The Story Stock Trap
Welcome to issue #24 of The Davem Dish. Every two weeks I share what actually works in investing based on my 20 years of wins, losses and expensive lessons. You’ll also get my thoughts on solopreneurship and life in general because the same principles apply — keep it simple, stay consistent and focus on what matters.
In theory, a stock price reflects current earnings and future expected earnings. That’s the model every textbook says.
In reality, it’s more complicated.
Prices reflect what people think will happen. What they hope will happen. What they fear might happen. They reflect narrative, attention, momentum, and the willingness of the next person to pay more than the last one. Sometimes that lines up with fundamentals but often it doesn’t.
The fundamentals give a stock a floor. The story is what makes it move and the story has no floor or ceiling.
A Sneaker Turned AI Company
A few weeks ago the share price of Allbirds — yes, the wool sneaker company — went from $2.49 to $24 in a single trading session. A 600% gain in a few hours.
What happened? Did they announce record earnings? A revolutionary new shoe? An acquisition by Nike?
None of the above.
They announced they were no longer a shoe company. They had sold their footwear business in March for $39 million (less than 1% of their 2021 peak valuation), and now the shell of the company would pivot to AI infrastructure with a new name (NewBird AI), a new plan (buy GPUs and lease them out) and new financing ($50 million from an unnamed investor).
That’s it. That’s the news.
No customers. No experience running data centers. No revenue projections.
The market didn’t care. The story was enough.
This isn’t unique. During the dot-com days, companies added “.com” to their name and watched their stock pop. During the crypto boom, Long Island Iced Tea Corp. — yes, the beverage company — renamed itself “Long Blockchain” and the stock jumped 380% before eventually being delisted by the SEC. The pattern is older than the internet.
The Math Doesn’t Apply
Quality companies have an anchor. A business with $1B in earnings, growing at 15%, generating free cash flow — there’s a math problem you can solve. You can estimate future earnings, apply a reasonable multiple, and calculate a fair value. The price might overshoot or undershoot, but it will eventually be pulled back toward something rational.
A company with no earnings has no anchor. There is no fair value calculation because there are no fundamentals to plug into the formula. Whatever someone is willing to pay is the price. Whatever the next person is willing to pay becomes the new price.
This is why these stocks can rocket higher and why they can collapse just as fast.
Look at any number of speculative names that have run up hundreds of percent on the AI narrative without ever generating meaningful revenue. They’re not investments in the traditional sense. They’re bets on whether the story holds long enough for someone else to buy your shares at a higher price.
Short Squeezes Make It Worse
Compounding the chaos in story stocks is short interest.
Quick refresher. When people want to bet against a stock they “short” it, meaning they borrow shares and sell them, planning to buy them back cheaper later. Shorting is risky. If you’re long a position the worst case is it goes to zero. If you’re short, the loss is theoretically unlimited because a stock price can rise to infinity. So If the stock goes up instead of down and you want to cap your loss, you have to buy shares to cover your position. That buying pushes the price even higher, which forces more shorts to cover, which pushes the price higher still.
This is a “short squeeze.” It’s how GameStop went from $10 to $483 in a few months in early 2021. It’s part of why these tiny, speculative names can move 600% in a session. There often aren’t many shares available, and any forced buying overwhelms the market.
Then it works in reverse on the way down. When the story breaks down, holders rush to sell, but there’s no fundamental floor to catch the price.
The Selling Tools Don’t Save You
Part of the Davem Method is using stop-loss and trailing stop orders to manage risk. These tools work well for liquid, quality companies. They fail with story stocks.
A trailing stop only triggers when the price reaches your level. But story stocks often don’t trade through prices smoothly — they gap. A stock can close at $20 today and open at $8 tomorrow on bad news. Your stop at $17 doesn’t protect you. It triggers, but it executes at $8 because there’s no buyer at $17.
You wake up to a 60% loss instead of the 15% one you planned for.
The structure of these stocks — thin liquidity, narrative-driven pricing, gap risk — defeats the systems designed for predictable, fundamentally-anchored businesses.
There’s no way to safely invest in story stocks. Either you treat it as gambling money, or you stay out. Trying to manage the risk with conventional tools is a trap.
The Opposite Problem
The narrative effect cuts both ways.
Look at what’s happened to software stocks over the past few months with the so-called “SaaSpocalypse.” Salesforce down over 30% for the year. Workday down over 40%. The software sector ETF down over 20%. Roughly $2 trillion in market cap wiped out.
Why? Did these companies stop growing? Did their earnings collapse?
No. Most of them are still posting solid results. The narrative changed.
When Anthropic released its Cowork AI tools in early 2026, investors started pricing in the worst-case scenario that AI will replace traditional software entirely. Why pay for software when AI can do the same work for a fraction of the cost?
Maybe that fear plays out over time. Maybe established software companies get disrupted. Or maybe AI ends up running on top of existing software platforms rather than replacing them. Maybe the moats — long-term contracts, deep integration, mission-critical data — protect these businesses.
The honest answer is nobody knows yet.
But the market doesn’t wait for honest answers. It prices the fear immediately. Quality companies with real earnings and real businesses get hammered just as hard as story stocks get pumped because the narrative is the same force in both cases. People aren’t buying or selling earnings. They’re buying or selling stories about earnings.
This creates a different kind of opportunity. When a quality company gets caught in narrative-driven selling, you sometimes get a chance to buy excellent businesses at significant discounts. But it requires a process. You have to know what the company is actually worth, which means doing the analysis instead of just reacting to the headlines.
The Number One Job
The most important job of an investor isn’t picking winners. It’s managing risk.
Picking winners is what financial media trains you to focus on. Hot tips, breakout stocks, the next NVIDIA. But anyone who’s been in the market long enough knows that one big loss erases years of gains. A 50% loss requires a 100% gain just to break even. A 70% loss requires 233%.
Quality companies aren’t immune to drawdowns. The SaaSpocalypse proves that. But they have something story stocks don’t — a track record. Real earnings and free cash flow. When the price disconnects from those fundamentals, you have something to anchor your decision-making to.
With story stocks, there’s only the price. And the price is whatever the next person is willing to pay.
The Two Games
There are really two different games being played in the stock market.
In one game, you’re buying ownership in real businesses. Companies that grow earnings, generate cash, and compound value over time. Your job is to find quality companies and buy them at reasonable prices. The game is math, patience, and behavior management.
In the other game, you’re trading narratives. What matters is the story, the momentum, and the timing of your exit. Your job is to be ahead of the next person.
Both games can make money. But they’re not the same game, and the skills don’t transfer. People who succeed at the first game often blow themselves up in the second one because the rules are completely different.
I play the first game. Not because I’m morally opposed to the second one — speculation has been around since markets existed — but because I’ve seen what happens when people confuse the two. They take quality-company-sized positions in story stocks. They build wealth slowly and lose it quickly.
There’s a place for speculation if you know what you’re doing and you’ve sized it appropriately. But don’t confuse it with investing. And don’t expect the tools that protect you in one game to protect you in the other.
The first question to ask before any position isn’t “How much could I make?”
It’s “What is actually anchoring this price?”
If the answer is “earnings, cash flow, and a track record,” you’re investing.
If the answer is “a story,” you’re gambling.
Both can work. Just know which one you’re doing.
Cheers,
Andrew
Have you ever bought a “story stock” that worked out? Leave a comment and let me know!
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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.