“I am not a cat,” stated Keith Gill at the start of his virtual testimony in front of the House Committee on Financial Services in February 2021. Known across social media as Roaring Kitty, the infamous investor had recently captured the attention of the financial world and well beyond.
Gill was testifying about allegations of market manipulation that had risen during the 2021 GameStop (NYSE:GME) short squeeze. He would speak for just over five minutes in front of the committee, during which time he admitted that he barely understood the events that had transpired — events that had resulted in an unprecedented phenomenon that turned heads across the financial community. He hadn’t invested in GME stock to start a short squeeze or inspire a movement. Rather, he famously ended his testimony by highlighting that he saw value in the company. “I like the stock,” he said.
The phrase would become iconic. Though originally attributed to CNBC host Jim Cramer, Gill’s words became a battle cry for retail investors as they poured money into meme stocks like GameStop and AMC Entertainment (NYSE:AMC). These traders, likely following the same philosophy as Gill, were choosing to invest in stocks simply because they knew and liked the companies.
Some might compare this methodology to a philosophy made famous by investing icon Peter Lynch, which centers on investing in what you know. “Buy only what you understand, believe in, and intend to stick with,” he famously wrote. “Even when others are chasing the next miracle.”
However, the legendary mutual fund manager claims his well-known advice is often misunderstood. In a 2015 interview, Lynch highlighted a significant problem with simply investing in what you know: Investors often interpret this approach as an alternative to conducting actual fundamental market research.
As it turns out, buying a stock simply because you like the company isn’t a good investment strategy. Personal intuition must be coupled with real information in order to make prudent financial decisions. And in an age where bad investment advice is dominating social media forums like Reddit’s r/WallStreetBets, sometimes recognizing good investments isn’t easy.
Two Investing Philosophies
In 2021, the massive retail investing community that had grown around Gill and helped fuel the GME squeeze began looking for other companies with high short interest in hopes of creating another unprecedented event. With this, the meme stock craze that is still happening today was born.
Despite the dangers of this trading style becoming undeniable as such “favorites” have plunged, retail investors have continued to stake risky bets on struggling companies. In the years since, no short squeeze has surpassed the gains made by GameStop during its 2021 run. AMC would come close a few months later and, the following year, Bed Bath & Beyond would experience a rise and fall from which it would never recover. Indeed, Bed Bath careened into bankruptcy and, ultimately, oblivion. More often than not, meme stock rallies tend to be flash-in-the-pan instances that end as quickly as they begin.
Even so, retail traders continue to embrace the risk of betting on poor-performing stocks with questionable financials. Some Reddit users have taken pride in this approach, posting photos of the iconic phones made by BlackBerry (NYSE:BB) and Nokia (NYSE:NOK) and hyping the companies, for instance. While both of these firms have branched into areas other than phone-making, these tactics haven’t done much to boost share prices or make the stocks look appealing to anyone apart from risk-embracing traders. Indeed, these posts might inspire social media chatter, but they rarely lead to direct price action.
That “I like the stock’ philosophy may reflect the gist of Lynch’s famous advice, but it ignores the nuances of it. And this trend suggests that some investors haven’t taken the time to properly assess the financial expert’s teachings.
Lynch’s philosophy of investing can be summed up as I like it, so I will look into it. Yes, it makes sense for less experienced investors to be drawn to the companies with which they are familiar. But that does not absolve an investor of needing to conduct research on a company’s fundamentals.
As Lynch has said about people buying a stock they know nothing about, “That’s gambling and it’s not good.” His investing philosophy centers around investing in companies you believe in only after doing the necessary research to assess their profitability.
Sometimes this can mean stepping out from behind the desk. Former InvestorPlace contributor Alexander Wah, who serves as founder and Chief Investment Officer of mid-cap investment firm Prince Capital, recalls the time he spent sitting in Chipotle (NYSE:CMG) and Starbucks (NASDAQ:SBUX) cafes to assess the companies’ growth prospects, citing this kind of in-person experience as highly valuable:
“Use of the product/service by the investor can provide a useful datapoint of customer experience. A lot of hedge funds actually pay money for insights on how consumers interact/feel about products, so the individual investor in this case is essentially getting that information for free just by using it themselves and assessing how they feel about it.”
