Did you hear the one about the "apes" who destroyed the Citadel? No you didn't; and you won't. But you will hear a lot about this "army" that's going to make the giant hedge fund "pay," as they so loudly and proudly claim.
The big enemy of free and fair markets has become visible. And he's going down. That may eventually become true in some regard. But there's a bigger problem for the "ape army" in solving the riddles of markets: the biggest enemy is actually invisible -- because he or she lies within. Let me explain... There's a growing body of data about how people get mentally trapped in conspiracy theories, and how deeply. Part of the attraction is the intellectual challenge. The more elaborate the web of intrigue, the deeper we go down rabbit holes seeking the answers to more mysteries, or simply confirmation of the new beliefs we've adopted. And when we believe that there are nefarious forces working against us, and that there are layers of secrecy and lies protecting "them," the cause becomes a moral one. In many respects, a good theoretical war against a mythical enemy has the same appeal as do cults and their charismatic leaders. The causes become all the more enthralling when we can share them with others in euphoric bonds of brotherhood and enlightenment. It's how revolutionary mobs form, when we feel we are part of something bigger than ourselves. But it's nothing markets haven't seen before. Indeed, long before Karl Marx and Vladimir Lenin ignited their passionate revolutions, a wonderful study of crowd psychology was published in 1841 titled Extraordinary Popular Delusions and the Madness of Crowds by Scottish journalist Charles Mackay. From tulips to Bitcoin, history is full of lessons. Euphoric Revolutions Rarely End Well And so it is with the new stock market revolution in so-called meme stocks, those financial stories of company battles that rally armies across the market cybersphere. I first addressed the parallels between meme stock madness and our ancient needs to both belong and transcend in this piece from early February... GameStop Lessons: Becoming a Savvy Investor with ETFs And last week, I talked about different aspects of the mania as it surrounds one stock in particular... AMC Worth 10X Sales? Not So Fast Roaring Kitties In that video and article, I go over the math that explains why small traders should pay more attention to the valuation metrics of a movie theater company than the emotional and ephemeral "call to arms" that might make them money... if the stock goes to $100 and beyond, as they win the war against the evil hedge funds. If you follow my Twitter feed @KevinBCook, you get a lot of updates on the madness. Like how and why AMC Entertainment ( AMC Quick Quote AMC - Free Report) traded more dollar-volume in early June than Tesla or Amazon ( AMZN Quick Quote AMZN - Free Report) -- in the history of ever! And how the "insiders" like company executives and officers have been selling their shares in a big way. You can get an update on the latest transactions, by which top brass, from our own insider expert Tracey Ryniec... AMC Insiders Are Selling: Should You? Watching the Ape Army on StockTwits Still Worries Me I don't use Reddit for any reason. Besides apparently not being that cool, I follow a big and impressive collection of science, technology, education, philosophy, and investing junkies on Twitter to keep me well-enlightened (and out of Reddit rabbit dens). Call me primitive, but I find the Twitter feed structure much more amenable to absorbing content and new info. So I don't follow the mindless rabbity musings of WallStBettors, or whatever they call themselves. But I do still occasionally frequent the "Twitter for traders" called StockTwits, or ST for short. And since last week's massive "game-stopping" move in AMC shares from $26 to $72, the message feed for AMC has been off-the-charts in two ways: (1) speed, at dozens of messages per second, and (2) insanity, at the extremity of cultish beliefs that have nothing to do with investing and trading realities. In the video that accompanies this article, I describe some of those mad beliefs of the crowd that keep getting perpetuated by message posters whom we could reasonably question the intentions thereof. And, it's worth repeating: I don't mind at all if someone gets rich off of a short squeeze. I sincerely hope the ape army wins, AMC goes to triple digits, and Citadel or other "hedgies" lose on any short positions they may have. All I'm trying to point out is that this is not a reliable strategy to make money as a trader in markets. Not only is the "crowd" effect of pushing, holding and cheerleading a stock higher unsustainable, no army will be there to save you when things go south. Markets work when large investors finally catch on to the value-growth combination you have discovered early on, say in NVIDIA ( NVDA Quick Quote NVDA - Free Report) at $25 in 2016, or Tesla ( TSLA Quick Quote TSLA - Free Report) at $50. Markets are about you against the world, with your research efforts, your probability and risk calculations, and your rules, systems, and routines for making decisions. Yes, of course, you can rely on the research of others. But you can't ask them to "HOLD" and "NEVER SELL" as a repeatable, winning strategy. If you go back to my AMC Worth 10X Sales? article, you can start to evaluate the investment more objectively. Then if you still decide to take the risk of riding the waves of the revolutionary fervor, by all means do so. Be a Surfer, Never