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  • Bed Bath & Beyond shares skyrocketed 567% since late July.
  • A billionaire activist surprisingly sold all his shares this week, causing prices to collapse 62% in two days.
  • Knowing what you own and following strict risk control rules helps protect you from FOMO-driven mistakes.

When everybody else makes money fast, it’s human nature not to want to be left out. However, this fear of missing out, or FOMO, can be disastrous. To “catch up,” investors take on far too much risk at precisely the wrong time. As a result, they end up with oversized positions acquired too close to peak prices. That’s especially dangerous for investors who rely heavily on borrowed money. It doesn’t take much to wind up with a margin call resulting in a forced sale.

Bed Bath & Beyond  (BBBY)  reminded investors of this point this week. The widely-known retailer of household items skyrocketed below $5 in mid-July to $30 this week on a Reddit-inspired frenzy, only to collapse by over 60% the past two days. Unfortunately, many individual investors got wiped out in the process.

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This isn’t the first time companies with lousy financials have moonshot higher only to crash back to earth. Nevertheless, the allure of easy money is enticing. The chance to get “your share of the American pie” by hitting it big by buying stock isn’t a new story. Sadly, charlatans have preyed on this desire for as long as markets have existed.

We’ve seen plenty of examples of this over the past two years. Flush with cash because of the spike in personal savings caused by stimulus payments and accelerating wages, many – mostly younger – investors have flooded chat rooms looking for the next big and easy winner.

As a result, video game retailer GameStop  (GME)  skyrocketed from less than $1 in summer 2020 to over $120 in January 2021, and movie theater giant AMC Entertainment  (AMC)  soared from below $2 in January 2021 to over $70 in June 2021. Likewise, bed Bath & Beyond’s version 1.0 moonshot took its shares from below $3.50 in April 2020 to $54 in January 2021.

Those moves represent life-changing returns for those who bought early. But unfortunately, they’ve also caused more than a few broken dreams because shares have declined significantly from their peaks.

Buyer beware

Bed Bath & Beyond’s recent rally was fed partly by optimism over shareholder activism from Ryan Cohen, the billionaire founder of e-commerce pet food retailer Chewy. Cohen, who became a favorite amount the “meme” investing crowd because of his role in sparking GameStop’s rally in 2020, invested $121 million into Bed Bath & Beyond in the first quarter of 2022, acquiring over 10% in the retailer.

Cohen’s involvement prompted many to believe that he’d take a longer-term activist role within Bed Bath & Beyond, similar to how his initial interest in GameStop resulted in his becoming its Chairman. That logic, however, was flawed. Cohen exited his entire Bed Bath & Beyond position this week, pocketing $68 million in profit – a cool 56% gain in a few months.

What particularly stings his meme-crowd followers, however, is that his sales came into the meat of their renewed buying. According to Vanda Research, retail investors gobbled up $131 million in shares this week before his sale. Over the past three weeks, their net purchases eclipsed $229 million.

Cohen is mum about why he soured on the retailer. Regardless, it’s a good reminder that investors shouldn’t assume what other investors may think. Perhaps, Cohen never intended to hold Bed Bath & Beyond. Instead, he saw it simply as a short-term opportunity. Nothing more. Nothing less.

The Smart Play

Speculative run-ups like we saw in Bed Bath & Beyond can happen near the tail end of a move when people are feeling particularly greedy. The rally since mid-June certainly unlocked some animal spirits. Perhaps more than a few saw the chance for easy money in Bed Bath & Beyond as a way to recover their remaining drawdown more quickly.

Real Money Pro’s Doug Kass wrote in his diary today, “the silliness of MEME speculation (read: Bed Bath and Beyond) has spread and, as of yesterday - Ryan Cohen selling, shares, down -70% today - been exposed. Speculative activity, as seen in AMC, GME and BBBY are late Bull Market cycle occurrences.”

That sentiment echoed Real Money’s James DePorre, who wrote in “The Blow-Up of Meme Stocks Is Another Sign of a Short-Term Market Top,” today, “Excessive speculation is often a sign of a potential market turn…Conditions are never the same, but there are always some similarities in the way cycles develop. The market has become extended recently primarily due to poor positioning rather than improving fundamentals. The speculative trading has helped to create tremendous fear of missing out, and now those who chased some of the highest risk situations are being badly burned here on Friday morning.”

The takeaway from Kass’ and DePorre’s comments is that when you see frothy speculation in names like this, there’s a good chance that stocks are closer to a top, even short-term, than a bottom.

Sure, there were signs you shouldn’t invest in Bed Bath & Beyond. For example, its debt is trading at a steep discount – a sign of distress; its current ratio, a measure of current assets to current liabilities, is only 1, its book value is negative, and quarterly earnings reported on June 29 were dismal (sales were down 25% year over year and it lost $2.83 per share). So it’s not surprising that it hired Kirkland & Ellis this week to evaluate options, ostensibly including bankruptcy. Indeed, this is a great reminder that “knowing what you own” is critical.

The larger lesson, however, is to embrace risk control. For example, buyers who ignored the warning signs could still have contained some damage by buying a below-average-sized position, booking profit as share prices increased, and to a lesser extent (a lot of damage occurred in the post-market session), using stop losses. Strategies like this can help you avoid an Oh-No, even if you succumb to FOMO.

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