The Psychology of the 'Meme Madness'

With Robinhood getting crushed and meme madness celebrating the peak of its insanity, this quick note in a book explains exactly what happened... Here we are, a year after the fact, and we're still talking about "meme madness." Or at least some of us are. It was a moment you remember, even if you weren't […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Psychology of the 'Meme Madness' By Herb Greenberg With Robinhood getting crushed and meme madness celebrating the peak of its insanity, this quick note in a book explains exactly what happened... Here we are, a year after the fact, and we're still talking about "meme madness." Or at least some of us are. It was a moment you remember, even if you weren't usually focused on the markets, because by that point, it seemed as though almost everybody was. The crazy moves in the market had become headline news, and everybody knew somebody who knew someone else whose kid just hit the jackpot – if not on crypto, on a stock nobody had ever heard of, or one that had been given up long ago for dead. The rest of us felt like chumps, and to think, while it was impossible to say exactly when it would all blow up, it was all predictable. Or, as Spencer Jakab puts it in his new book, The Revolution That Wasn't: GameStop, Reddit and the Fleecing of Small Investors... You need a solid grasp of human psychology, which has hardly changed in the last fifty thousand years, to dissect a financial mania. What a mania this one was... And as editor of the Wall Street Journal's "Heard on the Street" column, Jakab had a ringside seat as this mania played out. But to understand why it happened, he dove into the psychology behind the madness. As he told me as we direct messaged back and forth on Twitter... I've been fascinated with the psychology of manias for a long time, but the way that these apps put the tendency on steroids is something else. Those "apps," of course, are the likes of Robinhood Markets (HOOD), which offers commission-free trading from the phone in the palm of your hand... making buying stocks feel no different than playing a lottery game or placing a bet on DraftKings (DKNG). And all of it was fueled by the one thing no other previous mania had... social media, or to be more specific, the cheerleading and jeering, mostly on Reddit's WallStreetBets, but elsewhere. Central to it all – as the title of Charles Mackay's 1842 classic on manias put it so well – were the "extraordinary popular delusions and madness of crowds"... Meme madness was fueled by the same thing that drove up tulip prices in the 1640s, shares in the South Sea Company in the 1700s, stock prices in the 1920s, and the dot-coms... good old-fashioned FOMO, or the fear of missing out. It's a core human emotion... watching other people have fun, live better lives, or make more money easily. And that plays right into something one psychologist quoted by Jakab dubs "the illusion of control." It's the reason people think they can beat Wall Street by doing it themselves, even if they're likely to fail. As Jakab writes... It is because they hear about others getting rich, fear missing out, and then overestimate their ability to guess something that is almost completely random – the performance of individual stocks. As with all manias, for each stock in meme madness, there were ringleaders... Back in the dot-com bubble, there were often anonymous posters on the message boards of Yahoo!, America Online, and the Motley Fool, and some were more articulate and convincing than the next guy/gal... and everybody would hang onto that person's every word. Back then, when I was a daily columnist at the San Francisco Chronicle, I was public enemy No. 1 at one point thanks to my nonstop columns on Iomega, arguably the poster child of that era's mania. (Oh, and by the way, it went way up, sucking in even the periodontist at the time... Just before it imploded.) This time around, it all started with posts by an articulate, convincing, and (at the time) anonymous overnight social media star, whose claim to fame was sharing screenshots of his trading records on GameStop (GME). That gave him instant credibility, which a psychologist quoted by Jakab thought was all that was needed... Once enough attention is captured, it can exert influence on real behavior. In this case, the screenshots provide what is known as social proof, which motivates other people to take the same action in ambiguous situations. Add in a frenzy surrounding the seemingly get-rich-quick onslaught of special purpose acquisition company ("SPAC") IPOs – all of them with nothing to their names but a dream – and this mania secured its place in stock market-mania history. Jakab summed it up best in a recent article headlined, "[How Robinhood Investors Robbed Themselves]( Following the crowd works – until it doesn't. We humans... when it comes to manias, we always think it's different this time. Spoiler alert: It never is. --------------------------------------------------------------- Recommended Links: [Whitney Tilson goes public with HUGE 2022 prediction]( Nearly 200,000 folks signed up to witness history as Whitney Tilson teamed up with three financial legends on camera. If you missed this event, you'll be shocked to learn what's actually happening in the markets right now. [You'll understand why when you see this](. --------------------------------------------------------------- [Bombshell opportunity: 