Hedge Fund Manager Warns: Beware the Meme Stock

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In a conversation with CNBC, hedge fund manager David Neuhauser warned against following current investment trends, the “Robinhood phenomena” and the “bubble equity and bond market.”

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Neuhauser refers to the investment trends of the past year which have seen first-time investors flooding the market with pent up cash into meme stocks like Dogecoin and Reddit-fueled stocks like GameStop.

These new investors entered the market during a time where equities markets in general roared past expectations and saw returns not seen before for these types of investment moves. For the first time in history, a group chat dedicated to stock tips of Reddit singlehandedly drove the price of a stock up 1,500% — it crashed the popular trading platform Robinhood and forced short-selling hedge funds to fold.

GameStop lends itself a useful example to the investing frenzy over the past year. “A number of these investors — whether it be in crypto, whether it be in equities, whether it be in meme stocks like GameStop – they typically are naïve, they’re early investors, they don’t calculate risk very well,” Neuhauser told CNBC’s “Squawk Box Europe.”

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High returns and a roaring stock market makes it easy to forget the amount of risk associated with these kinds of trades. Cryptocurrency of all kinds are extremely volatile and some of the riskiest assets investors can get into. That didn’t stop Dogecoin though from skyrocketing almost 15,000% over the past six months.

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Dogecoin, which started as a joke based off of an internet meme in 2013, has recently been endorsed by Elon Musk and Mark Cuban. With its price currently hovering around 57 cents, Cuban believes it will eventually hit $1, while Musk recently announced his company, SpaceX will start accepting the coin as payment.

Neuhauser states that these kinds of investors “jump on those trends, and that leads to much higher prices and speculation — but ultimately fundamentals do matter.”

Fundamental investing — investing in a company for their fundamentals value — focuses on classic cash flow, debt to revenue ratios and evidence-based earnings report evaluations. Investing in, a product such as Dogecoin on the other hand, is purely speculative.

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Neuhauser named three alternatives to meme stocks that he believes are better built for longer-lasting returns. All three are in the commodity space. They are: Jadestone Energy, Sibanye Stillwater and AEX Gold.

He also expressed interest in copper. Copper has been a growing area of interest for many large hedge funds as of late. As the world goes more green, emissions-friendly products typically rely on copper in their manufacturing processes. The move towards green products and green investing have put copper on the map as the hot new commodity to own.

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Average investors would do well to hold off on popular internet-craze stocks and stay steady the course on traditional investing values. This means investing in companies that you truly believe in, have reasonable balance sheets and provide value to their shareholders with concrete revenues and profit margins.

This doesn’t mean to not stay up to date on what happens in the market — there are always opportunities for the right type of investor to make a quick buck. Copper for example, 5 years ago, would not have been as attractive of an investment as it is today but both buzz, and importantly value, have increased its price. The bottom line is that it is important to recognize the difference between gambling-investing and value-investing and to know where you want your financial future to lie.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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