Hating or Blaming the Ocean 20 years ago when I used to run seminars for traders and teach them how to think in terms of probabilities, and how to deal with randomness and the risk of ruin, I made up a mantra that was easy to remember and encapsulated the essential perspective of one's place in the market... "I'm just a surfer looking for the next wave, never hating or blaming the ocean for being itself." So here was my message to the mad StockTwits crowd on Wednesday morning, an hour before the stock market open, as they watched their beloved AMC try to get back above $55... $AMC If you want to gain insight about the psychology of trading, just read the #AMC feed on ST. Every post turns the essential challenge of markets on its head, from oneself as the enemy to conquer to “we are an army at war!” This may work once or twice, like catching a good wave as a new surfer. But the ocean doesn’t care, and you will never win consistently without self-mastery. There is no army to help you on that solo journey. As I've read many hundreds of messages on the ST AMC feed over the past week, several "belief memes" stand out. They don't call their actions a "cause" nor a "revolution." They use hipper, more powerful terms like "movement" and "fight." In fact, they are an "ape nation" taking on the bad dudes of Wall Street, like Ken Griffin at Citadel. But, again, some things never change. Like human behavior when faced with visions of heaven. Take this Twitter exchange I had with the excellent professional trading coach Steven Goldstein of the AlphaMind podcast, from May 4... @AlphaMind101: Why do people with no skin in the game and no axe in crypto get so fired up about Bitcoin and other cryptos? I don’t think any other asset class does this. (Or does it?) and I assume we are all advocates of open markets and know how they can behave. @KevinBCook: Crypto has both revolutionary & religious appeal. We know how those human belief dynamics play out with zealotry and blissful faith. Humans seek to find something perfect, ordered, & mysterious and BTC seems to fit the bill for 'overthrowing the corrupt system' and being 'pure.' Can you see how the same human behavior dynamics are at work in the AMC army? Get Your Trading Mind Out of the MUD Finally, before I recorded my quick video, I listened in on the YouTube livestream of one Mr. Matt Kohrs. There were 50,000 viewers watching! The comment stream there was just as cray. Including from him, with thoughts about "winning" because the Ape Army held a stock above a certain price level. The same MUD (Maniacal Unwavering Devotion) we saw described by the astute TD Ameritrade Network anchor Oliver "OJ" Renick about Bitcoiners in May is ever-alive in crazy meme-sters like AMC this week. I watched another video just published by YouTuber Jeffrey Forbes (43K followers) on the morning of June 9 and it already had 13K views (by noon!) where he said "We've come so far, why would we want to give up now?" By Wednesday evening, the same video had 33K views! Here was another prophecy from his "business" pulpit as he tried to goad AMC "hodlers" into being as tough as GameStop ( GME Quick Quote GME - Free Report) playas: "If we already pushed this far with the hedge funds, if you let them brush this under the rug, and let this manipulation happen, chances are you will be broke for the rest of your life." Strong words from a playa who spoke of AMC "holding the $50 range." A precise psychological price level is not a "range" as any 5th-grader who keeps up in math will tell you. Honestly, I would love to see AMC go to $100 and make a million hearts happy about hitting Smaug in his missing chink. But I don't think it's going to happen because the "price" of AMC is far higher than it should ever be, even if it opened the first theater on Mars. My primary concern is all the new traders listening to this silliness and believing this is how they will win in markets. I picture the kids using college money or the single mom using her life savings. Money they may never see again. Not only is this movie theater company not worth over $30 billion, the smart HF money is way smarter and way more quantitative. They can precisely dial-in the risk/reward at every price turn and use options and swaps to trim or amplify it all. And they rarely must act on exaggerated emotion, feverish fanaticism, or idolatrous ideology. You can rightly blame and shame a hedge fund titan like Griffin for trying to drive AMC to the brink of bankruptcy. But you can't actually hurt Citadel or any other hedge funds. Their pockets are too deep, too quantitative, too emotionless. But even if you could, it wouldn't be worth it. That's my main message here today. Learning to trade is about conquering the biggest enemy in markets: oneself. You do that with rules, routines, and systems that build consistency in one or various strategies over many hundreds of trades where your "expected value" is nicely positive. And if you learn to manage risk within the realities of uncertainty and randomness, you will avoid that account fatality we call ruin. Learn what that means and you will be a million miles ahead of the meme cult leaders. Kevin Cook is a Senior Stock Strategist for Zacks Investment Research. He cut his trading teeth in the pits of the Chicago Mercantile Exchange before becoming an interbank currency trader dealing over $100 million per day. He is the creator of the trader training simulation known as The Scylla & Charybdis.
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