Invest in quality, not meme stocks

It appears the "meme stock" days are back.

| More on:
Two men excited to win online bet

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One of my personal investing mottos is "the market is straight up kooky dooks".

Not only did I think of this saying again today, I also felt it fitting that it was paraphrased from a movie – in this case the Disney (NYSE: DIS) animated movie Moana.

That is because, as I woke up this morning and checked the overnight news, I saw that the share price of American cinema company, AMC Entertainment (NYSE: AMC), increased by over 78% overnight.

On a whim, I then looked at the share price of GameStop (NYSE: GME), a company whose story is now intrinsically linked with AMC Entertainment. Yep, it too saw its share price rise dramatically overnight. In this case 75%.

It appears the "meme stock" days are back.

My first feeling was one of sadness.

I hoped that this was a saga that we left back in the dark days of the COVID pandemic. Whilst many saw it as an entertaining side show, or even a David vs Goliath story, I saw it differently. I knew that a lot of regular people were going to lose a lot of money that they couldn't afford to lose.

I watched with horror as people, many who were entering the markets for the very first time, piled into, what I believed to be, "bad" companies.

I've seen this film before. I know how it ends and I don't like it.

Unsurprisingly, fast forward a few years later, and the share price of AMC Cinemas is down over 99% and GameStop down 59% from their 2021 peaks. I am sure many of those who were wiped out will never trust the share market again despite it being, overall, a great tool for people looking to build wealth.

So, it is again I feel my stomach churn seeing the potential sequel with people piling into companies which, in my opinion, have really bad fundamentals and are suffering from an enormous list of structural headwinds that they will struggle to overcome.

I could go on and on about the various tips, techniques and lessons that I have learned to become the investor I am today. I could also go on for pages highlighting why I personally wouldn't touch the shares of the above businesses with a 100-foot pole. However, in this case, I feel there is only one thing to remind you all…

Whilst the share market can, and will, do almost anything in the short term. Over the long term, share prices tend to, almost always, track the fundamentals of the underlying business.

Some meme stockers will tell you that fundamentals don't matter. They are playing a different game. They'll tell you to just trust them. That I am part of the enormous Wall Street conspiracy looking to keep the regular folk down.

But fundamentals do matter. In fact, if you plan on holding for years, you can argue that they are the only thing that matter.

So, if you find yourself looking at the recent share price rise of companies like AMC Entertainment and GameStop and getting tempted to press "Buy", ask yourself, do I think these companies have good fundamentals? Do I think these companies are going to be earning significantly more revenue and profits in 2, 3, 5, 10 years' time than they are today?

If you, like a lot of others, think the answer is no. Then don't buy.

There are countless other opportunities (both from listed companies and passive investment vehicles like ETFs) that offer high quality, growing and profitable opportunities. So, don't waste your time trying to ride a wave of what many consider to be irrationality.

All you really need to do is buy great companies, at fair prices, and hold on to them for as long as they remain great companies.

It is that simple.

This is also the best way to make a short seller's life miserable, much better than trying to outsmart them by trying to fight them directly when the fundamentals are against you.

Motley Fool contributor Andrew Legget has positions in Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Walt Disney. The Motley Fool Australia has recommended Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Blue Chip Shares

3 high-conviction ASX 200 shares I'd buy in June

Let's see why these strong stocks could be top picks for investors this month.

Read more »

a mature aged couple dance together in their kitchen while they are preparing food in a joyful scene as the Breville share price rises on the back of a 25% profit surge
Dividend Investing

The best ASX income shares for retirees in 2025

Let's see what makes these shares top picks for retirees.

Read more »

A retiree relaxing in the pool and giving a thumbs up.
Dividend Investing

3 under-the-radar ASX All Ords shares that could fund your early retirement

I think all three of these relatively unknown stocks are strong choices for retirement.

Read more »

Falling yellow arrow with descending wooden bars with the percentage sign written on them.
Dividend Investing

Buy these ASX dividend shares to beat falling interest rates

Let's see which dividend shares analysts are tipping as buys this month.

Read more »

Two plants grow in jars filled with coins.
Growth Shares

3 ASX 200 growth stocks up more than 100% in 1 year that could charge higher

It's been a memorable year for shareholders of these 3 companies.

Read more »

A man reacts with surprise when her see a bargain price on his phone.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors in June

These stocks may be priced too cheaply.

Read more »

Couple looking at their phone surprised, symbolising a bargain buy.
Cheap Shares

Why I think these 2 ASX shares are steals

These investments are trading at really attractive valuations.

Read more »

A senior couple discusses a share trade they are making on a laptop computer
Dividend Investing

1 ASX dividend stock down 54% I'd buy right now

This business could build good returns for investors.

Read more »