Hertz and Dogecoin test investor ‘common sense’

Before Dogecoin (DOGE-USD) there was GameStop (GME). And before GameStop, there was Hertz (HTZ), the original meme stock whose bankruptcy last May and resulting zombie price surge (and fall and resurge) defined the original meme stock.

Now, it’s back and better than ever. If you kept your cheap $1.50 Hertz shares from last summer that were expected to be worth zero dollars in a bankruptcy restructuring, you’ll have quadrupled your money. A new deal for the company’s assets would pay shareholders around $8 per share.

From May through June of 2020, Hertz appeared to be chiefly a roulette wheel substitute, a way for people to find some rollercoaster volatility to potentially parlay a stimulus check into two stimulus checks — or more. With enormous volatility swings typically not seen in stocks of tripling share prices in a matter of days, the gamblers sat down at the table.

Due to the boom, Hertz was talking about issuing new stock, and had to warn potential investors that it was worthless — i.e. bankruptcy. While Hertz didn’t issue new stock, a lot of people still bought existing stock.

At the time, most market veterans watched in consternation.

“What you’re getting right now is this great disconnect between fundamentals and finance,” Mohamed El-Erian, chief economic adviser at Allianz, said at the time.

“Clearly there’s some speculative fever going on right now,” Kathy Jones, Charles Schwab’s chief fixed income strategist,told Yahoo Finance.

It didn’t turn well in the near-term. The big price swings that investors were hoping for didn’t materialize and the stock lay dormant at around $1 to $2. Until now. As of May 17, the stock is over $6, up more than 250% in the past 30 days – and around 360% since last June.

After the bidding war to buy the remains of the company, the stockholders are suddenly going to be paid $8 a share and, incredibly, people who bought and held Hertz shares are looking good.

What happens when ‘silly’ investments make a bunch of money

A theme of the past year has been trying to distinguish between the “crazy” investment bets (or theses) we’ve seen in meme stocks and “joke” coins from more serious ones. People like El-Erian and Jones have very good reasons to be put off by meme stocks and joke coins, often because their growth and potential growth are driven by pure sentiment.

That sensitivity and lack of an implicit “this stock will do well because the business has great long-term prospects” can mean that making money on them is all about either timing or a moon shot wager in the case of a real believer in Dogecoin or the Hertz rental car business’ superiority, or that GameStop can actually become an amazing business.

And as anyone with market experience knows, the former is the absolute hardest thing to do. As Ritholtz Wealth Management COO Nick Maggiulli wrote in a blog post recently, market timing is a negative sum endeavor where someone wins and someone else loses, whereas something like asset allocation involves a scenario where everyone can win. As for the moon shots, the classic argument is that those are speculations, not investments.

None of this matters, though, when someone buys a “silly” asset and makes a bunch of money. Either they’ll have been clear-eyed and know they got lucky, or they’ll have a warped investing worldview. When things go well, neither changes.

Last year, Hertz did not do well. Some who timed the rollercoaster perfectly hopped out at the top, but anyone holding the stock in June when activity died down lost money. And at a moment when huge fortunes were minted in mere days, many impatient people cashed out to take the loss and moved on to the next meme stock in the casino rather than have their money tied up.

But the stock’s recent performance turns that lesson on its head. Now, the people who stayed in look smart and vindicated. Their diamond-hands paid off over the weak-willed who sold and the chickens who never bought.

Rental vehicles are parked outside a closed Hertz car rental office Saturday, May 23, 2020, in south Denver. (AP Photo/David Zalubowski)

Rental vehicles are parked outside a closed Hertz car rental office Saturday, May 23, 2020, in south Denver. (AP Photo/David Zalubowski)

Other recent market activity has also changed the paradigm. With a huge crop of investors living through their first bear market and recession in the past year, the traditional slog out of the hole has been completely bypassed. Last year, stocks were at record highs just months after the March bottom in the early stages of the pandemic. While many retail investors doubtless thought the lows were great times to buy — brokerages confirmed lots of retail customers buying the dip— a longer horizon than three months later was probably in their minds. It’s possible that last year has made the young investors feel like a 25-year-old with a motorcycle and a dream.

With Dogecoin millionaires, GameStop millionaires, and Hertz flying high again (the Hertz millionaires haven’t appeared in public yet) it’s even harder than it was last year for speculators to be talked out of a viral investment — there’s just too much highly visible upside, not to mention community for those in the forums.

When thinking back to the fork in the road — to buy the meme stock or not — the best thing to do is to contemplate whether it was a good decision at the time with the information you had. If it was a dice roll, and it won, it’s probably a good idea to recognize that.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

This might be the most disappointing jobs report of all time

Why Morgan Stanley is convinced the U.S. isn’t in a housing bubble

Buffett: It’s ‘corporate fiction’ to say higher business taxes hurt customers

What investors need to do to combat inflation

3 things that saw the highest prices this month

Read Full Article


Latest articles

Related articles

Leave a reply

Please enter your comment!
Please enter your name here