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Tue, July 27 at 7:00PM ET
 
 
 
 

Reddit Stocks: How to Become a Millionaire With Meme Investing

If you’re thinking, “things are harder these days,” you’re probably right. (If you disagree, congratulations on winning last week’s Powerball lottery). 

Median household incomes have stagnated since the mid-1980s. That’s made everything from paying down student loans (an average balance of $38,255) to paying for essentials (74% of income) harder than ever for young families. And if you’re older, you’re probably worried too; healthcare costs are 30 times higher today than in 1970.

What happened?

America’s wealth has slowly but surely concentrated at the very top. Today, the bottom 95% of Americans  — i.e., any household earning less than $380,000 per year — hold just one-third of all U.S. wealth. And that wealth has to stretch further than ever; few non-government employees can count on defined-benefit pensions to fund retirement.

But investors have been given a lifeline from the most unusual place: Reddit.

The rise of meme stock investing on social media platforms has created the Moonshot Bet: some of the riskiest, highest-returning wagers that any investor can make. It’s a way for ordinary people to level the playing field and catch up to the “haves” of America.

In today’s Big Read, we’re going to look into 1) the usefulness of Moonshot investing and 2) how you can earn “F— You Money” without blowing up your retirement portfolio.

The Big Read: Reddit and Financial Freedom

If the term “F— You Money” sounds offensive to the establishment, it’s by no accident. Many people feel stuck in an endless financial grind; they’d like nothing more than to stick it to the man.

Don’t like your job? Leave it and find one you love. 

Don’t like your house? Sell it and move somewhere else.

Don’t like your spouse? Buy a second home to put them in. (Did you think I’d say “divorce”?)

The concept of financial independence, however, has become so far removed from most Americans.

Before. In 1960, a 30-year-old who started investing $10,000 (in 2020 dollars) would have been age 58 by the time they accumulated $2 million.

After. Doing the same today would take a Millennial investor until age 73 to achieve the same feat.

“Today there are no easy portfolio choices,” reported JP Morgan in its most recent Long-Term Capital Market report. “Low yields and elevated equity valuations act in concert to push the frontier to very low levels.” The bank’s long-term stock return expectation now sits at 4.1%.

That means long-term investing doesn’t work for most people anymore. In a country where the average 34-year-old only has $14,852 in net worth, buying an S&P 500 ETF won’t fund retirement (let alone a house down payment). 

So, what have these newer investors done? Rather than sink their life savings into slow-moving investments, retail traders have realized the power of taking risky bets. And done well, Moonshot investing could help you earn that “f— you money” sooner than you think.

MOONSHOTS VS. LONG-TERM INVESTING

I get it. 

Moonshot Investing seems stupid.

When you’re an Ivy-League-educated investor with Wall Street experience, people expect you to say, “buy a low-cost ETF and hold onto it for the long run” and “Dogecoin and GameStop are for idiots.”

To be fair, there is some truth to that. I encourage everyone to put around 95% savings into long-term investments as their “main course.” I prefer high ROIC companies with wide competitive moats — John Deere (NYSE:DE), Adobe (NASDAQ:ADBE), UnitedHealth (NYSE:UNH) — or low-cost target-date index funds. These investments will keep your portfolio healthy and put you on the right path toward eventual financial freedom. (I can hear the snores in the background).

But what about the remaining 5% of your savings? That, my readers, can go toward a decadent dessert that’s soaked in rum and lit on fire: Moonshot Bets.

For those who can afford it, these Moonshot investments have 1,000x upsides so enormous that you can afford some losses along the way.

To illustrate my “5% dessert” rule, consider this:

As I said before, if a 30-year-old puts $10,000 into the stock market every year starting in 2020, it would take them until 2063 (age 73) to reach $2 million in net worth.

Instead, if that same person channeled 5% of their savings (i.e., $500 per year) into a single Moonshot Bet every year, they could reach that $2 million four years earlier by age 69. That’s assuming they only find a 100x returner once per decade; finding one every five years will mean you’ll be sitting on $3.2 million just as your friends are retiring.

And what about the worst-case scenario if every Moonshot bet goes to zero? I’ve got good news. Since you’re only playing with 5% of your savings, you’ll only delay reaching the $2 million goal by a year.

Those with highly stable careers might even consider up to 10% in risky bets. In the worst-case scenario (i.e., if every Moonshot goes to zero), it would take you an extra two years to reach your $2 million target. And what if you find one 100x stock per decade? You would have $4.3 million by the time you’re 73. Now *that’s* some “f— you money” to spare.

