Steve Sosnick, chief strategist of Interactive Brokers, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): GameStop and AMC are up several hundred percent or something [since last week.] Roaring Kitty posted to social media for the first time in years. Is now the time for investors to get in?
STEVE SOSNICK (SS): Should investors buy now, up a hundred percent after being up 70% yesterday? No. I can understand sometimes chasing momentum, but this has gotten insane. These stocks have opened up doubled in a second day, so no. GameStop was not a fundamental value when it was $9 or $10. It wasn’t a fundamental value at $30. It’s not a fundamental value at $60. So if you’re getting in these stocks, you’ve gotta realize that what you’re buying is just not worth the price you’re paying. So that’s operating on the charitable side, it’s momentum on the non charitable side. It’s the Greater Fool theory. Momentum trading has its place, it’s very risky. Greater Fool theory is just basically saying, I know this is dumb, but somebody will do something dumber than me. That’s really a bad way to invest. What brought it back? I think we had the right conditions. I think part of it is these things don’t happen in bear markets. It happens when markets are relatively exuberant and with major indices at or near all time highs it is certainly easier to get people enthused about stocks. I do think to some extent the meme stock-like behavior of DJT stock, the Trump media stock, I think signaled to a lot of the people who engaged in this kind of behavior to say, oh wait, maybe we could put the band back together. Conditions might be ripe for this sort of thing. And in 2020 hindsight, ‘cause I really wasn’t watching the stock last week, honestly, the GameStop was up about 70% in two weeks. But what was interesting was, as it went, call it from 10 to 17, rounding a lot, we saw a lot of buying of calls, a lot of buying in the 20 level calls, which makes sense as the stock goes toward, you know, 10, 15, 17, 20 is the not logical next stop. But we saw a lot more buying in 25 and 30 strike calls, stuff that was essentially, you know, 70 to a hundred percent outta the money. And when you see that, it’s telling you something’s brewing. Again, I gotta admit, I didn’t see in advance. I don’t really want to watch GameStop in detail, but I’m forced into it periodically. That was sort of the priming the pump for what we saw yesterday and off we went.
AM: Yeah. So you mentioned the greater fool theory. Do you think this is some of GameStop’s early meme investors trying to pump it and get out?
SS: It might be, but on the other hand, there were some social media posts of like, see, I held this thing down to nine and I’ve had it for years, and I’d like to think that some of these people, especially as the stock is now approaching 50, 60, I’m not quite sure where it is as we’re speaking, but by all means, if a stock is up 500% on no fundamental news other than that a key person posted a meme, that’s probably a good time to take a profit. You could argue it’s a good time to short it, but if you thought it was a good time to short it yesterday at 30 and then it’s at 50 or 60, obviously that’s not the best trade. So maybe you don’t want to get in the way of the freight train, but you might wanna do what AMC did, which was recognize that their stock was up big and used it as an opportunity to sell. AMC, for better or worse, I think has been effective at embracing their meme stock status. And when the stock has had big bounces, it has sold into them. I think that’s why the company is solvent at this point because they had a huge debt load and one of the ways they were able to pay down the debts was by selling the stock when it got hot. They did. So yesterday, the stock’s up another a hundred percent, which the company is telling you that it was a good sale yesterday. But again, this is not the rationality. I wouldn’t be surprised if they sold more. Companies that feel their stock is overvalued don’t sell it in a big way. Apple announced a $110 billion buyback. They’re not selling, so take that in perspective. I’m not faulting AMC. I actually think it’s kind of wise. There’s an old saying on Wall Street, feed the ducks while they’re quacking, and they were quacking really loud yesterday.
AM: Yeah. So the headline I’m getting from you is Sell the meme stocks now.
SS: If you have them, sell them. I’m not suggesting go out and short them because that is a very treacherous trade. There’s so much that can go wrong. Again, when you have a stock that goes up 70% one day, and then a hundred percent the next, I don’t wanna be shorting that. But if you did buy these stocks at good prices, by all means, what are you waiting for? If you have them, I think this is a great opportunity.
AM: Speaking of shorting it, it’s an incredibly volatile time, too. So if you pick the wrong moment, it could go up another thousand percent, who knows, because it’s not generated by fundamentals.
SS: Exactly. This is not basically saying, if we did a discounted cash flow analysis and, you know, this company’s trading at $90 a share, we think the discounted set of cash flows is $80 a share and there’s room for you to shade to the sell side. The company is trading so beyond any fundamentals and so divorced from any historic measures. It’s basically pure momentum, pure enthusiasm, pure social media frenzy. I’m not gonna wag my finger at it, but it also means that unless you’re really, unless you’re both really risk averse and really attuned to the messages that are coming out in social media, probably best not to jump in at this point.
More on GameStop, AMC, and the meme stocks rally
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