Richard Smith, a market risk expert, said that executives in companies like AMC and GameStop are playing along with the speculative nature of the meme stock trade.
Smith told Insider that leadership in companies whose stocks get a boost from meme-trade mania are now in the game.
They have to play the game because they are actually getting paid to do that.
Ryan Cohen, chairman of the video-game retailer, increased his stake in the company by buying another $100,000 shares last week. Smith said that his purchase was seen as a vote of confidence in the new management's continued investment in the company with their own money.
Smith suggested that Cohen would have been a catalyst for the company to soar.
Smith said that $10 million bucks in some ways is pocket change.
—Ryan Cohen (@ryancohen) March 22, 2022
He shouts from the rooftops that he just made 100,000 more shares and the stock will double in a couple of weeks. That is good for him.
The last 30 days have seen a 40% increase in the shares of GameStop. The stock split plan gave it another boost on Friday.
The movie-chain theater's deal to buy a large stake in a Nevada gold mine has led to AMC's rally.
AMC will pursue more M&A deals where it can reach for the stars and intriguing investments that have potentially attractive returns, according to the company's CEO Adam Aron.
Smith pointed to red flags in Aron's quote about the attraction of high-risk investing.
What does that mean? He said that the idea of a meme stock is unmoored from any fundamental principles.
It is only moved by what people say about it. It doesn't matter what it does.
—Adam Aron (@CEOAdam) March 30, 2022
After barely moving in February, AMC shares have gained over 30% in the last month.
The meme stock comeback has been driven by a combination of a psychological trick called the anchoring bias and a recovery from the market bottom on March 15, according to Smith, the author of the Risk Rituals Newsletter.
He said that they are kind of psychological operations based on volatility.
The way the system works right now is that you get volatility, you get these sharp moves, the media piles on, everyone starts focusing on it, and then you have FOMO.
According to him, retail traders are often thinking they might miss out on a profit unless they are part of the speculative trade, as buying GameStop around $80 a share seems so much cheaper than its record high of $347 in January last year.
He thinks the meme stock revival will be shorter-lived than the one in early 2021.
A chartmaster shared 3 charts that show how much bigger the bubble is for the three digital payments.
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