We’ve all probably heard about income shares. Many of us should be familiar with value and growth stocks, too. But recently, a new category of stocks has appeared in the investing lexicon – meme stocks.
These are shares that have been widely talked about on certain social media platforms. It starts off with just a few people discussing a particular company. Then, as more and more people join in the discussion, they subsequently unleash their full force on the stock.
It can, and often does, send the price of the share to astronomical levels. It is not uncommon for a targetted stock to surge thousands of per cent in a short time.
These meme stocks encapsulate all that is good and all that is bad about the stock market. The good part is that it shows that the market is working. The market is, after all, there to give investors a chance to discover the right price for a stock….
…. When there are more buyers than seller, share prices rise.
The bad part is that is shows that the market can be manipulated, which, by inference, means that it is not always the best place to discover the right price for a stock.
Put another way, the market isn’t always right. Warren Buffett famously said: “I’d be a bum in the street with a tin cup if markets were efficient”.
That said, the market can be a great place to create wealth. But it is also a great place to destroy wealth if we don’t think independently. Let’s not forget that the market is a collection of people with different biases and objectives.
At any given moment in time, their motivations may be very different to our own. In other words, the market can be as complex as it is simple.
The upshot is that we should try to stay within our circle of competence, whether it is growth, value, or income. FOMO and YOLO, by the way, are not investing disciplines.
What should matter to us right now, is that there are worrying signs of inflation stirring in the global economy. The jury is still out as to whether the inflationary pressures are transitory or entrenched.
If you want to FOMO about something, then be very afraid of missing out on putting your money into inflation-beating assets. Why? Because you don’t only live once, but the money that you save today will need to sustain you when decide it is time to stop work.
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David does not own shares in any of the companies mentioned.