Bed Bath & Beyond.
What do they all have in common?
They’re meme stocks.
In case you are not aware, a new retail trading phenomenon has emerged whereby “geniuses” on Reddit and social media platforms promote a hot stock with a meme.
Then, the masses, including big investment firms, go buy that stock in a communal way of investing. The price of the stock goes up (at least temporarily) due to all the buying. And viola. You have a rocket ride of a stock.
While everyone is one big happy family on the way up, those leading the movement aren’t going to tell everyone before they sell.
And sell they will.
For that’s exactly why the bought the stock in the first place.
Eventually everyone becomes aware that the leaders are selling, so they start to sell.
But many quickly are schooled on a basic tenet of the stock market… to sell something in the market, you must have a willing buyer.
Just like the clock striking midnight for Cinderella, everyone is trying to get thru the exit door, less they turn into pumpkins.
And many will turn into pumpkins, as fewer and fewer buyers show up interested in buying a quickly falling stock.
With nobody to sell to, these investors are forced to sell their stock at a loss when the stock finally gets so low that buyers regain interest.
My friends, there are a lot of efficient systems in our world. Modern machinery and technology has taken activities that used to take days and weeks to achieve and reduced them to taking minutes or seconds.
But none of those can hold a candle to the stock market’s efficiency.
The market is a marvel at methodically transferring money from those that don’t know what the hell they’re doing to those who do.
And those who invest their hard earned money with the tiniest slivers of information, telegraph to those who know what they’re doing in the market that the don’t have a clue.
It’s as if they’re wearing a “scarlet letter” of U for “uninformed”. They’re literally screaming, “Come take my money!”.
I realize that this is a fascinating way to try and get rich. And a few people have done just that with this sort of speculation.
But I can tell you the masses will not get rich this way.
When this phase passes, and just like all the hair-brained schemes before it it will, a lot of people will have lost money.
Which brings me to this point…
Warren Buffett has taught us the golden rules of investing:
Rule #1. Never lose money.
Rule #2. Never forget Rule #1.
Many people get confused with this key principle from Buffett. Some think it means to put trailing stops on your investments. Others think it means to sell out of a stock investment at the first sign of a decline.
Neither are correct.
What Buffett is teaching us here is this – Don’t invest in the type of things whereby the risk of losing most or all your money is high.
The reason here is simple – for every dollar you lose investing, you have to make a 100% return on your future investment just to break even.
In other words, you’d have been better off, and richer, by simply leaving your money in your bank account than to go gamble it away playing an investment “game”.
Which brings me to my final point – Ben Graham (Buffett’s mentor) taught us that all investing is intelligent. Everything else is speculation.
Those who won’t spend 10 minutes to educate themselves before investing $10,000 are speculating. And they will most likely part ways with that $10,000 as the market does what it does best – move money from those that know what they’re doing to those who don’t.
Take your time investing. Read a lot of books. Buy companies that have strong fundamentals and bright futures. Purchase them when they’re trading at a discount (i.e. recessions) and look to hold them for the long term.
Yes, this is a very boring way to build wealth. But boring is good. For the market doesn’t reward silly herd-like activity. It rewards patience.
Be free. Nothing else is worth it.
P.S. Why aren’t you wealthy yet? It’s because of something you don’t know. Otherwise you’d already be rich. Isn’t it time to learn what you don’t know? Consider signing-up for my newsletter below, to help you build wealth faster.
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