Viral investing is the practice of investing in meme stocks popularized by social media platforms, and it’s caused multiple earthquakes on Wall Street in these post-Covid years. By sharing information and strategies quickly and easily on platforms such as Reddit and X, investors can create rapid traction and a surge in interest in a particular stock. The effect on that stock price can be nothing short of meteoric – the 2021 GameStop short squeeze is a prime example. This is a phenomenon based on trend rather than fundamental analysis, and it carries all the risks inherent to that kind of scenario.

Cult stocks, on the other hand, have been around for a while. They are also backed by investors’ faith and belief instead of by the financial fundamentals that we use to establish the stability and health of an asset, but the investors tend to be passionate early adopters of niche products or services. They might be nothing more than smoke and mirrors led by a charismatic founder convinced of a future market where there is none, but occasionally they do turn out to be diamonds in the rough with excellent returns for the farsighted investor who sticks around for the long run - think Apple. 

Social media-fueled phenomena

Meme stocks and viral investing are recent phenomena fueled by social media. Online communities of investors united by a common interest in a particular stock contaminate the wider investment community, creating that surge of interest that sends a company’s shares skyrocketing overnight as a meme stock. The volatility of the situation creates significant risk - the ascent to the moon becomes a painful crash landing if that interest wanes, leaving investors with significant losses. Don’t fall for pure virality unless you’re looking for a very short-term, immediate-gratification-type of investment and you are able to get out quickly.

At particularly high risk, when it comes to meme stocks, are novice investors who lack knowledge and experience, and this, unfortunately, is precisely the type of investor who is most likely to follow social media sentiment and strategy advice without putting in the legwork of due diligence.

Meme stocks do provide the chance for very high returns, and very quickly, so I wouldn’t write them off completely just because of the risk element. After all, volatility is an inherent feature of investing – an investor accepts a mitigated risk, in return for the future reward of long-term returns on capital. But there is a big difference between investing and gambling, and that line is perhaps more easily blurred with meme stock than any other type of asset.

Fear of missing out on an apparently lucrative investment opportunity can result in impulsive and irrational decisions based on information received without verifying the source or doing the necessary due diligence. FOMO is a widely recognized phenomenon in both the crypto and meme stock worlds, where social media is a powerful influence on investor behavior and markets move spectacularly fast.

Social media influence

The lack of financial education in schools has driven Millennials and Gen Z to use social media for their financial information. Not so surprising for those generations who have grown up online. “Finfluencers” on social media are now racking up millions of views for their stock-picking videos, regardless of the accuracy of the information or the qualifications and motivation of the content creator.

Social media’s influence on young investors is not to be underestimated - 76% of Millennial investors and 73% of Gen Z recently told Nasdaq surveyors that they were likely to use social media as a resource when making investment decisions. At the end of the day, the returns from Finfluencer stock picks aren’t necessarily any better than a good ETF, and they come with the added danger of the low-barrier online environment where the advice could be questionable.

Insider information vs misinformation

It’s a double-edged sword. Social media and internet communities can provide solid ‘insider’ information before the general public gets wind of it, but it’s also an unregulated environment where unverified and possibly inaccurate information can spiral out of control. 

How to spot the difference? If your due diligence on a meme stock reveals solid fundamentals that would make it a good long-term investment in any case, if the economic climate is right and it fits into a well-diversified portfolio, then it could make sense to climb on board. Obviously, it’s even better if you can buy into a potential meme stock just as it’s taking off, but if you’ve spotted something that’s already on its way into orbit it can still be worth investing in, as long as it ticks all the boxes on the due diligence and still has some climbing potential.

Tips of going viral

As an investor, you may one day find yourself in the fortunate position of holding stocks that go viral. I can speak from personal experience here – the Wonderskin all-day lip stain that exploded on TikTok last year is now so popular that one is sold every 15 seconds, and that award-winning cosmetics brand was already in my portfolio. Feels good, but don’t just sit back and enjoy the ride. It’s time for action.

Do the research – companies and products go viral for different reasons, so why did this one take off right now? Reassess the market to establish if this is the beginning of a new trend or a flash in the pan. Is this virality sustainable as the basis of long-term success for the company? In which case you might consider buying more of the same stocks, depending on the business model and market saturation.

Research the competition because this could be a good time to start buying into them as well, but before you invest in something similar, make sure the market is sustainable. And always diversify – the old adage never fails, so don’t put all your eggs in one viral basket.

By Evgeny Kireev

Keywords: Innovation, Culture, Entrepreneurship

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