The film, Dumb Money (2023), directed by Craig Gillespie, is a dramatized representation of the events that unfolded at the beginning of 2021.
The specific event I am referring to is the GameStop (GME) short squeeze that occurred in January 2021 and continued to provide extreme volatility in the stock until the end of June of that same year. Our team published a piece in February of 2021 that summarized the events – Our Thoughts on the GameStop Saga.
While most of the movie is a comedic representation of the GME short squeeze, the film’s main points are historically accurate. The film is based on the real-life story of amateur trader Keith Gill, who goes all in on GameStop shares and convinces thousands of others to do the same through his YouTube channel, Roaring Kitty. The film represents the big-name players on the short side of the trade: Gabriel Plotkin of Melvin Capital, Steve Cohen of Point72 (even Steve Cohen’s pet pig is represented), and Ken Griffin of Citadel.
Although most of the story is factually correct, not everything happened exactly as shown. For example, some of the people who followed Keith Gill’s trade, such as the character Jenny, are mere representations of the type of people who participated in the GameStop mania. The movie seems to focus more on the idea of class warfare between retail traders and the Wall Street elite; retail traders being the “good guys” in this case, while the other side is being portrayed as the “bad guys.”
Possible Questions Leaving the Movie
I was able to convince my wife to come with me to see Dumb Money. While the movie is informative at times, she left with some important questions that our readers may also be curious about (the Big Short film from 2015 does a good job of providing some clarity, in my opinion).
“What is a call option? How does it work?”
A call option is a derivatives contract giving the owner the right (“the option”), but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time. Often, the underlying for these options are stocks or equities. But technically, the underlying could be almost anything.
These call options gain value when the price of the underlying value rises above the strike price of the options contract. To keep it simple, if you buy a call option on stock XYZ with a strike price of $100 and the stock is trading at $110, then the underlying value of the option is $10.
“How do people use gains from investments to buy more investments?”
There are two main ways investors are able to do this. First, the investor could close the position from their “first” investment. After closing out this position (for example selling a stock you own), you can then use the proceeds to make another trade.
The second way would be to utilize leverage. You can use the securities from the first trade as collateral for a loan to fund a second trade. This entails additional risk but there is the possibility for additional return this way.
Lessons Learned
Overall, the movie was enjoyable, but I felt that the fast-paced movie glossed over a valuable lesson to be learned from the GameStop craze of 2021: risk management. Lots of money was made and lost by both sides of the GameStop trade. Some people sold at the top while others held on and rode the stock all the way up and all the way down.
On the short side, the main risk when taking on this trade is that the possible losses are unlimited while the potential gains are limited. This short trade also commonly utilizes leverage1. An important reminder when using leverage is that leverage can amplify returns upwards but can also amplify losses downward. So, while leverage is helpful in up-trending markets, it can be very hurtful in down-trending markets. These lessons on leverage apply in both long and short trades.
The other big risk management point I took away from watching Dumb Money is the consideration of taking gains over time. There are many traders out there who rode the GameStop craze all the way to the top, didn’t sell and rode it all the way down, erasing their potential gains. Although there are tax implications to taking gains, realizing gains can allow investors to rebalance portfolios, take profits, and manage risk. While maximum returns can be enticing, managing the tradeoff between risk and return can be integral to reaching an investor’s goals over time.
1) A short sale is when you borrow the stock, sell it into the market, and the proceeds of those trades come back to the seller. In exchange for borrowing the stock, the short seller has to buy an agreed upon interest rate to the owner who lent them the shares. The short seller must pay the interest rate as well as deliver the shares back to the owner at some point in time.
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
