When the Game Stopped for Wall Street: Lessons From “Dumb Money”

Throughout history, the power of collective action has won battles, shaped civilizations, and achieved what even today is unexplainable. In ancient times, collective efforts built the pyramids, the Great Wall of China, and the city of Petra — structures that still stand as Wonders of the World.

A collective action is a double-edged sword, capable of driving both progress and disruption. This holds true in finance, where it has the potential to change lives for the better, and also to destabilize entire markets. An example of this could be seen in the GameStop short squeeze, illustrated in the 2023 movie “Dumb Money.”

The COVID-19 pandemic left a lasting impact on many businesses. One victim of the lockdowns was GameStop, a game store whose value had already been declining due to online game purchases. With the lockdowns, GameStop’s stock price plummeted, and hedge funds were betting against its survival. Sensing an opportunity, many investors, both retail and institutional, moved in to squeeze every last drop out of what they saw as a dying company through short selling.

Steve Cohen sneered, ‘You’re shorting even more right now, aren’t you?’ Gabe Plotkin responded with a dismissive shrug, ‘600’000 shares, maybe.’
‘Dumb money, man,’ said Cohen, and Plotkin added with a smirk, ‘I’m happy to take it.’ Little did they know that they were about to get a taste of their own medicine.
— Dialogue of two fictional characters from the movie “Dumb Money”

The situation changed rapidly when Keith Gill, an amateur investor, saw value in GameStop’s low prices. He not only invested but also posted his ideas on Reddit and regularly updated his positions. Inspired by his move, many like-minded investors united on Reddit's r/WallStreetBets and bought shares in GameStop, raising its value to the point where the market almost crashed.

What are the takeaways from this event, as showcased in Dumb Money, for the private investor?

1. Think Twice Before Aligning Investments With Personal Values

An image of Steve Cohen and Gabe Plotkin from the movie “Dumb Money”
Source: IMDb

Short selling, a strategy that profits from a stock's decline, can seem lucrative but is often criticized for the way it overlooks how profit is pursued at the expense of real people’s livelihoods. Dumb Money portrays Wall Street as a monolithic entity driven by the single goal of money-making whatever it takes, epitomized by Gabriel Plotkin (played by Seth Rogen), the manager of Melvin Capital and a key figure in betting against GameStop.

Dumb Money doesn’t just focus on the conflict between retail traders and hedge funds but emphasizes the consequences of financial maneuvers on individual lives. A poignant example is Harmony Williams, a college student drawn into the meme stock frenzy. Her involvement is fueled by the desire to combat perceived injustices in the financial system, rooted in her family's hardships.

When Harmony’s friend questions her commitment to holding on to her GameStop shares, she highlights, “The stock market is not about money.” In response to the obvious misunderstanding, the heroine shares a story about her father:

I told you about his store, right? Shopgo. It was like this big chain in our area. My dad, he worked his way up from bag boy to general manager. And then a Wall Street fund bought it, *** all the money out and then declared bankruptcy. He lost his pension. Everything. It’s why he had to work at Pick’n *** Save til the day he died. And it’s why I’m now up to my *** in debt. These *** are trying to do the same thing to GameStop.
— Harmony Williams, a fictional character from the movie “Dumb Money”

While a huge success at the beginning, things take a turn. Harmony's approach, rooted in impact investing, allows individuals to align their portfolios with companies that reflect their ethical values or contribute to long-term societal progress. While this strategy can yield great financial returns alongside meaningful change, investors must exercise extra caution.

As the Dumb Money example shows, if an investor is blinded by love, they can't identify and break up with a bad investment strategy, even as it becomes obviously unsuccessful. Kenneth Griffin, founder and CEO of Citadel, warns, “When you're emotionally married to an investment, you lose the rational judgment that defines successful investors.” Therefore, investors need to remain objective and avoid falling in love with their investments.

2. Beware of a Bull Market Driven by a Collective Action

We may be hyenas, yes. But guess what? You put enough of us together, and we can destroy a lion.
— Marcos Garcia from the movie “Dumb Money”

An image from the movie “Dumb Money”
Source: IMDb

At the time, Keith Gill, also known as u/DeepF**ingValue and RoaringKitty, was a financial analyst at MassMutual. He boldly claimed that the hedge fund was wrong and, driven by emotion, invested USD 53’000 in GameStop. His bet could have remained a losing one had he not decided to share his strategy online. When he streamed his insights, the idea caught fire and thousands of netizens jumped on board.

