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Investment strategy
January 27, 2021
1 min

Avoiding the madness of crowds

January 27, 2021
1 min
Joseph Fiorica
Global Equity Strategist
Aerial view of large crowd crossing road in Latin America
SUMMARY

Retail traders have driven certain stocks sharply higher in recent days. Amid the euphoria, we stress the case for long-term investment based on fundamentals rather than sentiment.


Anyone looking just at index level returns in the past week may be unaware that a small pocket of the market has succumbed to chaos. A horde of internet traders has taken aim at favored shorts among the hedge fund community, rallying countless retail investors and wealthy celebrity tweeters to their cause. If this sounds hyperbolic, it is not. But this episode is also unlikely to have long-term consequences for broader equity markets. Fundamentals-based investing has time on its side. 

Last June, shares of bankrupt rental car company Hertz rallied over 500% in a week, as a group of investors bid up the stock despite clear fundamentals pointing to the company’s ultimate demise. The euphoria did not last. Hertz’ insolvency ultimately prevailed over the speculators.

This month’s craze was initially concentrated in a select few companies, namely GameStop, a video game retailer, Blackberry, a former leading cellphone manufacturer now more focused on software and security, and AMC, the troubled movie theater chain.

All three names characterize a broader group of publically-listed firms with large institutional short bases, but which have for months been favorite long positions among retail traders active on popular investing-focused internet forums. 

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