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Heavily shorted stocks have outperformed the market four to one over the past five years. So is this a meme bubble or a new paradigm for investing? Motley Fool Money starts now.
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From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I'm Travis Hoi. I'm joined today by Lou Whiteman and Dan Kaplinger. Guys, one of the themes of investing in 2025 and really over the past few years is the rise of meme stocks, short squeezes. This is something that's gotten a lot more attention. It seems like retail investors, which is us, that's
what we do at The Motley Fool, that's our customers, that's the people that we want investing, have gotten ahead of the market by buying some of these companies that are maybe highly shorted, maybe they're not quite profitable yet. These stocks, the FT put out a chart this week that showed that they have outperformed 4-1, just phenomenal returns over the last five years.
There's some stocks that have just gone crazy in 2025. So Dan, how do you think about this? This is very different than what I learned in business school about how we should be doing discounted cash flow analysis and all this stuff. The story is really what's driving a lot of these stocks. So is that a good or a bad thing for the market?
It's incredibly difficult. It makes things very difficult as a long-term investor. The reason for that is that you suddenly run into all these situations you wouldn't normally run into. We got a question on Fool24 the other day talking about an investor bought a stock, they were interested in the stock, they thought it would potentially 3X in five years.
It turns into a meme stock, it triples in the first month. And they're like, what do you do? And it's hard to know what to do in that situation because there is non-fundamental stuff going on that's making that stock go up.
Well, GameStop really started this, right? In 2020, early 2020, GameStop was arguably a value stock. I know that it was held in, the Motley Fool held it in some places. And then it became a meme stock. And so some of these things start as something fundamentally driven, then become something else. Right.
Or it can go the other way. Sometimes you can actually use the meme stock status to generate a business model to generate cash because investors bid up the stock. Suddenly, the company can do a secondary offering a stock and raise a bunch of capital that it wouldn't otherwise have been able to raise. And that doesn't necessarily mean that the company is going to be able to start making money.
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