As time passed, GameStop’s stock price began to soar. In April 2020, shares were trading at just USD 2.57, but by the end of January 2021, they had skyrocketed to USD 483 — a nearly 190-fold increase. At the same time, Keith’s investment was worth USD 47 million while the short squeeze cost hedge funds a staggering USD 12.5 billion in January 2021, according to financial analytics firm Ortex.

The parallel between Gabe Plotkin and Keith Gill in “Dumb Money”
Source: IMDb

The reason many investors held on to their GameStop stocks can be seen in the character Jenny Campbell, who said, “[...] look what we pulled off with these hedge funds! If we keep pushing up the price, maybe we can scare even more of these guys into closing out their shorts – so all that bailout money? It becomes ours.”

Moments like these, fueled by collective enthusiasm, can easily lure investors in, especially when headlines and conversations echo the sentiment, “Everyone is investing here now!” However, prudent investors should always conduct their own due diligence before getting swept up in such momentum.

Investors should evaluate whether the crowd is acting rationally or emotionally, consider the underlying fundamentals, and assess whether the company or technology has long-term potential beyond the current hype. Remember, collective action can quickly spiral out of control; as the saying goes, “It’s time to sell when shoeshine boys are giving stock tips.”

3. Liquidity Is Never Guaranteed in Cases of Panic Selling

To grasp the whole picture between Wall Street and Reddit, we also worth mentioning the third party — Robinhood, an app-based brokerage service that allowed the short squeeze to happen in the first place. Back in the early 2020s, Robinhood gained popularity among retail investors, particularly Gen-Z and Millennials, for making investing more accessible. However, the desire to democratize the stock market became a cruelty when it came to GameStop's stock squeeze.

Robinhood’s leadership found themselves in the middle of a firestorm; they couldn’t pay all their users. They received a notice for a deposit of USD 3 billion to clear all the trades coming in but the company only ever raised USD 2 billion in its history.

To avoid dire consequences, the platform made the controversial decision to restrict trading on GameStop on January 28, 2021, allowing users to only sell their positions, not buy more. Naturally this move, while helping to stabilize the market and resolve the critical situation Robinhood was facing, was met with public outrage and accusations of siding with Wall Street.

The following shutdown of r/WallStreetBets only further sowed doubt among investors. Since there was no way to check Keith Gill's balance sheet updates, some retail meme stock investors decided to take the safe route and sell their assets, thus breaking even and avoiding risks.

For private investors, the lesson is clear: guaranteed liquidity is never truly guaranteed during periods of market upheaval. Even platforms built on the promise of accessibility, like Robinhood, can find themselves overwhelmed by the sheer scale of a crisis, leaving investors unable to buy or sell when it matters most. Being prepared for unexpected disruptions is therefore essential in navigating the complexities of modern markets.

A lot of people feel the system is broken. The whole idea of the stock market is […] kind of a fair playing field, where if you’re smart and lucky, you could make your fortune. But, if it ever was that, it’s certainly not anymore. The big firms have such a big advantage [...] that there’s no hope for the little guy anymore. Or there was no hope. Now, it seems like maybe there is. As for me, I like the stock [GameStop], and I don't plan on selling anytime soon.
— Keith Gill from the movie “Dumb Money”

Final Thoughts

Dumb Money doesn’t shy away from blunt language and, in contrast to The Big Short, employs a lighthearted narrative style. But that doesn’t overshadow the movie’s invaluable lessons for private investors, one of them being the collective power of many can prevail.

In many ways, the protagonist redefined the phrase “Your network is your net worth.” Keith Gill built his blog from scratch, published profits to the public, recorded videos and streamed, communicated with other netizens, and eventually built the trust of thousands of people, becoming something of a legend.

Gill’s story highlights the tremendous power of networking in the investment world. Today, rather than relying solely on social media, investors can find even greater value by joining exclusive communities of like-minded individuals – such as the Moonshot Circle – where shared expertise and insights create a foundation for success.

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