- GameStop and AMC executives are going along with the meme stock game, risk expert Richard Smith said.
- "They're trapped, and they have to play the game because that's what they're actually getting paid to do," he told Insider.
- The meme stock comeback was partly driven by a psychological trick called the "anchoring bias", he said.
Executives in companies like Reddit darlings GameStop and AMC are playing along with the hyper-speculation behind the meme stock trade, according to market risk expert Richard Smith.
"They are in this game now," Smith told Insider in an interview Thursday, referring to leadership in companies whose stocks get a boost from meme-trade mania.
"They're trapped, and they have to play the game because that's what they're actually getting paid to do."
GameStop chairman Ryan Cohen made waves after boosting his stake in the video-game retailer by buying another $100,000 shares worth $10 million last week. His purchase was seen as a vote of confidence that new management is continuing to invest heavily in the company with their own money, Smith said.
Smith suggested Cohen is well aware his increased holdings would've been another catalyst for GameStop to soar.
"He's a billionaire, so $10 million bucks in some ways is pocket change," Smith said. "And maybe he looks at it and goes 'man, if I do a $100,000 share purchase right now, I can really juice up.' It could really send the stock from $100 to $170, where it is today."
—Ryan Cohen (@ryancohen) March 22, 2022
"And then he shouts from the rooftops that he just made 100,000 more shares, and the stock doubles in a couple of weeks. That's good for him."
GameStop shares are up 40% in the last 30 days, compared to a 6% rise over the prior month. Plans for a stock split provided another boost to its shares on Friday.
Meanwhile, AMC's rally has been more the result of the movie-chain theater's deal to buy a large stake in a Nevada gold mine.
AMC CEO Adam Aron told Reuters the company will pursue more M&A deals "where AMC can reach for the stars and intriguing investments that have potentially attractive returns."
Smith, who is familiar with the attraction of high-risk investing, pointed to red flags in Aron's quote.
"What does that mean? It means nothing," he said. "And that's the trouble with the whole idea of a meme stock, is that it's completely unmoored from any fundamentals."
"And it only is moved by what people say about it. And it doesn't matter what it actually does."
—Adam Aron (@CEOAdam) March 30, 2022
AMC shares have gained 35% in the last month, after having barely moved in February.
Smith, the author of the Risk Rituals Newsletter, said the meme stock comeback has been driven by a combination of a psychological trick called the "anchoring bias" and a recovery from the market bottom on March 15.
"They're kind of psychological operations based on volatility," he said.
"The way the system works right now is – you get volatility, you get these sharp moves, the media piles on, everybody starts focusing on it and then has FOMO."
According to him, retail traders are often thinking they might miss out on a profit unless they're part of the speculative trade, as buying GameStop around $80 a share seems so much cheaper than its record high of $347 in January last year.
He believes this latest meme stock revival is like the Reddit-fuelled frenzy of early 2021, only this time it'll be much shorter-lived.
