Less cats, ok, great.
– Keith quotes from Dumb Money (2023)
The new movie ‘Dumb Money’ dramatises the true story of an unlikely messiah named Roaring Kitty who decides to sink his life savings into shares of the video game seller GameStop and then praise the stock to his fans.
So many people buy GameStop shares that the company’s valuation soars, crushing the positions of hedge funds and investment banks that had bet against it. Thus, a band of lovable misfits triumphs over the financial giants.
Much as we enjoyed the movie, we are investment banking analysts, not movie critics. As practitioners of the dismal science, we worry that some viewers will continue to be inspired to copy the heroes’ investment strategies, which are about as smart as driving home at 140 kilometres per hour after seeing ‘The Fast and the Furious’.
You can see our worry in the movie’s title itself: ‘Dumb Money’. That’s Wall Street lingo for unsophisticated individual (retail) investors who make mistakes that can be exploited.
Is it nice to call the actions of everyday Joe investors dumb? No. Is it fair? Well, … yes.
We aren’t calling retail investors dumb. What we are saying is that these are smart people who behave in dumb and self-destructive ways.
Their actions reflect overconfidence, financial ignorance, and a wealth-reducing love of gambling. Even a brilliant mind like Sir Isaac Newton could make dumb investment decisions. In 1720, he became an investor in the South Sea Company, only to lose money in what would later be known as the South Sea bubble – the world’s first financial crash.
While we celebrate an unintelligent investment strategy in a moment when the stock market was reaching historic heights of stupidity, ‘Dumb Money’ raises an important question: Are financial markets getting dumber over time? Or was this merely a momentary lapse?
We did see a prior peak of stock market dumbness in the 1999-2000 tech stock bubble when many retail investors made the mistake of being wildly overoptimistic about technology stocks.
In the financial model I devised, I managed to capture the self-destructive behaviour exhibited by investors during this specific period. However, compared to the GameStop story, that crazy optimism seems almost rational since it at least involved a correct thesis that the internet would eventually produce some profitable companies, stupidly applied.
After the tech bubble burst a year or so later, stock markets were less obviously dumb until the COVID-19 lockdowns spurred a tsunami of retail investing, as enormous numbers of people were suddenly stuck at home with nothing to do and, importantly, nothing to bet on. Casinos were closed and professional sports were on hold. Meanwhile, brokers like Robinhood were offering the option of trading stocks commission-free.
The gambling impulse was also goosed by the Employees Provident Fund (EPF) retirement savings withdrawals and social media platforms like Facebook.
Money began to flow to meme stocks, shares of oftentimes struggling companies that somehow caught the popular imagination owing to nostalgia or the desire to root for the underdog.
Among these, GameStop stands out as a prime example. Its meteoric rise at the start of 2021, despite the company’s bleak business prospects, symbolised a broader populist protest. I vividly recall how everyday investors banded together, rallying against the billionaires and powerful investment banks.
For those unfamiliar, meme stocks are shares with a compelling narrative that are hyped up and popularised by retail investors on social media platforms.
Since GameStop, a suspiciously high number of other dumb things have occurred recently. Just this year, I’ve seen bizarre price fluctuations of meme stocks that are in or approaching bankruptcy and in foreign companies such as Bed Bath & Beyond Inc, WeWork or even the Vietnam EV maker VinFast, listing in the stock markets.
Should we throw up our hands and conclude that the whole stock market is crazy? No. These crazy incidents remain confined to only a few stocks.
Generally, stock prices tend to return to their fundamental value over time, although this process can sometimes take years. Unfortunately, retail investors who bought in at inflated prices and held onto their investments for too long would often end up bearing the brunt of the losses.
Why? Investing is hard and there is a lot of competition. There are thousands of actively managed mutual funds. Do you think the average golfer would have a chance against Tiger Woods in his prime?
In this case, the ineptitude of individual investors has nothing to do with the lack of trying. The harder those individual investors try (in the sense of trading more often), the more they lose. Perhaps this idea will resonate with some readers.
I’ve witnessed the wealth-destroying powers of retail investors countless times. Whether in stocks, mutual funds, or options markets, across various countries and periods, the pattern remains consistent.
If retail investors are the dumb money, then who exactly is the smart money? Well, the answer includes sceptics who can spot a company’s shortcomings and express their views by either selling their shares or betting that share prices will fall in a practice called short selling.
Although Dumb Money depicts professional hedge fund investors as heartless villains who treat a pet pig better than their housekeepers, it would be wrong for movie audiences to think that selling short is inherently bad.
Those who saw the movie “The Big Short,” which depicts a band of misfit short sellers spotting major problems in the U.S. financial system before its near collapse in 2008, these investors can also be lovable — even heroes.
I certainly hope that over time, widespread meme stock investing will go the way of toilet paper hoarding and people will go back to rooting for Real Madrid versus Manchester City in the quarter-final of the UEFA Champions League instead of Roaring Kitty versus hedge funds.
Those who are concerned about inequality should channel their voices through the voting booth rather than the stock market. Additionally, I wish that retail investors confine their gambling to small stakes, like buying lottery tickets or placing wagers on their favourite football teams.
Admittedly, a movie about a bunch of ordinary people gradually building wealth through prudent financial decisions would be the world’s most boring movie. Boring, but also not dumb.
The views expressed here are those of the columnist and do not necessarily represent the views of New Sarawak Tribune.
