The Dumb Money movie narrates the recent story of the battle between hedge funds and the subreddit Wall Street Bets, serving as a somewhat spiritual sequel to the 2015 Academy Award winning The Big Short. However with a of only 104 minutes the movie doesn’t delve into the minor, and quite bizarre, details that made this such a great real-life story to begin with. As it’s released to streaming this week, and as someone who was part of the ride, let me take you on a deep dive into the story behind Dumb Money. We’ll go a bit more into the details of the economics taking place so you can be the smartest guy in the room when you make a re-watch party for the film on the anniversary of the squeeze.
Our tale starts just as the movie with Keith Gill (a.k.a Roaring Kitty/DeepFuckingValue) a thirty something year old trying to make ends meet during the pandemic. While the movie portrays Keith as an average Wall Street Bets (WBS for short) investor trying to make a bag from his basement Keith is far from the stereotype. Unlike the majority of WSB users, he actually makes money through the investment strategy engraved in his name. You see in the stock market you can find the companies that everyone knows and love: Meta, Amazon, Netflix, Google, Apple etc. This companies are your investing safe zone since is the part of the market that gets analyzed the most and as such it takes more effort, risk and luck to hit one of those 10x gains you try to impress the ladies at the bar with. The uncharted territory of less sexy and less analyzed industries such as waste management and plastic production is where you can find price discrepancies between the market and real value of a company that can potentially produce that 10exer. In his July 2020 video Roaring Kitty describes himself as Deep Value investor. For a more in-depth understanding of this investing strategy I highly recommend checking this video by YouTuber Benjamin, which is where I took the safe zone example, who makes a great job at giving a fun and in depth explanation of what deep value is. For now, know that Keith aimed to find struggling companies, preferably on the verge of bankruptcy, that could attribute their poor performance to external rather than internal factors. One of those companies happened to be GameStop. While the movie jumps between Roaring Kitty’s first video in August of 2020 and the short squeeze in January of 2021, Keith and GME’s story goes way back. For a full timeline of events, I refer you to another one of Benjamin’s videos (he’s really good). Back on September 3, 2019, Keith invested $53,000 into long-term GameStop call options expiring in January 2021. Under his reddit name DeepFuckingValue, he shared his findings on WSB where he was mostly ridiculed. Everyone new that GameStop was the next Blockbuster, a company on its last leg. Long gone where the days when gamers made their annual excursion outside in order to battle royal their way into buying a copy of the latest Halo release and stores could re-sell the same GTA copy 10 times to turn in a profit. If you’re interested, you can watch Roaring Kitty’s own explanation as to why he liked the stock. Essentially he liked the fact that most of the stores where actually profitable ,and GameStop had a big market share in a $150 billon dollar industry. Investors also thought that the arrival of the new rumored diskless generation consoles would be a swan song like moment for the company. However, Keith saw the departure from disk consoles as the perfect opportunity for the company to reinvent themselves, all what they needed was a push in the right direction. Backing up Roaring Kitty’s claims was none other than Dr. Michael J. Burry, famous for his involvement in the real-life events depicted in The Big Short. In August 2019 Burry announced that he now owned 3% of GameStop through Scion Asset Management, validating Keith’s original research. The decision not only DeepFuckingValue plenty good Reddit karma inside WSB but also increased his investment’s value by $50,000. It was all looking good for the company until the summer of 2020 when it seemed that the company was on its last leg after a terrible earnings report, a global pandemic, some bad press and the announcement of a plan to close approximately 1000 stores in the coming years. This didn’t scare Keith though; instead he purchased more stocks and braced for the long winter ahead. Little did he knew, spring was coming early.