CURB YOUR ENTHUSIASM: POSITION SIZING AND RISK

I’ll be up-front: 5%… or 10%… isn’t the correct Moonshot number for everyone. People with high-interest student debt should pay that down first. And anyone without a sufficient cash cushion — defined by the CFP Institute as three to 12 months of expenses — should delete Robinhood from their phones before reading another sentence of this piece.

Financial constraints are also essential. Many Americans can’t afford to lose $500.

But let’s assume you’re already saving $10,000… $50,000… or $100,000 per year. Then you can certainly afford a $500 Moonshot here and there. And that’s especially true when you have insight into the next big Reddit stock.

So how can you know how much to spend on a Moonshot?

I typically use a modified version of the Kelly Criterion, a formula developed by J.L. Kelly of Bell Labs in 1956 and used by professional gamblers. (For stocks, I recommend no more than “half-Kelly” or “quarter-Kelly” because we tend to underestimate long-tailed stock risks).

Others might turn to Warren Buffett’s more straightforward “20-punch-card” approach and make only a few concentrated bets in their lifetimes.

But you can also go by a simpler rule: if you can lose that money and not feel bad, then that’s the amount you should invest. For some, that’s $20 to $50. For others, that’s $1,000. Just think about how much you could lose in a casino without either 1) losing sleep or 2) having your spouse lose sleep.

FINDING THE NEXT MOONSHOT INVESTMENT

Once you’ve budgeted out your “Moonshot Fund,” how do you go about finding the next 100x Moonshot?

First, focus on cheap assets. Buying GameStop (NYSE:GME) at $4 has a far more significant upside than buying in at $250. Dogecoin (CCC:DOGE-USD) at $0.0001 is more attractive than DOGE at $0.50.

Second, find investments with some Reddit excitement. Redditors tend to do better at identifying promising industries than Wall Street expects.

Finally, avoid frauds. Hot stocks such as Lordstown Motors (NASDAQ:RIDE) and Nikola (NASDAQ:NKLA) might wow investors for a while, but accounting shenanigans usually hide a rotten core business.

I’ve ranked this week’s list of sub-$10 stocks by cheapness and momentum. As usual, some have longer odds than others. Bankrupt satellite company Intelsat (OTCMKTS:INTEQ) will probably see shares drop to zero but could rise 20x if a white-knight investor steps in. (Perhaps Jeff Bezos wants to compete against Elon Musk’s Starlink program?) Bankrupt pharma company Mallinckrodt (OTCMKTS:MNKKQ) faces even higher hurdles with billions stuck in opioid litigation claims.

Others like Express (NYSE:EXPR) offer a more conservative Reddit-driven bump. The struggling mall retailer could easily see shares rise 5x as people replenish their wardrobes for going back to the office. Teekay Tankers (NYSE:TNK) might see a similar short-term boost as Reddit favorite Castor Maritime (NASDAQ:CTRM) did in January.

Finally, this week’s list also features Venator (NYSE:VNTR), a titanium dioxide producer that’s starting to reap the benefits of industry consolidation. Blue-chip competitors Chemours (NYSE:CC) and Tronox (NYSE:TROX) have already seen share rises of 150% to 200% since 2020. Smaller firms like Venator could become a takeout target as the big players continue to consolidate.

Closing Thoughts: Long-term Investing Isn’t What It Used to Be

Those born in the 1930s would have seen wars, inflation, and the constant threat of nuclear disaster. But they would have also seen 10-year bond rates of 7.5% and stock returns of 10%.

Today, bond yields are a paltry 1.5% — a rounding error to most investors. Stock and real estate return expectations are also lower than ever. 

That’s why investors are turning to speculative investments like cryptocurrencies and meme stocks to make up the difference. 

Done poorly, these speculative bets will make your money vanish forever. 70% of bankrupt companies leave investors with nothing, according to a study by Associate Professor Philip Russel at Philadelphia University. And according to BscScan only 143 of 642,769 BEP-20 Binance (CCC:BNB-USD) tokens have any discernible market capitalization.

But risky bets are also a hotbed of mispriced Moonshots. Because when stocks are too small and scary for Wall Street to play in, you’ll quickly find yourself as the shark in a pool of minnows.

FREE REPORT: 17 Reddit Penny Stocks to Buy Now  

Thomas Yeung is an expert when it comes to finding fast-paced growth opportunities on Reddit. He recommended Dogecoin before it skyrocketed over 8,000%, Ripple before it flew up more than 480% and Cardano before it soared 460%. Now, in a new report, he’s naming 17 of his favorite Reddit penny stocks. Claim your FREE COPY here! 

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.


Article printed from InvestorPlace Media, https://investorplace.com/2021/06/reddit-stocks-how-to-become-a-millionaire-with-meme-investing/.

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