Should you hop on board when a stock shoots to the Moon?

Investors should try to invest in good, solid companies at the right price, financial experts say

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For most people, investing is a long-term, slow-rolling process that involves accumulating wealth over years and decades. Not always, though.

There are times when investors spot an opportunity to make fast money and these moments can be hard to resist. Especially when others are making tall profits in short order.

That's when investors are prone to lose their heads, as we saw in the mania over so-called meme stocks in 2021, when business including GameStop and AMC Entertainment rocketed to the Moon, then crashed back to Earth.

There will always be a market for this kind of stock, and the internet keeps throwing them up, with the frenzy fuelled by free trading apps including Robinhood and social media forums such as Reddit subgroup WallStreetBets.

Some early birds will make fortunes. Latecomers will bank huge, real money losses but that won’t stop them trying.

Meme stocks haven’t completely gone away but keep returning in different shapes and forms, with another revival this summer.

FinTech firm SoF, software maker Palantir and homewares company Tupperware Brands this year saw their shares double, triple and quadruple, respectively. Car retailer Carvana is up 457 per cent in the past six months.

Rapid growth stocks like these play on the imagination. Just think how much you’d have if you invested $10,000 in them before they took off. Then think how much you might lose if you invest $10,000 just as they peak.

Vietnamese electric vehicle start-up VinFast Auto, which listed on the Nasdaq as a special purpose acquisition company (SPAC) on August 15, is the latest to whip investors into a frenzy. Its shares soared from $10.45 to $82.45 in less than two weeks, a rise of 689 per cent.

Briefly, VinFast was the world's third-biggest car maker after Tesla and Toyota, with a market capitalisation of a staggering $191 billion.

The main reason for the crazy rally was that 99.7 per cent of the company is controlled by one man, Pham Nhat Vuong, Vietnam's richest person. Investors were scrapping over the remaining 0.3 per cent.

Now, many are fighting to get out, with the stock crashing to about $34 and still falling. Its market cap stands at $80 billion, down more than $110 billion. Someone is at the wrong end of a very costly trade.

VinFast is not the first EV maker to find itself blowing bubbles. The same happened to a company called Nikola, which got caught up in a Robinhood frenzy two years ago.

Its shares surged from $10.80 on April 3, 2020, to $65.90 in about two months. Today, investors can buy them for $1.18. There are few takers.

In July last year, AMTD Digital, a Hong Kong-based digital entertainment platform developer, floated in the US with just 19 million shares and saw them fly more than 21,000 per cent at one point.

The company issued a statement saying it could see “no material circumstances” for the activity. The frenzy ended just as quickly. Today, its shares trade at $5.60.

Another Hong Kong-based company, FinTech solutions service provider RC365, whipped up a storm after debuting on the London Stock Exchange in March.

So far, it’s only published one annual report and a half-yearly follow-up, and recently posted a loss after tax of HK$3 million ($382,000), after turning a HK$500,000 profit the year before. It’s shares were up 600 per cent at one point.

While it can be enticing to bet on a stock in the hope of banking quick gains, the risks are equally high, says Carolane de Palmas, an analyst at ActivTrades.

“Rapid price movements are rarely sustainable. If the fundamentals aren't that robust, the hype will soon fade and the share price will decline, often sharply," she says.

VinFast is a good example of that. At its peak, the EV maker was worth more than Ford, General Motors and Volkswagen combined.

Yet, in 2022, it sold just 24,000 cars globally. By comparison, Ford sold 4.2 million, GM sold 5.9 million and VW posted sales of 4.56 million.

VinFast made a loss of nearly $600 million in the first quarter of this year and that is expected to widen as it increases production. In the same quarter, Ford made a $1.8 billion profit, GM made $3.8 billion and VW posted €1.74 billion ($1.89 billion).

Ms de Palmas says many stocks that rocket often trade on thin volumes after a small public float, which renders them particularly sensitive to price fluctuations.

“The restricted number of shares available for trading results in higher volatility," she says.

Once the speculators pile in, it’s time to get out. “Only experienced traders with a high risk tolerance should get into this kind of trading," she says.

Some call chasing hot momentum stocks investing. Others say trading. Or it may just be gambling. “Whatever you call it, there’s a danger you could lose a lot of money,” says Russ Mould, investment director at online trading platform AJ Bell.

The prospect of sudden riches has always played havoc with the human brain, stirring up emotions such as the fear of missing out, known as Fomo.

“Financial markets are often at their most treacherous when making money looks easiest. Just think of the peaks in 1999 or 2007, or the frenzy over GameStop, AMC, precious metal silver in early 2021,” Mr Mould says.

Financial markets are often at their most treacherous when making money looks easiest
Russ Mould, investment director at online trading platform AJ Bell

Investors need to keep their discipline and make sure any purchase fits with their overall strategy, target returns, time horizon and appetite for risk, he says.

Most private investors should try to invest in good, solid companies, with a strong business model, competitive position, financial strength and management acumen, and, crucially, buy at the right price.

“Over time, these companies will rack up the profits and pay out dividends that can be reinvested. Although this isn’t without its risks, either,” Mr Mould says.

Trading, by contrast, involves trying to time money movements and second-guess where markets and stocks will go next, and it’s risky.

“If anything goes wrong, or the hot money simply moves on to the next short squeeze, the lofty valuation of the stock could provide little or no downside protection," he says. "If the shares went up for little or no reason, they could go down in the same way and just as quickly.”

Vijay Valecha, chief investment officer at Century Financial, says investing in early stage companies does offer the potential for substantial gains, particularly if investing in emerging industries and innovative technology.

“As with any investment, you have to balance the potential risks against the potential reward," he says.

Mr Valecha advises sticking to basic principles when faced with what may purely be a fad. These include:

  • Defining your goals: are you pursuing long-term growth or aiming for short-term profits?
  • Doing your research: understand the company's operations, financial performance and competitive positioning before parting with your money.
  • Not being impulsive: draw up an investment strategy and stick with it.
  • Working out what you can afford to lose: never invest money you need for essentials and never, ever borrow to invest.
  • Diversifying your portfolio: distribute your investments across a spectrum of stocks to mitigate risk.
  • Being patient: successful investing needs a long-term perspective. Rapid wealth accumulation is seldom the norm.

Investors can draw up all the investment rules in the world but there will always be an exception.

In this case, it's Tesla. Elon Musk’s electric car maker has been behaving like a meme stock for years. Over the past five years, it's up an incredible 1,370.54 per cent. That would have turned a $10,000 investment into $147,054.

Every time it seems to be ready to crash down to Earth, back it comes. The stock is up 137 per cent in 2023. Some meme stocks are built to last. And while they do, investors will keep shooting for the Moon.

Updated: September 06, 2023, 5:30 AM