The Branding of Investments: Meme Stocks

"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." John Keynes

"The ultimate gift, in our digital age, is a CEO who has the storytelling talent to capture the imagination of the markets..." Scott Galloway

Since I last wrote an article, in May, the markets have been on a tear. There are plenty of good reasons for that (liquidity, vaccine, bored-markets hypothesis), but something that does not get mentioned is the brand some stocks have. Think the Nifty Fifty, WAAAX, FAANMGs, BATs, all include(d) brand name stocks, that created a narrative about ownership and the owner, that abstracted from their place in the economy and the wider world. The stocks that cause the indexes to rise are generally those brand name stocks, the largest ones.

As I think longer and longer about what makes a good investment, the more that I believe that brand is an essential characteristic of what makes a good investment. And I am not talking about corporate/product branding, but what I call investment branding or securities branding. This is when investor relations guru's, good marketing, key investor thematics combine into creating a brand around a stock or other investment.

A meme stock is a company that has brand value in the minds of investors. The brand is not entirely tied to the brand of the company, but becomes tied to the investment in the company itself. The word meme itself comes from Richard Dawkins. It describes how cultural units change and evolve, especially by imitation. A meme stock spreads by prophets and missionaries, and as people find out about it, the stock price increases.

This analysis is particularly pertinent towards the rise of retail trader/investor, something that occurs every few decades before they get burnt by the market. Professionals and institutions do get suckered into paying for the brand "nobody ever got fired for buying IBM," but do also tend to stick to more rationale fundamental analysis. What this post proposes is not a rejection of fundamental analysis per-se, but a way of discussing what may be happening when there is too much liquidity in the system, and prices/multiples no longer make sense. Investment branding is a cartoon of fundamental research, an abstraction; it helps to explain why good companies do not always make good investments or in the reverse, why bad companies make good investments. It also helps explain why some company fundamentals, their price and the real economy are so out of lockstep.

This was all written in December and January’s before the events with GME. I am still processing these events and how this framework can capture these market moves. This will be discussed below in further detail.

What is Branding and Investment Branding?

As Professor of marketing, Scott Galloway (known as Prof G), would say: a brand is the emotional and tangible touchpoints that surround a product. It is what distinguishes one product, or maker of said product from another in our mind. Businesses make their brand from packaging, advertising, logos, colours, choices of words etc., so to create an emotional response in the consumer.

"Brands are two things: promise and performance." Scott Galloway

For any brand, there are three branding touchpoints, prepurchase, purchase and post-purchase. For this post, we will treat them as the same, unless signalled otherwise.

Whilst we are comfortable in understanding that, we will need to look at how companies, and their missionaries, also create a brand within financial markets; their product is their equity. The ultimate goal of this is to drive up investor interest in the stock, decrease their cost of capital and make for easier exits. Creating an emotional story for investors helps CEOs sell this product. Investor relations is the job of managing the marketing and communication between a company and the financial community. They are the ones, in conjunction with others in the marketing department and the executive leadership team, in charge of informing market participants of the company. Further some investors themselves become missionaries of their investments and try to sell their ideas to others.

Returning to Prof G, we should look to his ideas on what makes a good investment and how that relates to investment branding. And then we can discuss how investor relations help guide the investment branding decisions in conjunction with others.

Prof G would say there are three characteristics for investors that are important: reoccurring revenues, high growth and increasing gross margins. But that is not enough to create a brand; the brand must be positioned in the mind of the consumer. All good investment brands want to position themselves in your mind and de-position their competitors against themselves. When I write "de-position" think of how Apple uses privacy to de-position Facebook and Android against iOS (see this article by Prog G on laddering).

The investor relation guru will talk to the investor in a language that shows, increased and reoccurring revenue, greater growth, and greater margins. Attributes that investors care about, such as distribution networks, logistics, addressable markets, and balance sheets etc. will be stressed if important. The positioning of the securities brand is always aligned with the product and corporate branding. Investor relations professionals know that there is a limited amount of money chasing too few stocks and therefore must position companies into investors minds.

"In a capitalist society, we mark life by our purchases." Scott Galloway

Many people think about the above quote in terms of material acquisitions, and also experiential acquisitions. But the truth is, nowadays saying you trade stocks, crypto, sneakers or anything else also marks the consumer out. To the retail trader, buying a dividend darling like BHP on Commsec says as much about the trader as buying NIO call options on Robinhood. Our ego is tied to what we invest in, as much as everything else. The good investor tries to act unemotionally, if they can.

To become a brand name stock, the company must be in a hot sector. No unloved sector can have a security that is branded. If you think of energy, for example, you may only think of one or two public companies, but I assure you they are not sexy companies. No one thinks of Exxon Mobile or AGL as sexy. But if you think of the renewables sector, suddenly you have Tesla. Now Tesla is a sexy company and a sexy security. If you own TSLA you own the future, you're helping the world, and it is exciting. One way to find the hottest sector is to see what type of ETFs and funds are being launched.