However, Wah emphasizes that those coffees and burrito bowls were just the beginning of his research. Investing in companies you know and believe in is “a great philosophy because it creates a touch point with the company that someone can build on, which hopefully inspires them to do more research on the stock.”
If You Like a Stock, Look Into It
But are meme investors inspired to do actual research on the stocks they claim to like so much, as Wah suggests?
They certainly weren’t when the meme stock craze began. In the wake of the GameStop short squeeze, The Wall Street Journal reported that some investors openly admitted they hadn’t done research on their stocks. WSJ specifically noted one example of a TikTok video in which a young investor discussed his position. “I don’t know what the f— I’m doing. I just know I’m making money,” he said.
Years later, it isn’t clear how much time the retail crowd spends in GameStop stores or AMC theaters. Gill has admitted that he grew up playing video games and frequently shopped at GameStop. When AMC investor Jason Iannantuoni unsuccessfully campaigned for a spot on the company’s board in August 2023, he referenced “watching a movie at AMC.”
Still, that doesn’t mean that all investors will use a company’s financials and key market metrics to assess how good of an investment the stock is. For Wah, this means examining the broader sectoral landscape of a company, assessing what the trends in its sector are and what needs the company is addressing. “You should look to see if the financial progress is showing reflective of your findings on the qualitative side, both for the company specifically and then in comparison to its peer group,” he notes.
For those who don’t take a fundamental-driven approach that centers around the elements that Wah highlights, investing can pose significant risks. Drayton D’Silva, CEO of Tower Hills Capital, spoke to InvestorPlace about the potential problems with buying into a stock simply because you like the company.
“It is a terrible investing strategy to buy shares in a company simply because you like its products because there are companies that sell great products but end up being very poor investments […] Companies like WeWork, Revlon, Toys R Us and Borders went bankrupt despite being well-liked by their customers.”
The Bottom Line
As Lynch advises and Wah highlights, investing in companies that you know isn’t inherently bad. But it is more important than ever to consider context — especially in an era where entire social media communities are touting struggling, well-known companies as good investments.
Many popular meme stocks are struggling, even after Gill’s return to social media sparked a rally last month. GME has been highly volatile since news broke that Gill had exited his call options and purchased more shares. And for GME’s fellow meme stocks, things have been worse. Even after the rally, AMC is still down over 20% for the past six months.
So, what meme stocks are potentially responsible investments? Which companies are both hugely popular but also financially sound? One example is Robinhood (NASDAQ:HOOD), the trading app that helped get many people invested in investing and is often praised by retail investors for its gamification of stock trading. HOOD stock has displayed impressive growth of 70%-plus over the past six months and looks poised to report its first annual profit this year. Robinhood’s foray into crypto has also helped it gain favor with Wall Street analysts, including its recent acquisition of exchange Bitstamp. Indeed, the trendy app has gone far beyond making stock trading fun, offering investors valuable exposure to multiple growing industries like crypto and fintech.
There are plenty of other meme stocks with actual growth potential, as indicated by their financials and performance. Recent data from ApeWisdom shows that the popularity of artificial intelligence (AI) leaders Palantir (NYSE:PLTR) and Advanced Micro Devices (NASDAQ:AMD) has been rising among enthusiastic retail investors.
Shares of these companies have made impressive progress over the past year with gains of 65% and 45%, respectively. It’s hard to ignore the power of the AI boom that has overtaken markets. But these innovative companies have displayed an impressive ability to make steady growth and give investors continuous reason to bet on them — enough reason to capture the attention of both Wall Street and r/WallStreetBets. Like Robinhood, they have spent the past year climbing while other meme stocks have either fallen or proven volatile.
These examples should remind retail investors that often, the most prudent strategy is not to bet against Wall Street. Rather, investors should do the type of research that can reveal dynamic companies in fast-growing markets projected to continue expanding for years to come.
Investing in what you know can pay off, but history has proven that investors are best served by going beyond the basic interpretation of Lynch’s philosophy. They should take the time to learn about their favorite companies — beyond the headlines.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
