This week saw the release of the movie ‘Dumb Money’, based on the meme stock mania of early 2021. The stimulus cheque induced stock market rally at a time when most people were home locked down sucked in many first-time investors. Social media where such rookie investors could share information and worse, make concerted bets on stocks with questionable fundamentals, soon turned it into a mania. GameStop, the video game retailer was perhaps the most famous of those. And this article talks about the protagonist – Keith Gill, in the Gamestop story who rallied small investors to bid up the stock at a time several noted hedge funds were shorting the stock. The episode soon turned into a war on Wall Street, the Goliath by the small investors, the Davids.

Keith Gill whose athletic career was cut short by injury found his calling in stocks.

“…at night he would post YouTube videos and write posts on Twitter and Reddit’s Wall Street Bets (WSB) about which stocks were catching his eye. He mixed this advice with his thoughts on Belgian beers and would celebrate big gains by dunking chicken goujons in one of those beers, or perhaps in a glass of prosecco if he was feeling flash. Sometimes he would consult Uno cards or a Magic 8-Ball, a novelty toy shaped like a pool ball which offers 20 possible answers to any yes/no question.”

Gill found deep value in GameStop as he believed the company would recover eventually:

““Everyone thinks I’m crazy, and I think everyone else is crazy,” he said at the time. “I’ve never endured bearish [falling price] sentiment this heavy. I’m a fundamental value investor through and through, and GameStop is an established, uniquely positioned player.” Later, he would say that “many folks just weren’t digging in deeper. It was a gross misclassification of the opportunity. When no one wants to buy it and it looks like it’s going bankrupt or it’s dead, that’s when you really dig in deep.”

…It was this combination of style and substance that was key to Gill’s appeal: part showman with his deliberately cultivated everyman image of headband and beer, part serious number-cruncher who never shirked the hard, painstaking work of financial analysis. And then there was his willingness to put his money where his mouth was. He would post screenshots of his personal investment in GameStop: $US53,000 in all, most of his savings. GME YOLO, he’d write: “GME” for GameStop’s ticker symbol on the New York Stock Exchange, “YOLO” for “you only live once”.

…With Gill as the Pied Piper to his multitude of online acolytes, both stock price and retail investor interest rose vertiginously. A combination of pandemic stimulus paychecks and low interest rates meant that people had cash to spare, and smartphones and social media had democratised the stock market like never before. With trading fees at zero, and apps such as Robinhood allowing investors to buy and sell as though this were just another game, anyone could bypass the traditional gatekeepers.”

The frenzy wrecked havoc on the hedge funds who were short:
“At the height of the frenzy on January 28 the share price was almost $US500, nearly 30 times what it had been at the start of the month. Gill’s original investment was therefore worth nearly $US48 million. Overnight more than 1.5 million users joined WSB, increasing its membership base by 25 per cent. This was the moment for Joe and Jane America to gatecrash the party Wall Street insiders had been enjoying for years. Several hedge funds took huge losses: Melvin Capital was at one stage losing a $US1 billion a day, and both it and White Square, another hedge fund caught in the Gamestop short squeeze, would close their doors within 18 months.”

But eventually Wall Street had the last laugh:
“Inevitably, however, the real picture is not as clear-cut as the David and Goliath narrative where retail investors make a killing while Wall Street takes the hits. Plenty of hedge funds made serious money both from their own stakes and from lending out stocks to panicking short sellers: Mudrick made $US200 million, Senvest $US700 million, BlackRock more than $US2 billion. The hedge funds which did go under did so because rivals kicked them when they were down. GameStop might have brought the likes of Melvin to its knees, but it was Melvin’s competitors who didn’t let it get back up.

And for every small-time investor who cashed in, there were many others who held onto their stock too long and never saw a profit. GameStop is now trading at less than $US18 a share, around the same level it was before the short squeeze began. WSB is full of young, aggressive traders who ignore fundamental risk management principles and regard letting go of stock as weak. “The guys who got in because of the structural short, that was a smart move, and that was the right thing to do,” said analyst Michael Pachter. “The guys who stayed in because they believe in [GameStop’s new executive chairman] Ryan Cohen: dumbasses.”

What about Gill?
“..walked away from the Gamestop short squeeze with around $US20 million. He hasn’t posted on YouTube, Twitter or WSB for more than two years. He didn’t participate in the making of Dumb Money. What, if anything, he’s spent his money on remains a mystery.”

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