‘Dumb Money’ And The Myth of The Wall Street Underdog

Relaying
the
Basics

Nor
can
I
quarrel
with
the
film’s
basic
story.
(By
the
standards
of
Shakespeare’s
history
plays, Dumb
Money rates
as
a
documentary.)
As
it
relates,
GameStop
was
once
a
sleepy
stock.
Through
late
2020,
investments
made
by
members
of
a
Reddit
forum
helped
to
quintuple
its
share
price.
By
January
2021,
the
excitement
over
the
stock’s
rise
had
become
a
craze.
That
month,
the
forum
began
gaining
3,000
new
users
per
day.
By
January
28,
the
daily
addition
was 1.8
million.

The
new
buyers
jump-started
GameStop’s
stock
price.
Those
increases
forced
several
short
sellers
to
cover
their
positions,
which
could
only
be
accomplished
by
buying
additional
GameStop
shares.
The
“short
squeeze” was
on.

All
accurate,
as
far
as
it
goes.
There
is,
however,
more
to
be
said.

Initially
Right

In
summer
2020,
the
“dumb
money”
was
onto
something.
GameStop
possessed
a
stock
market
capitalisation
of
$250
million
despite
annual
revenue
exceeding
$6
billion.

True,
the
company’s
business
of
selling
video
game
software
through
retail
stores
was
both
unenviable
and
shrinking.
On
the
other
hand,
the
company
was
priced
for
bankruptcy
while
being
only
marginally
unprofitable
and
holding
half
a
billion
dollars
in
cash.
It
was
a
reasonable,
if
high-risk,
investment. 

Conversely,
shorting
GameStop
was
a
dangerous
game.
(The
Wall
Street
adage
is,
“Bulls
can
make
money,
bears
can
make
money,
but
pigs
cannot.”)
The
stock
had
shed
93%
of
its
value
over
the
previous
seven
years,
as
investors
realised
the
future
lay
with
online
merchants
instead
of
brick-and-mortar
businesses.
Why
hold
out
for
that
final
7%?
When
shares
sell
that
cheaply,
even
modestly
good
news
can
double
or
triple
their
price.
The
risk
would
appear
to
have
outweighed
the
return.

This,
to
be
sure,
is
hindsight
analysis.
But
it
accurately
describes
what
occurred.
From
August
2020
through
the
year’s
end,
presumably
owing
in
part
to
purchases
made
by
participants
in
the
Reddit
forum,
GameStop
shares
grew
from
a
split-adjusted
$0.94
to
$4.75.
Without
stretching
the
point
too
greatly,
one
could
state
that
GameStop’s
buyers
had
been
rewarded
by
emulating
Ben
Graham
in
demanding
a margin
of
safety,
and
its
short
sellers
were
penalized
for
forgoing
it.

Eventually
Wrong

Had
that
been
GameStop’s
peak,
the
stock
would
have
remained
obscure
and
there
would
have
been
no
film.
During
January
2021,
though,
the
stock’s
price
grew
25-fold
(!).
The
business
that
once
sold
for
4%
of
its
annual
revenue
reached
a
price/sales
ratio
of
500%.
In
contrast,
fellow
retailer
Best
Buy
[BBY] traded
at
60%
of
revenue,
although
it
was
more
profitable
and
carried
less
debt.

The
point
at
which
GameStop
went
from
being
credibly
valued
to
irrationally
priced
arrived
on
one
of
two
possible
dates,
depending
upon
one’s
perspective.
On
January
13
GameStop
sold
at
$5.11,
barely
up
from
New
Year’s
Day.
It
promptly
doubled,
in
response
to
the
weekend’s
news
that
the
company
had
hired
three
board
directors
affiliated
with
the
e-commerce
firm
Chewy
[CHWY].

For
me,
that
was
when
GameStop
crossed
the
Rubicon.
By
the
morning
of
January
14,
the
stock
had
risen
1,000%
over
the
previous
six
months.
Too
much,
too
fast –
especially
as
investors
incorrectly
assumed
that
adding
directors
from
an
Internet-based
firm
would
speed
GameStop
along
that
path.
(Not
so
far,
it
hasn’t.)

But
even
those
of
a
more
generous
mindset
would
grant
that
the
stock
overstepped
its
boundary
the
following
week,
when
it
doubled
by
Tuesday,
then
more
than
doubled
on
Wednesday.

Who
Was
Long?

GameStop’s
abrupt
gain
did
partially
owe
to
the
short
squeeze
on
hedge
funds
that
is
portrayed
in Dumb
Money.
However,
as
GameStop’s
trading
volume
in
January
was
21
times
above
its
December
rate,
another
explanation
must
be
considered:
the
stock
skyrocketed
simply
because
so
many
people
bought
it.

That
was the
SEC’s
conclusion after
months
of
studying
the
topic.
Its
October
2021
report
dryly
noted
that
the
trades
made
by
shorts
who
were
covering
their
positions
were
but
a
“small
fraction
of
the
overall
trading
volume”.
Without
doubt,
the
squeeze
on
hedge
funds
depicted
in Dumb
Money did
occur.
But
of
greater
importance
was
the
behavior
of
the
long
investors.
Powerfully
albeit
briefly,
they
trampled
all
that
lay
in
their
path.

By
then,
Wall
Street
had
joined
the
party.
As
detailed
by this
article from The
Wall
Street
Journal,
several
institutional
giants,
including
former
bond
king
Bill
Gross,
joined
retail
investors
in
buying
GameStop
during
January’s
feeding
frenzy.
Unlike
many
everyday
buyers,
though,
the
professionals
had
no
intention
of
staying.
They
were
there
strictly
to
buy
high,
and
then
almost
immediately
to
sell
higher.

Conclusion

The
conventional
view
of
the
GameStop
saga,
largely
echoed
by Dumb
Money,
is
that
the
good
temporarily
defeated
the
wicked,
by
turning
the
latter’s
tactic
of
market
manipulation
against
itself.
I
view
it
differently.
I
see
morality
as
immaterial.
GameStop
was
an
initially
sound
investment
that
gradually
became
fully
valued,
and
then
hugely
overpriced.
At
that
point,
anybody
who
owned
the
stock
was
a
speculator.
Some
profited
from
that
gamble,
some
did
not.
None
of
them
should
be
called
“investors.”

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