Jan 28, 2021
Amanda Lang: A 'final fool' will be left holding the bag in Reddit frenzy
By Amanda Lang
Markets will eventually adapt to Reddit scenario: Trader
What makes a stock more or less valuable? There are traditional metrics, obviously: a share price represents the present value of a future income stream. Those metrics allow for easy comparison from one stock to another, or what we call “cheap” versus “expensive”.
But from time to time markets disconnect from any kind of metric you can broadly apply. In the dot-com era it was popular to consider price to sales, instead of price to earnings, since many of the high-flying tech firms of that era had no earnings.
Today, it may be a metric like “total addressable market” that is used to generate excitement. If that phrase doesn’t make you nervous, it should. It’s like saying my total addressable market of potential viewers is 7.6 billion, since that’s the total number of people on the planet; and, hey, they could all watch.
We are definitely in a part of a bull market where those new measurements are being applied, to justify some valuations on stocks.
So maybe it’s not surprising to see utter dogs be bid up on utter nonsense. If Tesla Inc. can be more valuable than General Motors Co., why shouldn’t GameStop Corp. be worth US$340 a share? Once you’ve parked common sense at the door, in other words, anything goes.
Now you’re in “greater fool” territory. As in, a stock is worth whatever the next person is willing to pay for it. And you’re safe as long as somebody more foolish than you is willing to buy your shares at a higher price.
There has always been a place in stock markets for the greater fool theory but something is different here. The rush by some retail investors not just to buy a few stocks themselves, but to rally other retail investors to the same cause, has a different flavour.
The cheerleading on Reddit feels a little closer to a classic pump and dump scheme than someone with real conviction in a firm’s fortunes. And maybe this is a David and Goliath, or retail investor versus Wall Street.
But keep in mind that in the greater fool theory, there is always a final fool.