It can be challenging to resist the call of meme stocks, given their ability to skyrocket. For example, GameStop GME, +0.05%, perhaps the best-known meme stock, jumped to $190 from $78 over just a two-week period in March, for example — a 143% gain. A basket of 16 meme stocks that investment researcher Morningstar created last December didn’t do quite so well, but still performed spectacularly — gaining an average of 49% over the same two-week period.
If you had any doubt about meme stocks’ volatility, consider that GameStop, for example, has lagged the S&P 500 over the past 12 months, even after its 143% gain in March. Meanwhile, that package of 16 meme stocks from Morningstar is down 32%, on average; ARK Innovation ETF is down 51%. Over this same 12-month period, the S&P 500 SPX, -1.21% has gained 8.8%.
To find an answer, I followed the methodology proposed in a study a number of years ago by John Graham and Campbell Harvey, both finance professors at Duke University. They devised a way to evaluate a fund’s performance by comparing it to a hypothetical index portfolio with sufficient leverage so that its volatility and other statistical characteristics matched that of the fund.
How to test The bottom line? The next time you’re tempted by the spectacular short-term gains of this or that stock or ETF, first try to determine if it would have beaten a hypothetical index fund that is leveraged to match the stock’s or ETF’s volatility. Even if you don’t want to go through all the individual steps to replicate the Graham and Harvey approach, a simple back-of-the-envelope calculation is better than nothing.
MktwHulbert FUD is back on the menu boys!!!! Can't Stop. Won't Stop. GameStop. GME $GME
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