Who let the Doge's out? Lessons from the return of the retail investor and what to do now?

 It might seem like forever ago, but cast your mind back to January. What was the number 1 investment related story? Three, two, one... OK, time's up.

Gamestop. 

Remember how thenGME stock price went from the teens to above $400 in the space of a few weeks. It almost took out a couple titans of Wall Street along with it. What was the key takeaway at the time? The little guy getting one up on the professional investors. The key question was: Is this a one off or has the balance of power shifted with technology very well making this phenomenon increasingly possible. Like most stories, this one eventually died down (GME in February went up 6x, rallying from $40 to above $260 with little fanfare) and we moved on.

The story of the week is the Coinbase direct listing (I wrote a couple of posts on this earlier). Although it's clear that it was largely a successful listing, with COIN settling at $342 by the close of Friday, it certainly wasn't a grand slam success, as the stock fell from above $400 on day one to close below $330. This listing led Bitcoin and Ethereum to briefly touch all time highs. However the real crypto winner was none other than that joke of a coin, Dogecoin. DOGE has rallied from approximately 7 cents to the mid 30 cent range this week alone (that's a 350%-450% return for those keeping score at home).

Let's do a brief 2021 investment recap: $1000 invested in TSLA on Jan 4 would have netted you approximately a 0% return YtD. $1000 invested in GME stock on that date would be worth just under $10,000 today. But the big winner so far has been DOGE. $1000 invested at the beginning of the year would now be worth over $50,000! Amazing indeed.

What explains the recent rise? It's a similar situation to what occurred to GME in January. The retail investor has been pushing it (not hard to do when high profile individuals such as Elon Musk and Mark Cuban keep on touting the Dogecoin) on the reddit pages of late. Scarce supply of coins relative to the surge in demand led to this inexorable rise.

I teach an AP Stats class at school. A lot of times students wonder why and ask "when will we ever use this?" Similar questions are asked to my esteemed colleagues, notably those who teach Economics. Well boys and girls... this is when you use some of the basic principles you learn in school. Supply and Demand are the keys to determining the price of assets. In this case, a scarce supply has met with an insatiable demand, and the next thing you know is that Dogecoin is now one of the top 5 cryptocurrencies as measured by market cap.

What are some key takeaways:

1. When will this mania end? It's anyone's guess. Nobody can know for certain.
2. The power of the retail investor is slowly increasing and should now be taken into account when deciding what to buy and sell. 
3. A very sensible investment strategy may be to adopt a barbell approach with a large portion of one's assets allocated to sensible investments, but buying out of the money calls in the form of stocks such as GME or coins such as DOGE are worth holding and can add tremendous value to a portfolio's return.

But always remember, as we used to say on the Morgan Stanley trading desk: "If it's a bubble, it can double. When it bursts, it's the worst."