Fintech Zoom: Beware of meme stocks
The Fintech Zoom Take
Recent news has paid a lot of attention to “meme stocks” — such as Grapevine-based GameStop and AMC Entertainment Holdings — that have skyrocketed because they were hyped on social media. Cryptocurrency Dogecoin, named for a shiba inu dog and begun as a joke, also joined the meme party, racking up gains of as much as 12,000% from early January through early May.
The meme stock boom could signal a fundamental change in how the stock market works, but it could also be a massive bubble soon to burst. While some investors have profited from the popular names, there are many reasons to avoid meme stocks. For example:
1. You’ll never know when to sell. Deciding when to sell an ordinary stock is hard enough. But with meme stocks, the fundamental factors that apply to most other stocks don’t apply, and sudden parabolic gains can easily disappear.
2. You could lose a lot of money. In January, GameStop suddenly surged to $483 a share before plunging more than 90% over the subsequent weeks.
3. They are simply overpriced. A stock isn’t just a bet, it’s ownership in a business, and the price of that stock generally represents the performance of that business over time. Meme stock prices are often divorced from the fundamental value of the company.
Ask the Fool
From F.H. in Vineland, N.J.: I was thinking of investing in Lordstown Motors, which is making electric trucks, but the stock has been really volatile. What’s up?
The Fool responds: Lordstown Motors has been a bit of a cautionary tale lately. Many investors had been excited about the prospect of electric trucks, which lifted the stock price. But a few months ago, allegations were made that Lordstown was overstating its orders, and the company warned that it might run out of cash next year. Then the CEO and chief financial officer both resigned after an investigation suggested that at least some allegations were true. Research it deeply before investing, or wait for it to get on firmer ground.
From G.P. in Erie, Pa.: Do companies ever reduce their dividends?
The Fool responds: Yup. When companies are struggling, they may reduce, suspend or even eliminate their dividend in order to conserve cash. But most companies try to avoid dividend cuts if possible, as they can look like signs of financial weakness and disappoint shareholders.
Dallas-based AT&T is a recent dividend-cutter, announcing in May that along with spinning off WarnerMedia and merging it with Discovery, it will be “resizing” its dividend to a smaller one. After having increased its payout for 36 years, it will end that streak and be ejected from the list of “Dividend Aristocrats” that have hiked their payouts for at least 25 years in a row.
Many companies have sharply reduced their payouts; some raised them again later, though at lower levels. Harley-Davidson has drastically cut its dividend then raised it somewhat twice since 2008. General Electric, meanwhile, cut its payout four times over that period; since 2019, it’s been only a penny a share.
The Fool’s School
Don’t assume your kids can just ignore investing now and learn about it later in adulthood. Teens and preteens have the most to gain by starting to invest early because they have a huge advantage over the rest of us: time. A single $1,000 investment can grow to $4,661 in 20 years (averaging annual growth of 8%), but it could become $21,725 over 40 years.
First get them interested in investing; then you can help them actually invest. Showing them how much money they can amass might pique their interest. Discussing money and investing with them regularly is smart, too: Let them see you managing household finances, perhaps using a budget. Talk about your experiences with debt and how you are working toward financial goals.
Discuss your own investing and lessons you’ve learned. Talk about companies in which you’re invested and companies in which they may want to invest, and follow them and their developments in the news. Kids are familiar with many great companies: Activision Blizzard, Amazon.com, Apple, Costco, Disney, Etsy, McDonald’s, Microsoft, Netflix, Nike, PepsiCo, Starbucks and many others.
Our book, The Fintech Zoom Investment Guide for Teens: 8 steps to having more money than your parents ever dreamed of, by David and Tom Gardner with Selena Maranjian (Touchstone, $17), can also teach them a lot.
Before they can actually invest, you’ll need to open an account for them. If they have earned income, they can save for retirement with an IRA account. (A Roth IRA is especially good for kids, as their tax liability on money going into the account is very low, and withdrawals will be tax-free.)
With Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts, you can give them money to invest while you serve as custodian. A new option is the Fidelity Youth Account for teens, which allows the teen owner, not parents or other custodians, to be in charge. Read up on these accounts to see which will serve your kids best.
My Smartest Investment
From P.L., online: My smartest investment has been education, hands down. Without it, I wouldn’t have a career, house or retirement savings.
The Fool responds: Education is generally a terrific investment, and it can enhance your life in countless ways. As you note, it can qualify you for a satisfying career, which can help you save money for a home and sock away needed dollars for retirement. Adding degrees or professional certifications over time may help you climb the ladder and earn more, too.
But there’s even more to it than that. Education takes many forms, including simply reading. Reading often and broadly can make you a more interesting person to talk to and can help you be a better writer, for both social and business purposes. Reading deeply about investing can help you get better at it, so that you can grow your investments more briskly and retire with a fatter nest egg. (Indeed, those who start learning early about investing and act on what they learn may be able to retire earlier and more comfortably.)
Educating yourself about health matters can help you get and stay healthier so that you spend less on health care throughout your life. And some studies have suggested that certain kinds of education, such as learning a second language, can benefit the brain — not to mention making traveling more fun.
Who am I?
I trace my roots back to 1979, when three friends saw great potential in software and information technology and founded me. Today, based in North Kansas City, Mo., I’m a major player in health care information technology, and I recently sported a market value near $24 billion. I employ more than 25,000 people and rake in some $5.5 billion annually. As No. 1 in electronic health records worldwide, I serve more than 650,000 physicians and more than 2 million caregivers in more than 35 countries. I’ve been granted more than 600 patents. I acquired Siemens Health Services in 2015. Who am I?
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Last week’s trivia answer: 1-800-F(LOW)ERS.COM