How ‘Pennywise’ Provided the Best Advice for Meme-Stock Traders

In the opening scene for the 2017 film adaptation of Stephen King’s horror novel It, a 12-year old boy named Bill Denbrough crafted a paper sailboat for his younger brother Georgie. Gleefully, the latter sibling sails the boat during a particularly rainy day until it falls into a storm drain. Attempting to retrieve it, Georgie runs into Pennywise. Luring him closer to the drain, Pennywise strikes, ripping the boy’s arm off and dragging him into the underworld.

Throughout the rest of the two-part film series, Bill is racked with guilt – a touching sentiment and also an understandable, rational one. Clearly, Bill had no love for Pennywise and was determined to end the mysterious tormenter’s existence.

Similarly, meme-stock investors should have the same level of disdain for influential people who cynically leverage the emotional vulnerabilities of market participants, particularly among young people who are just entering the Wall Street arena. Readily, the disaster that is Bed Bath & Beyond (BBBY) comes to mind.

The Setup for BBBY Stock

Last week, retail traders rushed into BBBY stock, sniffing out a potentially bullish opportunity for the otherwise embattled home décor retailer. Ahead of the Wednesday session last week, I wrote the following:

As other analysts have pointed out, no fundamental catalyst was apparent for the enthusiasm toward BBBY stock. Instead, it appears retail traders are merely hoping to blow up the bears’ short positions, thus forcing a squeeze higher. According to analytics firm Ortex, 50.7% of Bed Bath & Beyond’s public free float is held short, meaning that pessimists will profit should BBBY decline in market value.

However, the big news for the embattled retailer was that activist investor Ryan Cohen, via his investment vehicle RC Ventures, acquired 1.67 million call options on BBBY stock. According to a Form 3 document which Cohen filed on Aug. 14 with the U.S. Securities and Exchange Commission, the calls – which range from strike prices of $60 to $80 – all feature an expiration date of Jan. 20, 2023.

At the same time, I also cited The Wall Street Journal, which “warned readers that investors should avoid assuming that the present fresh momentum in meme stocks will yield similar results to what folks saw during the heady period of 2021.” Turns out, retail traders should have heeded the WSJ’s words of wisdom.

On Friday, BBBY stock imploded “after it was revealed billionaire investor Ryan Cohen had sold all of his stock and options in the home goods retailer.”

Hemorrhaging in the Rain

If you watch the aforementioned scene from It, you’ll notice that Pennywise emotionally toys with Georgie to earn his trust, much like how market influencers sway retail traders to essentially perform their bidding. In Georgie’s case, his penchant for popcorn laid out the perfect trap for Pennywise to exploit. For the meme-trading phenomenon, the temptation for easy money – often occurring against the backdrop of feelings of inadequacy – urge otherwise rational people into irrational behaviors.

Sadly, many retail traders fell for Cohen’s implied bullish narrative, along with the associated mass-scale euphoria. As The Motley Fool explained, “Cohen made it seem he was in for the long haul. In addition to buying a large chunk of the retailer, he also succeeded in getting three directors appointed to the board, and led the company's sale of various ancillary businesses and the ouster of its CEO.”

Following the sale of BBBY stock, though, it became clear that billionaires and meme traders play by a different set of rules. While Cohen is out patting himself on the back for pocketing several millions of dollars, many retail traders who believed in the unspoken moral ethos of the meme-stock movement were left hemorrhaging in the rain, just like Georgie.

However, what’s more problematic is that many people – based on their social media posts – don’t appear to be getting the memo. So, here it is. You have no friends on Wall Street. When you engage speculative trades, you must be prepared to get in and get out.

Otherwise, you risk holding a bag of unpleasant material.

The Harsh Reality of Meme Stocks

While the above discussion on BBBY stock may arouse controversy among the most committed meme traders, the sooner investors realize that the capital markets represent a competitive arena rather than a cooperative one, the quicker they will be able to make consistently rational choices. Usually, pain is a wonderful teacher because it helps prevent repeat mistakes.

Apparently, some traders require a more pronounced lesson. Here, math may open people’s eyes to the harsh reality of meme stocks. Over the past five years, the share of total net worth held by the 50th to 90th wealth percentiles declined by nearly 5%.

In other words, as people pour over the hundreds upon hundreds of compelling short-squeeze ideas, they should come to a stark realization: meme traders can’t be everywhere at the same time. Indeed, since average retail investors have a smaller share of the wealth pie, they must be judicious with where they put their money.

However, as billionaires exploit retail traders, the ultra-affluent have a much greater share of total wealth, while leaving the middle class with ever-smaller portions. And that’s exactly what the data shows. Over the past five years, the share of net worth held by the top 1% increased over 3%.

Ultimately, it’s up to each individual investor to conduct due diligence. Certainly, you don’t want to let Wall Street’s version of Pennywise direct you into a lopsided relationship.

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