MW Meme stocks and Robinhood users show why long-term investing is your best bet

By Mark Hulbert

Study finds that 'betting against Robinhood users is a profitable business': top stocks bought by Robinhood users fell 5% in the month after

GameStop or an S&P 500 index fund? One has made you far more money since 2021.

Are you a gambler? Or an investor? It's an important question, since investors in the stock market do better over the long term than gamblers, on average.

Investors will focus on a stock's long-term prospects. Stock-market gamblers are the opposite - zeroing in on the potential for a stock's explosive short-term gain.

A good place to start in determining if you're more of a gambler than an investor is asking yourself which of the following stocks you're more drawn to:

-- Palantir Technologies Inc. PLTR, whose stock is far more volatile than the vast majority of other issues and has a distribution of daily returns that is heavily positively skewed. These two characteristics imply that the stock has a small chance of producing a huge daily gain but also huge downside risk. So far this year, the company's stock has gained 82.7% (versus 2.4% for the S&P 500's SPX total return, through June 17).

-- Caterpillar CAT, which is one of the least volatile stocks on Wall Street and has a distribution of daily returns far closer to a normal bell curve. Its stock price year-to-date has been flat.

In fact, according to a 2021 study, "Only Gamble in Town," Palantir's stock would be considered a "lottery stock," while Caterpillar's is more attractive to long-term investors. If you're tempted by stocks such as Palantir's, the odds are good that you're more of a gambler than an investor.

The study was conducted by Alok Kumar of the University of Miami, Huong Nguyen of the University of Da Nang in Vietnam, and Talis Putnins of the University of Technology in Sydney, Australia.

In emails, Kumar and Melissa Vosse also identified Constellation Energy Corp.$(CEG.UK)$, Dutch Bros. Inc. (BROS) and Trump Media & Technology Group Corp. $(DJT)$ as examples of current lottery stocks. Vosse is an assistant professor of finance at the University of San Diego who has also researched gambling behavior in the stock market. Other examples of non-lottery-type stocks that the professors provided are Costco Wholesale Corp. $(COST)$, Cisco Systems Inc. $(CSCO)$, GE Aerospace $(GE)$ and AT&T Inc.( T)

You're in good company if you're a stock-market gambler. A surprisingly large percentage of market participants are. The study's authors measured the dollar value of stock-market gambling by comparing trading volume in both types of stock whenever a given country imposed restrictions on more traditional gambling activities. On average, volume in lottery stocks shot up, while that of non-lottery stocks did not.

Far more dollars are lost with meme stocks than gained.

A lottery stock's short-term potential traces in many cases to interest in the stock going viral on social media - becoming a meme stock, in other words. You can make a lot of money if you're early to the party before a stock goes meme, but far more dollars are lost with meme stocks than gained.

This was confirmed by a study of clients of Robinhood Markets Inc. (HOOD), a group of investors who disproportionately are drawn to meme stocks. Entitled "Attention Induced Trading and Returns: Evidence from Robinhood Users," the study was conducted by Brad Barber of the University of California at Davis, Xing Huang of Washington University, Terrance Odean of the University of California at Berkeley and Chris Schwarz of the University of California at Irvine.

They found that "betting against Robinhood users is a profitable business; the top stocks bought by Robinhood users fall by 5% over the next month."

A perfect illustration is provided by GameStop Corp. $(GME)$ - the original meme stock from January 2021. At one point in that month, the stock was up more than 2,400% from where it stood at the end of the prior month. Even so, as you can see from the chart above, GameStop's long-term performance has been dismal. Even if you had been lucky enough to purchase the stock before its explosive rally in January 2021, you today would be sitting on far less money than if you had instead invested in an S&P 500 index fund.

So while there's nothing necessarily wrong with gambling on stocks, you should know that you most likely will pay a price for it.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Momentum stocks that helped drive the market's epic recovery are stalling. Get ready for a 'buyable' pullback.

Also read: Burned by Robinhood not making the S&P 500? Here's how you can make money the next time this happens.

-Mark Hulbert

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June 20, 2025 07:50 ET (11:50 GMT)

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