A few weeks ago, a client told me that the movie “Dumb Money” was now available on Netflix. I watched the movie this past weekend, which portrays the still shocking events surrounding the surge of Game Stop stock in early 2021. The movie (while a bit crass and dramatic – it is a movie after all), did take me back to that time when each day brought a new jaw-dropping/this can’t be happening moment in financial markets.
Believe it or not, the phrase “dumb money” is an actual a term used frequently on Wall Street. It refers to retail investors, whereas more sophisticated (and larger) investors such as pensions, mutual funds, and hedge funds are more favorably labeled “smart money.”
If you blocked out the mania that was 2021, you may not be familiar with the Game Stop saga on which this movie was based. It was a classic tale of David vs. Goliath (or dumb vs smart money). If you Google it, you will be overwhelmed with retellings but here’s a quick summary.
Game Stop (ticker: GME) is a publicly traded stock of a company that owns and operates stores selling video games and equipment. The company (and its stock) had not done well and traded well below $1 in 2020. This poor performance got the attention of hedge funds, who took short positions in the stock (shorting a stock means you “win” when the price goes down but also means your losses are essentially unlimited if the stock rises). Perhaps due to the cult following of its stores or perhaps due to one largely influential person (Keith Gill) promoting GME on the blogging site “Wall Street Bets” (on which this movie is focused), retail investors also took interest in Game Stop stock and started buying it in mass. This imbalance between shares available, the large short position, and obsessive buying (further propelled by the use of a new trading app Robinhood) led to some wild events – including retail traders making millions and hedge funds losing billions.
This movie (and the real-world events it is based upon) is a cautionary tale at the extremes but after I watched it, I took away three key lessons from the wild ride that is Dumb Money
1.) Do your own homework – You’d have thought I was watching a horror movie at times as I watched this film (and while I watched CNBC as these events in real time). My horror was sparked by how many people were buying into the stock simply because they saw it on the news, someone on the internet told them too, their friend had made a fortune, etc. People on the screen blindly hit buy on their Robinhood app, investing all the money they had, and watching confetti rain down in celebration. I had to hide my eyes!
Group think is one of the world’s most powerful forces, amplified even more so today with instant communication. There was even a scene in the movie when Wall Street Bets went down and the holders of Game Stop stock were shown panicking as they didn’t know what to do with their shares when they couldn’t see what Keith Gill was doing with his. If you are going to be an investor, in my opinion, you need to always do your own homework. Of course – you can get ideas and motivation from others – but at the end of the day, you need to know what you own, what you’re doing, and why
2.) Everything is relative – it’s jarring to watch this movie and see how retail investors are elated (and then concerned) with tens of thousands (in a few cases, millions) of dollars and then in the next clip to see the hedge fund moguls throwing around a casual loss of a billion dollars here or there. In investing, as in life, it’s key to know that everything is relative – and be well aware of what field you are playing on. You’re investing journey is yours alone so resist the urge to compare it or evaluate it against others. Rather, consider every action and every investment as a percentage of your overall net worth. If any stock becomes an exceptionally outsized position in relation to your other assets, you need to very seriously consider the chance that you (or worse yet, the person you are putting blind faith it) is wrong – and what happens then. You may be right – but what if you aren’t (or what if the market moves against you even if you are right)? Always remain fully aware of your aggregate position, your relative loss/gain in any one stock, and act accordingly.
3.) Don’t conflate luck and skill – this whole movie reminded me of a question one of my favorite podcast hosts asks every guest on his show (Guy Ray of How I Built This). At the end of each show, which tells the story of various entrepreneurs and how they created their company/product, he asks the guests if they attribute their success to hard work or some level of good luck. Guy himself has said he asks this as a way of leading them to reflect on their journey as a whole. I love this question – and I kept thinking of it on repeat as I watched this film. If you buy a stock that goes up 400x are you a skilled investor? Or are you very lucky? I’d venture to say the answer is yes. You are very likely some combination of both of those things. Investing involves a messy (and sometimes beautiful) combination of luck and skill in almost every case. Work hard to always distinguish between the two.
If you watch Dumb Money for yourself, let me know what you take away from the film!
Happy viewing and onward we go,
Leave a note