On January 31st 2012 r/Investing reject u/Jartek decides to create his own sub reddit, Wall Street Bets. The forum originally worked as a safe space for serious and somewhat competent investors to post and discuss the risky trade ideas frowned upon inside r/Investing. This all changed when Robinhood began to gain some traction back in 2015. The commission-free trading app allowed the average Joe to enter the investing world. The movie gives viewers with a glimpse into the life inside WSB by showing a variety of memes born within the site but fails to convey the sheer level of degeneracy and borderline ludopathy displayed there. For a more detailed account of WSB’s most iconic members, such as 1ronyman and controlthenarrative, you can watch a videoby YouTuber Big Boss. But let me tell you about my personal favorite one: the tale of r/analfarmer2, yes 2 as in there was already an r/analfarmer and r/analfarmer1. R/analfarmer2 was a 19 year old member of WSB that through a series of YOLO investments, made and lost approximately $750,000 in just a matter of days. Despite the quality of the posts being essentially porn loses, clueless wins and memes, you can occasionally find valuable posts made by the other 1%, who actually know what they are doing, like our friend DeepFuckingValue. As previously mentioned, his original $50,000 dollar investment on GME was met with laughter and skepticism. Still, once Michael Burry, the protagonist of one of the two films WSB users have actually watched, bought into DeepFuckingValue’s thesis the subreddit began to pay attention to Keith’s monthly posts about GME’s performance. DFV’s posts eventually caught the attention of another member by the name r/airdoon who decided to do his own due diligence. On September 19, 2020 he made a post with his findings that would change thousands of lives. The original post titled GME short squeeze talked about how hedge funds sold short about 80% of all GME shares. Shorting a stock essentially means that you “burrow” a stock at a certain value, hoping to re-purchase it in the future at a lower price. If the price goes up, you either pay to keep burrowing the stock or buy it at the current price to return it. An increase in GME share price could trigger a short squeeze, forcing hedge funds would to buy the shares at a higher market value creating a potential loop that could make millions for those holding the shares. The only way this works though is if the share holders refuse to sell since selling lowers the share price. All that was needed for the short squeeze to happen was a fast rise on the share price, prompting the first short sellers buy. The post didn’t go viral immediately but began spreading throughout the forum like a virus. People had been locked inside their homes for almost a year, some lost their jobs and some lost loved ones. People were also bored, had extra cash from the stimulus checks, were angry at a system that saw the rich get richer during a pandemic, and had nothing to lose. The pieces of the rocket where already in place: all the moon mission needed was an igniter.
That igniter finally came on January 12, 2020 when Ryan Cohen joined GameStop board of directors hoping that his success selling dog toys could somehow translate into the video game industry. Markets really liked the news moving GME’s price to almost $20 per share, setting in motion the short squeeze. In the following days the price of the share kept rising but short sellers held their positions. Meanwhile an army of WSB apes began to assemble. On January 19, Citron Research, one of the biggest GME short sellers, makes a tweet calling the GME holders suckers for buying the stock at the current price stating that the price would go back to $20 in no time but the share closes the day at $43.03. This was the moment the rocket truly took off. By January 22, GME closes at $65 per share. On January 25 with the share price at $76.79 Melvin Capital, the biggest GME short seller, is in life support after losing 7 billion dollars on its GME position until it gets a bail out for 3 billion from another hedge fund. January 26 Elon Musk tweets “Gamestonk” sending the share price to $147.98. Is at this point that mainstream media picks up the story and people outside WSB began joining the movement. This people didn’t knew all the intricacies of the trade, all they knew was the narrative that had been created: it was the small guy vs the big guy and the more the line went up the more the hedge funds would suffer. Day traders also realized that companies such as Nokia, AMC and Blackberry were in a similar situation and began buying the stocks triggering smaller short squeezes all around Wall Street. It was no longer about the money it was about sending a message. People kept looking at Keith Gill who held strong to his shares despite his account hitting the 43 million dollar mark. Finally in pre-market trading on January 28 it hits the $500 per share the same day that Robinhood prevents users from buying GME and all other so called “meme stocks” and only gives them the option to sell. All of this chaos sends the price of GME back to $200 in the span of 2 hours. By early February, the stock goes back to a share price of $50 dollars. Now here comes the big question. Was Robinhood working with the hedge funds in order to stop the squeeze? This is a complicated question but the short answer is no. You see every time you make a transaction in Robinhood they give your money to a clearing firm which is the entity responsible for transferring ownership of the stock from the seller’s broker to the buyer’s broker—and vice versa. This process is not done individually for every transaction, instead the clearing house waits until it can net several trades into “one position per security, per client, per settlement date,” according to its website and this article. This whole process takes two days and at the end the seller provides the stock and the buyer provides the money. Since the clearing house guarantees the transfer takes place they require a collateral from the broker to ensure they have the assets to complete the transaction. Due to the volatility of the market during those days Robinhood was required to put a 100% of collateral which created a liquidity problem that could be solved by blocking the more volatile stocks being sold in the app.
After everything was said and done firms all around Wall Street had lost about 70 billion dollars. From this point on thing went down pretty much as in the movie’s third act. All major players got a subpoena to testify in-front of Congress as the US government and the public tries to make sense of the absolute madness that was the January short squeeze. Most of the drama that unfolds between Keith and his family is pure speculation since Gill refused to talk with any of the film producers. He might had not been an institutional investor nor a cat but he became the hero that people needed at the time. Oh and one last thing, that story of Kevin running during a thunder storm? That actually happened according to the filmmakers.