Stock

Key phrases: Interactive Brokers Founder Says AMC Leisure Memes Downside: "Individuals … are going to lose a really appreciable sum of money"

If the music stops for meme stocks, investors could expect huge losses, warns Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc.
IBKR,
-1.41%

The market veteran told MarketWatch in a Friday interview that the big problem with the so-called "meme" stock revolution, where assets are more influenced by social media sentiment than fundamentals, is that beginners face real losses when stocks like AMC Entertainment Holdings
AMC,
-5.90%
and GameStop Corp.
GME,
-3.40%,
to come back to earth at some point.

"There's a problem with the memes because the people who invest lose a very significant amount of money," he said.

AMC Entertainment was down 2.5% on Friday but posted the third-best weekly profit in its history, up around 90% according to Dow Jones Market Data.

GameStop stock, the other popular meme stock on social media sites like Reddit and Discord, was down 3% on the day but up 13% on the week.

For comparison: the Dow Jones Industrial Average
DJIA,
+ 0.53%,
S&P 500 index
SPX,
+ 0.92%
and the Nasdaq Composite Index
COMP,
+1.50%
had risen during the day and posted modest weekly gains as investors focused on the impact of a monthly employment report that showed the labor market made a patchy recovery from the COVID pandemic in May.

For the year to date, AMC is up over 2,200% and GameStop stock is up 1,220% over the same period, which is a headache for fundamental investors who say the escalation in values ​​of these companies is inconsistent with their earnings prospects, or short-term or medium-term sales.

Peterffy said the good thing about the surge in memes is that it will likely attract more young investors, but they will likely learn a hard lesson in the process.

"The first time I opened a broker, I lost all of my money and the second time almost all of my money, and I've made a lot more since then," joked Peterffy.

Peterffy owns approximately 75% of Interactive Brokers and his net worth is $ 23 billion, according to Forbes.

"You come to invest," said the billionaire because of the enthusiasm for stocks, "and will inadvertently learn how to invest in the market."

"I always find it better that the first trade [for inexperienced investors] is a losing trade," he said.

Peterffy estimates that about 15,000 accounts worth about $ 1.2 billion are with Interactive for AMC Long and about 5,000 are kept empty at about $ 400 million, meaning investors are betting on the The value of the asset decreases. He said the same ratio is likely for GameStop.

Investments in AMC and GameStop originally started as organized short squeezes by a group of individual investors who had discovered that a number of companies were being heavily short-sold by hedge funds and correctly suspected that those stocks could come under more pressure if they did together enough buyers would be immersed.

A short squeeze occurs when many investors who want to cover short positions start buying at the same time. The buy drives the stock price higher, causing short investors to speed up their cover attempts, which drives stocks up in a frenzy.

MarketWatch's Philip van Doorn rated the merits of owning some of the most popular meme stocks with the buzz that began in earnest earlier this year.

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