The latest scandal involving sports betting doesn’t surprise me. One industry source estimated that nearly $150 billion was wagered on sports in the United States last year.

With that much money at stake, it’s no wonder that some professional athletes decided to get in the action. A missed free throw here or a pitch in the dirt there, and a lot of money changes hands.

That doesn’t affect me since I’m not a gambler. However, I’m surprised so many people continue doing it knowing that the game is rigged.

Feeding the Kitty

Gambling, whether legal or illegal, should not be confused with investing. Every gambler knows they are playing a zero-sum game.

In theory, investing is different from gambling in that respect. Over time, an investment should produce a positive return without someone else losing an equal amount of money.

I guess people aren’t as patient as they used to be. Now, investors want to see immediate results in a matter of days, weeks, or months, but not years.

That dynamic explains the emergence of meme stocks. That’s when social media became the driving force behind a new type of short-term trading designed to squeeze quick gains out of otherwise moribund stocks.

Starting with GameStop

You may recall the uproar created four years ago by “Roaring Kitty,” a private investor who exhorted his Reddit followers to buy shares of retailer GameStop (NYSE: GME) while they were trading for less than $5 (split-adjusted). If not, you can take a quick look at the article I wrote about it at that time.

In less than a month, GME rose above $120. Investors who timed it right made a lot of money in only a few weeks, while those that timed it wrong took a bath as shown in the chart below.

At that time, meme stock investing was excoriated by Wall Street as nothing more than legalized gambling. It was dismissed as a fad that would soon disappear.

There have been other meme stocks since then. None of them did as well as GameStop but several were still quite profitable for traders that timed it right.

Joining the Club

Now that it appears that meme stocks are here to stay, Wall Street has decided that it wants in on the action. Hence the introduction last month of the Roundhill Meme Stock ETF (NYSE: MEME).

This fund has gotten off to an inauspicious start. After going public at $10 on October 8, MEME quickly rose above $11 before reversing direction.

It has since fallen steadily to trade below $8 last week. That equates to a 25 percent loss in just five weeks, not exactly what the fund’s shareholders were hoping to see.

Some of that decline can be chalked up to Wall Street’s risk-off response to the federal government shutdown. Speculative investments like meme stocks are on the outs while the economic data normally supplied by federal agencies is unavailable.

Binary Proposition

By the time you read this, the government shutdown may be over. Even still, I doubt investors will go streaming back into meme stocks.

That’s because the formula for anticipating meme stocks has become known. For a meme stock trade to work, a stock must have a substantial short interest position.

Short interest consists of borrowed shares of stock that have been sold before they have been bought. Short sellers look for financially troubled companies that appear to be heading for bankruptcy.

Eventually, short sellers either buy back their borrowed stock at a lower price to realize a profit, or they get caught in a “short squeeze” that forces them to pay a lot more for it than they sold it for and end up eating a loss. In that regard it is a lot like gambling, a binary proposition with a wide divergence in potential outcomes.

Lucky Losers

Short selling used to be the province of hedge funds and speculators that spent hours poring over trading data to identify failing businesses. They could get in early before everyone else realized that a company might be in the process of going under.

Now, there are websites such as Short Interest Tracker that provide lists of companies most vulnerable to a short squeeze. Sooner or later, they will either go out of business or start to recover, in which case a short squeeze may be in the offing. For meme stock traders, those “lucky losers” can become big time winners.

You don’t have to know anything about finance or accounting to join the meme stock movement. You can pick out a few stocks with very high short interest and hope for the best or buy shares of MEME and let the fund managers make those decisions for you.

Either way, you are essentially gambling on a presumably random outcome. Guess right, and you can make a lot of money in short period of time. But guess wrong, and you may end up wishing that you had bet instead on your favorite basketball team to cover the spread.