Robin Powell
By Robin Powell on October 02, 2023

What the movie Dumb Money gets wrong

It’s certainly entertaining, and Paul Dano has rightly earned plaudits for his portrayal of the nerdy YouTuber Keith Gill. (2) AKA Roaring Kitty, Gill amassed a huge internet following by incessantly arguing that shares in the retailer GameStop were undervalued.

As the stock’s share price grew, so did Gill’s fame. Like several other companies around that time, GameStop became a “meme stock”, constantly discussed on social media and, in particular, the Reddit bulletin board r/wallstreetbets. Things came to a head when, over the course of just two weeks, GameStop shares soared by a mind-boggling 1,500%.

However, although it’s very watchable, I do have a major gripe with the movie’s interpretation of events. First though, here’s some technical background.


What is short selling?

Dumb Money is a story about a trading strategy called short selling, and in particular, the risks that short selling entails.

Essentially, a short seller speculates that the price of a particular asset, usually a stock, will decline in the future. Instead of buying and holding an asset in anticipation of its price rise (which is the traditional way of investing), they do the opposite: they profit from price declines.

Short sellers do this by borrowing shares of a stock from a broker, and immediately selling them on the open market at the current price. They then wait for the stock's price to fall. If, as they anticipate, it does so, they buy back the same number of shares they initially sold. This repurchase is often referred to as "covering" the short position. Finally, they “close out” the short position by returning the shares to the broker.


Lucrative but risky 

As a strategy, short selling is highly favoured by large hedge funds. Several well-known UK companies have been the subject of short-selling in recent times, including the high street brands Debenhams and M&S, Sainsbury’s and the publishing giant Pearson.

When short selling goes well it can be extremely lucrative. But it’s fraught with risks. The potential losses you can incur are unlimited, so when the price of the shorted stock rises sharply, short sellers are often forced to buy back the shares to cover their positions, driving up the price even further. That’s known as a short squeeze, and it’s precisely what happened with GameStop. 

The hedge funds that shorted GameStop before the squeeze began lost vast sums of money. The worst hit was Melvin Capital, which lost $6.8 billion in a month. But many investors — a large proportion of them students — enjoyed big gains. Keith Gill himself is believed to have made more than $30 million.


A David-and-Goliath story?

It's not surprising, then, that this is often viewed as a David-and-Goliath story — a tale of ordinary, “dumb money” investors taking on Wall Street and winning. That’s certainly the picture painted by the movie, which even draws a comparison with the French Revolution. And that’s where, in my view, Dumb Money falls down.

Without wanting to spoil your enjoyment of it, there are some important facts about the GameStop story, and the broader meme stock phenomenon, that the movie either distorts or overlooks.

Yes, many investors profited hugely from GameStop, and other meme stocks including AMC, Get Free Report and Bed Bath & Beyond. But many more investors lost money on them. Typically, they bought in just before the peak and failed to get out before the price fell sharply. Many of those investors decided to cut their losses. Even many of those who stayed invested will never recoup the money they lost. 


“A massive payday” for Wall Street

Another misleading impression conveyed in Dumb Money is that small investors gave the whole of Wall Street a bloody nose. It’s not true. In fact, many professional investors prospered handsomely from the GameStop episode.

To quote the Wall Street Journal columnist Spencer Jakab (3) who has written a book on GameStop called The Revolution That Wasn’t (4), “the efforts of millions of mostly young speculators to stick it to the man and make a fortune in the process didn’t live up to the breathless headlines of (the time). They actually delivered Wall Street and already rich corporate insiders a massive payday.”

Another important point that Jakab makes in his book is that GameStop was a product of its time. It came just as online trading platforms like Robinhood were “democratising” trading, enabling those with no previous experience to buy and sell stocks within seconds. It also happened during the coronavirus crisis, which left students confined to their dorms and the young employed with stimulus money to spend. 

Also, Jakab points out, that novice investors who bought into stocks like GameStop benefited from “the quickest rebound ever from a bear market in 2020. In a trend never seen before, 96 per cent of stocks would rise in the ensuing year, making investing look easy.”


Dumb money or smart money: which are you?

Of course, as long as you didn’t panic and sell in March 2020, as many investors did, the subsequent bull market came as a welcome surprise.

But you didn’t need to be invested in a stock like GameStop to benefit. If you had simply stayed invested in a low-cost index fund, you would have made significant gains.

What people who trade individual stocks are trying to do is beat the stock market, and that is extremely difficult. In the long run, only a small number of financial professionals manage to achieve it. 

Remember, the professionals are usually very intelligent people; they have access to detailed research and the very latest technology and information. If even most of the pros consistently fail to identify winning stocks and weed out the losers, in advance, do you honestly think that you can do any better?

The good news is that, as the legendary investor Warren Buffett once said, “by periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.”

By all means, then, go and see Dumb Money and enjoy it. But don’t forget, investing beats trading almost all of the time, and simply buying and holding a stock because hedge funds are shorting it rarely has a Hollywood ending.

This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products

Robin Powell is a journalist, author and editor of The Evidence-Based Investor.

Published by Robin Powell October 2, 2023
Robin Powell