-directed investing brings excitement, it also leaves them in a precarious position. Younger investors desperately need financial advice, but they aren’t getting it. Instead of working with a chartered financial planner (CFP) they are opting to listen to YouTube personalities who have zero fiduciary responsibility to their audiences.
These young investors could eventually inherit estates that advisors have stewarded for their parents or grandparents. Decades of care and labour could be squandered on things like digital apes and social media darlings. The time to educate these investors is now, not later.
Many advisors write off the meme stock community as a passing trend. And perhaps they’re right. But I think there are some deeply important lessons for advisors from these meme-driven investors.
Lessons from the meme investorAre we in a tulip mania?⁴ No one really knows for sure. But regardless of that, here are four lessons we believe advisors should take from the meme stock mania.
1) Advice must be entertainingMoney follows attention. Attention is the currency. If you don’t command attention, you’ve got nothing. You need to find a way to get all eyes on you. You want clients and prospects looking at you, talking about you, thinking about what you’re saying. This is what Elon Musk does so brilliantly. Think what you want about him, there’s no getting around the fact that you know who he is and what he stands for. Attention leads to mindshare. Mindshare leads to wallet share.
You need to make financial advice entertaining, rather than just informative. Nobody wants to read your whitepaper. You need to think about how you can package your knowledge differently. YouTube personalities are building audiences because their content is entertaining while still being informative. Their videos are exciting and fun to watch. They make jokes. They have eye-popping graphics. They feature video footage of them living a certain lifestyle. They draw their audiences into their world. This is how the investor of the future will consume advice. They will want entertaining content they can consume easily but that also teaches them a lot.
Advisors must think about how they can make their content consumable and enjoyable to this growing younger audience. The advisor of the future is someone who attracts others to their brand through compelling ideas that grab their mind and force them to think. The advisors who figure this out will dominate the competitive landscape we are moving into.
2) Digital investments - You need an opinionIf a client asks you about cryptocurrency, you better have an answer. If you don’t, you’ve just proven your own irrelevance. Your job as an advisor is to constantly monitor the evolving landscape of financial investments so that you can properly help your clients navigate the ever-changing marketplace. If your client is curious about cryptocurrencies (and they all are), you better have an opinion.
The meme investor has shown us that there is great appetite for new and emerging technologies. Investors want to understand digital investments. Blockchain and smart contract technologies are creating marketplaces in many new ways. These new technologies are exciting, but they can also destroy many sound financial plans.
Yet too many advisors I talk to are not even curious about digital assets. It’s not that they don’t understand them, they don’t even want to understand them. This is staggering to me.
Cryptocurrencies, NFTs, blockchain, smart contracts, DeFi (decentralised finance) - all these ideas are disrupting the world of finance, and quickly. There is an unbelievable hunger by the investor community to understand how these instruments fit into a financial plan.
Advisors, this is your time to shine. Don’t back away from it.
3) Finance is becoming communal
The meme stock world is one of community. Investors are congregating on social media platforms such as Reddit to form a collective consensus about an investment strategy. When you really think about this, it’s quite incredible.
Investors are piling into securities based on what their underground community is collectively doing. Talk about herd mentality! They turn to anonymous users on subchannels for their financial advice, and they are collectively holding the line against those who they think are the enemy. This explains why stocks like GameStop and AMC Entertainment have continued to stay at elevated levels. The community is collectively holding the line. They are in it together.
Click image to enlarge
Source: Russell Investments, Morningstar. Data from 10/1/2020 to 01/25/2022.
This trend will continue. Underneath this hype is a huge concept. Investors are craving community in the emerging financial economy. They don't want to invest just by themselves, individually, on their own. They want to be a part of something greater than themselves. Investors want to be a part of a family, a tribe.
Advisors, what are you doing to foster community in your firm?
As we emerge from this virtual world we’ve been living in, you must aggressively build a community around your firm.
There are a thousand ways you can build a community within your firm. Here are a few ideas to get you started:
- Stock pick of the month club – A digital newsletter that goes out to all the young investors in your firm who might be interested in hot stock tips.
- YouTube episode series – Pick a themed topic and create an entertaining video series that you publish on YouTube in episodes. Create an underlying storyline that builds from episode to episode.
- PrimeTime news report – Build a makeshift newsroom set somewhere in your office and create weekly broadcasts of the latest market trends. Email this out to your clients on a newsletter and feature live questions from the audience.
- Create a podcast – You know who listens to podcasts? Everyone. This is literally the easiest way to create a sense of community around your firm and brand. Imagine if your clients and their friends started listening to your podcast each week. It would be even better if you featured special guests on your podcast. To me this is a no-brainer. But you must make it compelling, and you must make it entertaining.
4) You need an enemy
Why did meme stocks like GameStop and AMC Entertainment rally so much? Did Reddit users believe in the true efficacy of their business models? Did they believe the stocks were so undervalued that this was the best opportunity in markets?
The reality is not likely. As news reports indicate, they were fighting against the Wall Street community. They were trying to short squeeze hedge funds to fight back against the system. The creation of an enemy rallied investors and gave them cause to join in. There’s an important lesson here.
Does your firm have an enemy? Something you’re fighting against? Do you have a cause? Do you have a bad guy?
If not, you need an enemy. It can be anything, but you need to define it, and then make it villainous.
- Our firm fights against the industry stereotype that financial advisors don’t care.
- We battle against poor financial planning that doesn’t encompass a holistic approach to legacy management.
Whatever it is, you stand for something. Make an enemy out of the things you stand for and weave that into your approach to attracting clients. It could stir passion in your investor base that can lead to tremendous advocacy.
The bottom line
Behind every major asset bubble, lasting ideas emerge. The dot-com boom and bust led to the creation of powerhouses like Amazon and Salesforce. While many internet dot-com companies perished in the crash, certain companies with sound business models survived, and subsequently thrived. The ideas that lead to bubbles are usually disruptive, transformative and highly lucrative in the long term.
While certain coins or NFTs may not survive, blockchain, smart contracts and other technologies will likely change the way we do business significantly. These are the lasting trends advisors need to embrace in order to continue providing sound financial guidance.
Over the next 10 years, we estimate that more than 70% of baby boomer assets will transfer to the next generation. That next generation is already deciding today where they are going to get their financial advice from.
Will you be among them?
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
³ Excerpt from Irrational Exuberance, Robert J. Shiller. https://books.apple.com/us/book/irrational-exuberance/id936951345
⁴ Tulip mania refers to a 17th century commodity bubble in Holland where Dutch investors pushed the price of tulips to unprecedented highs.