Securities that end up with a brand most likely also have good marketing and consumer brand visibility, meaning that consumer brand knowledge helps drives security branding. In Kumar, Sujit & Abdul's (2019) paper on brand value and firm value, they show in Table 1 how the literature supports the idea that marketing and brand associations drive higher market performance. In Frieder & Subrahmanyam (2004), they find there is "a preference for visible, brand name stocks in individuals' decisions to hold stocks, which supports the hypothesis that individual investors exhibit a propensity toward companies with easily recognizable products." A simple 2018 paper by Herciu shows "that market capitalization, enterprise value, brand value and corporate reputation are interconnected and leverage each other." It seems self-evident that well-known brands, for a multitude of reasons, have better financials and hence may have better share market returns. Brands are built by superior marketing, which is leveraged by investors as shortcuts in decision making.

The deliberate misspelling of the word "stocks" to “stonks” has come to mean a humorous company that you can bet and trade on, companies you can make concentrated bets on with a high likelihood of extreme tail events (left or right), in which the online trading community at Reddit will reward you for. Part of the reward is the feeling of community. That feel of the status of owning a security that this community care about, which goes back into how a brand is experiential for one that owns the product (the security.)

Putting this together we have the necessary parts of the framework:

1) Valuation narrative more important than numbers

- The narrative of the markets and the security itself means that rational financial analysis should not matter. Numbers become performative.

- This is liable to change depending on the markets regime. At one point we can expect valuations to matter more than narrative.

2) The company is a disrupter

- Only hot sector companies can create a brand. This also means that they have high growth potential.

- If the company is not a disrupter there must be potential for the company to be a disruptor in the near-term.

3) Superior brand equity vs peers

- Market participants have to know what the company is and its products.

4) The missionary

- There needs to be a CEO, or someone else like an hedge fund manager, with clout telling the companies story

- By buying stock from the promises of the missionary, we align our life with their goals and promise.

Some less essential but still important parts of the framework:

5) Recurring revenues

- Companies with stable and recurring revenues get higher multiples, all else equal.

- Companies with the hope of recurring revenue also works. Think TSLA and their taxi idea.

6) Expanding margins

- As above, ceteris paribus, expanding margins get higher multiples.

Implications

There are three main implications I think we can take away from meme stocks. The first is that they help explain why the market can stay irrational than shorters can stay solvent. That is, investors are sometimes buying an experience in buying certain securities, and they are buying a product that becomes part of their personality. This is mania, but not in the entire market, but in certain securities.

Another implication comes from the game theory idea of tactical voting. Sometimes the best trades we find are not the ones that are the best ideas but are the ones that others think are the best trades. In this case, I would be advocating for trend/momentum trading on the back of story companies. Perhaps my framework above can help you find those companies.

Lastly, the implication of a meme stock goes to the understanding of the narrative that management and other missionaries can create, and also the memes that get passes along due to that. A great book on candour and investing is Investing between the Lines by L.J. Rittenhouse. Understand that all investment-related material is a marketing and branding exercise.

On GME

I'll assume you have some understanding of what happened late January with Gamestop. Let us go through the framework I have espoused one by one, as simply as possible, and see how this works.

1) In the current market, with the discount rate so low, the NPV of a company approaches its future value which can be whatever you forecast.

2) Ryan Cohen's role on the board led many to think that there was a disruption that could come to the game store sector, possibly by a new and better online store to compete with Valve.

3) GME has over 60m people in its loyalty program, showing that there is a brand that people know and recognise.

4) Michael Burry, Kieth Gill (aka RoaringKitty), Elon Musk, Chamath Palihapitiya; all got in on this bandwagon.

5) See 2, the move to an online store will expand margins vs having a retail store and all the expenses that entails.

6) See point 2, the move to an online store and more touchpoints for the consumer would create more recurring revenues.

Limitations of this post

The biggest limitation of this analysis is the lack of quantitative rigour. This could be improved by identifying meme stocks and then regressing them on the factors above. There would be some issues with this, including how to easily identify brand value and how much clout a missionary has.

Even if this framework can find a meme stock ex-post as it becomes one, it may not find a meme stock ex-ante. The real value for any investment framework is in the ex-ante analysis, and that analysis is correct. Further, some bad actors will use frameworks like this, and their innate understanding of human behaviour to create artificial meme stocks for the wrong reasons.

There is also an issue of when does a meme stock revert to being a normal non-branded stock.

Further, the last big issue of this framework is that at one point valuations will have to matter. I can't say when this will happen, but the artificial capitalistic markets that we have built ex-GFC will need to be dismantled for the efficient allocation of capital. When this happens, I would imagine the number of meme stocks will decrease.

Conclusion

This is only a framework for looking at meme stocks. But I think it may hold some promise in finding the next ones. There are some implications for the investor to look out for falsehoods and to make sure that the investor relations department does not blind you to the real promises of the company. A further quantitative look is needed to see how useful this is.