Meme Stocks & Mr. Market – A wealth of common sense

I once had a few American Eagle Jeans, probably 2004-like.

They were cut on boot, had some of those made of holes in it, a bit sad. It was one thing. You had to be there.

The stock has run away since I last set foot in an American Eagle store in my local shopping center:

More than 20 years ago, the stock price crossed the current levels for the first time.

Sydney Sweeney tries to change all of that. The company has been rolled out A new advertising campaign with SEENEY To breathe new life into the brand.

The share raised 15% in a few days after the announcement.

Yesterday Donald Trump posted on social media. The stock had risen another 24%. In one day!

I think we can add American Eagle to the list of Meme shares together with Gamestop, AMC, Hertz, OpenDoor, Kohl’s and GoPro.

Every time a new meme supply drops someone, this photo always places on Twitter:

It is a funny meme.

Fundamentals no longer matter. Value -investing is dead. Why would you even try to understand what more is going on if you have these crazy movements?

I get it.

But I have to stand up here for my fellow.

Benjamin Graham came up with the idea behind Meme shares The intelligent investor. In Chapter 20 of the famous book by Graham, he tells the story of Mr. Market:

Imagine that in some private matters you have a small share that cost you $ 1,000.¹ One of your partners, called Mr. Market, is indeed very mandatory. Every day he tells you what he thinks you are worth interest and moreover he offers offers to buy you out or to sell you an extra interest on that basis. Sometimes his idea of value seems plausible and justified by business developments and prospects as you know them. On the other hand, Mr. Market his enthusiasm or his fears with him running away with him, and the value he proposes seems a bit crazy to you.

If you are a careful investor, leave the daily communication of Mr. Market determine your view of the value of an interest of $ 1,000 in the company? Only if you agree with him, or in case you want to act with him. You may like to be sold out if he quotes a ridiculously high price and just happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas about the value of your participations, based on full reports from the company about the activities and the financial position.

Price fluctuations have only one important meaning for the real investor. They offer him the opportunity to buy wisely when prices fall sharply and to sell wisely when they make a lot of progress. At other times he will do better if he forgets the stock market.

The idea here is still the same as when Graham wrote about it more than 75 years ago. It’s just that now Mr. Market sometimes acts as if he had 13 Red Bulls before the market opens every day.

But the basic principles are still important in the long term, even if there are dislocations in the short term.

The largest shares are, for example, the largest shares for a reason:

Yes, the S&P 500 is concentrated, but that also applies to the share of the profit produced in the top 10. The share of income from these shares has also grown together with the profit of the stock price. Valuation is well above average because these are the best companies in the world.

If competition eats in their profit margins, these shares will stop performing better and shrink as a percentage of the market. Fundamentals still matter.

Take a look at the stock market compared to the income since the end of the Second World War:

There are times when the market is ahead of the basic principles (or behind), but there is a clear relationship in the data in time.

I will admit that the meme share speculation is a bit annoying for a long-term investor like me, but the basic principles also catch up with these names. Take a look at the characters for AMC and Gamestop since the highlight of the last meme -stock raziernia:

To succeed another Graham, Mr. Market in the short -term market a tuner, but in the long term it is a weighing machine.

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¹$ 1,000 in 1949, when this book was published, today looks more like $ 13k.