'America's Next Big Monopoly']( A little-known company is making all the right moves to destroy the competition in today's hottest industry. The media is already comparing it to the biggest success stories of our times. While Forbes says this company could be the next Apple or Microsoft, Barron's says this could be the "next big thing." Bill Gates has already invested millions into this company. So has tech investor Cathie Wood. If you're looking for massive gains... [this could well be the biggest opportunity of your lifetime](. --------------------------------------------------------------- Meanwhile, for the fun of it, let's juxtapose the craziness of the crowds with the way one serious investor anguishes over which stocks to buy... In the process of writing about memes, I stumbled on a copy of the most recent annual letter from Baupost Capital, run by legendary investor Seth Klarman. To explain how his firm picks stocks, he wrote... Warren Buffett famously noted that investing resembles poker in an important respect. In a poker game, when you look around the table and can't identify the patsy – the rube invited by the more skilled and experienced players – then it's probably you. And so, for each investment we evaluate, we consider whether we could be at an information disadvantage; we never want to be the patsy. We also regularly ask ourselves, "Why does this apparent opportunity exist? What is the market inefficiency? Have we inadvertently lowered the bar, causing investments to appear more attractive than they really are? If a particular opportunity is truly compelling, why haven't our competitors jumped in to correct the apparent mispricing?" All these questions must be answered to our satisfaction before proceeding with an investment. It might be worth remembering next time you hit "buy." From the mailbag... My [essay]( on Warby Parker (WRBY) struck a nerve... "Thank you for highlighting this nauseating 'virtue signaling' political correctness. A stock to ignore, clearly. Please highlight others [that are] doing the same when you have the opportunity." – Colin S. Herb comment: Thanks, Colin. It's certainly a warning. I know folks who think Warby Parker is a screaming buy here, others who think it's a screaming short. In the end, the bottom line is... Is it a good business? And are they executing? "Hi Herb, Good article. A CMO [chief marketing officer] for an ESG [environmental, social, and governance] company once told me that their motto is 'Be it. Do it. Say it.' If you do the first two, the third takes care of itself. Too many companies like to 'Say it' but don't 'Do it' or 'Be it.' Sounds like Warby might be one of those. Actions speak louder than words!" – Frank G. Herb comment: Frank, hard to argue with that CMO. In my mind, if you're an ESG, you should strive for exemplary disclosure. I don't think that's too hard a concept, and if they don't want to disclose, the question should then be... why? And if the answer is that's immaterial, well, then maybe the company isn't as ESG as it claims. "I just read that article you did about Warby Parker and how it's touting its charitable giving of eyeglasses or money for vision care. This brings up a question that I've had on my mind for a long time. "So companies like this, or like TOMS shoes, that when the customer buys a pair of their rather expensive shoes, the company gives a pair to somebody in need; or Bombas socks and now underwear which are expensive products that the customer pays for that the company then gives a pair of socks or underwear or whatever. It appears that the customer is who is forking over the money... to begin with so the company can make this donation. But then isn't it the company that's taking the charitable contribution and donation to its financial benefit and 'appearance'? "Example: I buy a pair of Bombas socks for $20. They send me one pair, and then they donate one pair. Didn't I just pay for that donation, but the company is going to take credit for it?" – Vivian L. Herb comment: Vivian, you raise a great issue. Without disclosure, you don't know what "one pair" really is. Is it cash in the form of the manufacturer's cost of the item? Is it at retail? Or are they really giving away an actual pair of socks? It's hard to quibble with companies that are philanthropic. Still, in my view, if a public company is public and is marketing itself to investors for its benevolence, then it should disclose details surrounding its donations, including the dollar amount. Bombas is private, so it's off the hook. "Herb, love your work and that of the rest of the Empire team. Whitney has put together a great team. Regarding the Warby Parker piece, if someone goes out of their way to tell you they are honest, they probably aren't. The whole ESG movement doesn't smell right to me. Virtue signaling doesn't actually show virtue by the common understanding of what virtue is. Thanks for shedding light on this topic." – NT N. "Hi, Herb, as for your question: 'Should companies that intentionally market themselves to investors as best-in-class in environmental, social, and governance ('ESG') factors be required to detail how much they spend for the greater good?' "My answer is a definite Yes. "Thanks for the article." – Rob D. Herb comment: NT and Rob, thanks for your kind comments. Hard to disagree with either of you. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg January 28, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](