Meme Stock Investors Missed This Critical Factor

Wondering why GME and AMC crashed? Published By Money & Markets, LLC. May 21, 2024 Published By Money & Markets, LLC. May 21, 2024 [Turn Your Images On] [Turn Your Images On] From The Desk of [Adam O'Dell]( Editor, [Money & Markets Daily]( Meme Stock Investors Missed This Critical Factor (and it Cost Them Big) Money & Markets Daily, It’s human nature to chase “moonshot” stocks. We’re drawn toward volatile opportunities, even if the odds of cashing in are limited. That’s why so many investors dumped piles of cash into “meme stocks” like GameStop Corp (NYSE: GME) and AMC Entertainment (NYSE: AMC) back in January of 2021 — then again [last week](. Practically everyone knew these stocks were a risky investment. But after seeing share prices soar by double or even triple digits, some decided to invest anyway. And in both cases, many Main Street investors ended up losing a fortune over the long run. That’s because one of the core assumptions made by 99% of investors is actually wrong… Risk = Reward? Since the 1960s, the capital asset pricing model (CAPM) became to investors what the Bible is to Christians… It was an unquestionable “North Star” that tied everything in the belief system together. For decades, it upheld its status as finance’s most sacrosanct law, embedding itself deeply into investors' minds. Regrettably, CAPM has now been wholly disproven. And it’s led investors like lemmings off a cliff alongside the high-risk stocks they thought would deliver “high expected returns.” See, the CAPM essentially says there is a positive linear relationship between a stock’s volatility and its expected future return. The more volatile the stock, the higher its expected future return. Many investors have taken this to mean: “If you want to earn a higher return, you should invest in stocks with higher volatility.” That’s why traders dove right back into GME and AMC last week. And why they lost a fortune on regional banks like New York Central Bank (NYSE: NYCB) over the last few years. These stocks are certainly volatile, but digging deeper reveals that this doesn't always work in our favor. --------------------------------------------------------------- [Turn Your Images On]( From our Partners at Banyan Hill Publishing. [AI Hell Will Break Loose [June 30, 2024]]( The White House just released a disturbing report on AI — and the immense danger it poses to you, me and millions of other hardworking Americans. That’s why Ian King has stepped forward to reveal what you can do to avoid this threat … and even how you can profit from it. [Here’s everything you need to know...]( --------------------------------------------------------------- Slow and Steady Wins the Race Dozens of academic studies demonstrate the market-beating premium investors can earn by investing in low-volatility — not high-volatility — stocks. This directly contradicts CAPM. And the evidence for this stretches back more than 90 years, so it’s no fleeting anomaly. The chart below shows the compound return of low- and high-volatility portfolios from 1929 to 2020. [Turn Your Images On] The existence of this counterintuitive relationship between volatility and expected returns has a few explanations… For one, most investors have an aversion to using leverage — which is when you borrow money to invest in a position larger than the cash you have on hand. In the absence of that aversion, it would be rational for an investor to build a portfolio of low-volatility stocks … and then lever it up conservatively so that it matches the return of a higher-volatility portfolio. But “leverage” is a dirty word to most folks. Instead, investors who seek higher returns forego that option and invest in stocks with higher volatility — as they did with moonshot stocks like GME or AMC. How has that played out for those two tickers since last week's lightning-quick rally? Shares of AMC are trading 35% lower after peaking last Tuesday at $6.82, and shares of GME have lost almost 60% since last Tuesday's top! This is a studied and documented psychological phenomenon… It’s called the “lottery effect,” and it explains why some investors are so eager to take on a large risk in exchange for a slight chance of making significant returns. However, as the chart above shows, this strategy simply doesn’t work in the long term. Keep Things in Perspective Paid-up Green Zone Fortunes subscribers already know that my team and I consider a stock’s volatility before we recommend it. In fact, “Volatility” is one of the six factor categories that my Green Zone Power Ratings model is built on. We don’t always seek stocks with the absolute lowest volatility, but we most certainly avoid stocks with the highest volatilities … since doing so is a consistent and effective strategy for boosting overall returns. In many market environments, it pays to take on some additional volatility. This means that a stock that ranks in the middle of the pack in terms of volatility may indeed be worth the risk and outperform some of the lowest-volatility stocks in the market. That’s precisely the case with the newest addition to my Green Zone Fortunes portfolio, a stock that’s quickly become the [darling investment of Wall Street’s biggest Tech Titan…]( To good profits, [Adam O'Dell]( Editor, [Money & Markets Daily]( --------------------------------------------------------------- [Turn Your Images On] 1 Government Trick Might Not Work This Year Social Security recipients look forward to their cost-of-living adjustment (COLA) every year. The Social Security Administration (SSA) calculates the COLA for benefits based on the Consumer Price Index for All Urban Wage Earners and Clerical Workers (CPI-W) for the previous year’s third quarter. Now, you might have noticed something different in that last sentence. The SSA uses CPI-W instead of the more widely followed Consumer Price Index for All Urban Consumers (CPI-U). It's probably an innocent mistake by someone drafting the law establishing COLA — but it's been a costly error. CPI-W is usually lower than CPI-U. This means annual COLAs are lower than they would be if the SSA used the more common definition of inflation. However, this year might be different. In the [Federal Reserve’s chart]( below, CPI-W (the red line) is slightly higher than CPI-U (the blue line) for the past two months. If this trend continues through September, seniors might get a break and see a higher COLA in 2025. CPI-W Is Slightly Higher Than CPI-U [Turn Your Images On] [(Click here to view larger image.)]( --------------------------------------------------------------- Check Out More From Money & Markets Daily: - [THIS IS THE NEW NORMAL]( - [A "BULLISH" CYBERSECURITY STOCK FOR 2024]( - [BORING IS BULLISH: JUST LOOK AT THIS SHIPPING ETF'S RALLY]( --------------------------------------------------------------- [Turn Your Images On]( Privacy Policy The Money & Markets, P.O. Box 8378, Delray Beach, FL 33482. To ensure that you receive future issues of Money & Markets, please add info@mb.moneyandmarkets.com to your address book or [whitelist]( within your spam settings. For customer service questions or issues, please contact us for assistance. The mailbox associated with this email address is not monitored, so please do not reply. 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Likewise, past performance is no guarantee of future returns. Certain investments carry large potential rewards but also large potential risk. Don't trade in these markets with money you can't afford to lose. Money & Markets permits editors of a publication to recommend a security to subscribers that they own themselves. However, in no circumstance may an editor sell a security before our subscribers have a fair opportunity to exit. Any exit after a buy recommendation is made and prior to issuing a sell notification is forbidden. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. (c) 2024 Money & Markets, LLC. All Rights Reserved. Protected by copyright laws of the United States and treaties. This Newsletter may only be used pursuant to the subscription agreement. 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