If they don’t learn, they will get burned. The advent of self-directed, app-driven retail trading has been a double-edged sword as it democratized investing but also brought unprepared participants into the fold. Now, they’re back in the meme-stock trade and they’re moving markets, for better or for worse.

COVID-19 brought some strange phenomena with it: hand-sanitizer hoarding, people leaving the workforce and never coming back, and legions of amateurs downloading brokerage apps for the first time. There’s nothing wrong with that, at least until people actually hit the “buy” button and get in over their heads.

Research is supposed to come first, followed by gradually scaling into high-conviction assets with long-term growth potential. Naturally, however, greed and bandwagon jumping drove many neophyte investors in 2020 and 2021 to bid up the share prices of businesses with less-than-stellar balance sheets, such as GameStop and AMC Entertainment.

The AMC loyalists have been among the most ardent meme-stock traders. Adam Aron, CEO of AMC Entertainment, seems to have encouraged the company’s frenzied investors, who call themselves “Apes” in reference to the film Planet of the Apes.

And here we are in 2023, a new year but the story remains the same. If you assumed that last year’s brutality in the financial markets would have deterred the short-squeeze crowd, think again. They’re back in full force, and evidently haven’t learned the lessons of the recent past.

Lately, the darling of the meme-stock mob isn’t GameStop or AMC Entertainment, but another financially unsound company: Bed Bath & Beyond. You know, the one that lured shoppers for years with gigantic paper coupons before smartphones and apps took over.

Courtesy: Yahoo Finance

Here’s what happened to Bed Bath & Beyond stock on Monday, during and after the trading session. Up 92% during market hours, down 33% in the evening. That’s the exhilarating/nauseating type of price action you can expect with stocks like this.

As it turns out, there wasn’t any news-based catalyst to prompt the 92% run-up. It was just a matter of people piling in because people were piling in. As the old saying goes, nothing attracts a crowd like a crowd.

The after-hours dumpage, however, was actually prompted by a piece of news. Reportedly, Bed Bath & Beyond waited until the stock market had closed to announce the company’s intention to sell $1 billion worth of shares and/or warrants.

That’s not going to help the company’s current shareholders, as putting more shares into circulation will likely dilute the value of the existing ones. Perhaps, Bed Bath & Beyond’s should have seen this coming, though, as the company is in desperate need of capital.

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    That’s not going to help the company’s current shareholders, as putting more shares into circulation will likely dilute the value of the existing ones. Perhaps, Bed Bath & Beyond’s should have seen this coming, though, as the company is in desperate need of capital.

    Bear in mind, Bed Bath & Beyond disclosed last month that it was in default on loans that were called in, was expected to file for Chapter 11 bankruptcy, and received a delisting warning due to the company’s late quarterly filing. So, it’s not as if the warning signs weren’t there.

    But then, it would have required a little bit of research (only a little bit of headline scanning, really) to identify the glaring red flags. The problem is, overeager meme-stock traders tend to forgo the research and instead rely on hype, buzz, and hope for a quick profit.

    Courtesy: ZeroHedge

    This harkens back to the time when stock traders bid up the share price of Hertz, another company that struggled during the COVID-19 pandemic. The Hertz stock rally was short-lived, and there were undoubtedly many more bag holders than get-rich-quick success stories.

    Instead of trying to catch the tail end of a meme-stock short-squeeze, I have a better idea. Consider scanning for established, publicly traded businesses with stellar leadership that operate in growing industries. Look competitive advantages, solid balance sheets, and charts that trend upwards but aren’t going parabolic.

    Of course, Bed Bath & Beyond stock might rally from here and some meme-stock stalwarts will declare that I was “wrong” about this. That’s fine, and people are free to choose their investment strategies.

    The real test, however, is whether someone can profit consistently over a long period of time. Think in terms of decades, not days or weeks. After all, Warren Buffett has more money than any of the meme-stock traders, and he earned his wealth the right way: slowly, surely, and securely.

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