We took some time this past weekend to watch and review Eat the Rich: The Gamestop Saga on Netflix. If you enjoy crazy stories about personal finance and investing, especially with a David vs Goliath theme, this show could just be your jam. We all love it when the little guy takes on the bully and wins (well, I guess the bullies don’t). However, in real life, as in this story, it’s rarely the case. Bullies often bully because they have a superior advantage (size, intellect, money, lawyers, hit men/women, rich/powerful family/friends), although sometimes it’s self-perceived, which gives the little guy an advantage.
Some people got hurt financially during this story, and some came out ahead. Everyone went for a wild ride. We’ll give you the run-down from a financial advisor’s perspective. To start, let’s cover the two competing teams.
On one side, you have the massive Wall Street hedge funds. What’s a hedge fund? They’re investment funds that someone can buy into, just as you can buy shares of an S&P fund. But these aren’t good old, passively managed, low-fee index funds. Since hedge funds are managed by (allegedly) the best of the best in terms of fund managers, the price of admission is very high. Sky-high, in fact. You don’t buy into these with chump change. We perceive them as a “rich people thing” for good reason. They are very actively managed with high expenses and typically use risky strategies, such as shorting stocks (more on this later). Picture this group as a bunch of folks wearing the very finest business attire, magnificent hair, manicured nails, and who dab the corners of their mouths with expensive linen napkins during three-martini lunches at the top of big fancy city skyscrapers. They would be the Goliath of this story.
On the other side, you have the wild and crazy loosely organized rabble of WallStreetBets, which is an internet-based investing discussion forum on a site called Reddit. Picture them as everyday younger folks, dressed in t-shirts and camo shorts, and who also love to play video games. These are your Davids. They use funny, made up names, rather than their real names. Oh, and it’s early 2021, when most of the Davids are stuck at home because of the COVID-19 pandemic. They use an app called RobinHood to make their trades. It has a cool name that in itself gives a “little guy vs big guy,” “David vs Goliath” vibe, and kind of gamifies investment trading. What’s not to like, right? (Narrator: “Investing is not a game.”)
Ok, teams assembled. Are we ready for the national anthem? Wait, we said we’d get some terminology out of the way. At the centerpiece of this documentary is the trading technique known as shorting a stock. Hedge fund managers do it quite a bit. So, what’s that?
Suppose you’re walking down the street with a friend who’s a veterinarian. You come across an injured baby racoon on the side of the road. You don’t think it’s too badly hurt, and you really love racoons, your spirit animal, so you’re rooting for the poor little thing with all your heart. The veterinarian inspects it, and using their lifelong knowledge, experience, and expertise, says, “This racoon is going to die.” You are aghast, can’t imagine it, and through welling tears you say, “No way.” The vet offers a bet, and you take it. The vet then leans down and smothers the racoon.
Ok, that’s a bit of a stretch, but not that far off. Shorting a stock is a bet that it will go down in value. Hedge fund managers have tools, data, and instant analytics/research at their disposal that normal folks don’t. If they see signs that a company is struggling, they’ll invest in that bet that the company’s stock will go down in value. That’s shorting a stock. If it then happens, the hedge fund makes money. It was a good bet! If it doesn’t happen, the hedge fund can lose, and lose quite a lot if the stock goes way up. When the market sees a lot of short action on a stock, that can exacerbate its decline (smothering the racoon). A self-fulfilling prophecy and a form of market manipulation by the market makers (industrial investors).
Regular investors (called retail investors) take offense at that, especially if they have some sentimental or financial connection to that stock, and definitely if it costs them money. Remember, these are everyday Davids, not napkin-dabbing Goliaths. They may not dress like it, but they’re a heck of a lot smarter and informed than folks (including Netflix) give them credit for. They write and share detailed investing thesis posts on the sites they frequent.
The trouble starts in this story when the Davids notice the short action building on one of their sentimental favorite “stonks,” the dying video game store Gamestop. They take umbrage at the Goliaths, and invoke the massive power of the masses to band together to buy in large quantities. There are a few ringleaders coaching the team along, primarily one who goes by the name of RoaringKitty. Gamestop also gets the attention of these David day-traders because someone noticed that the all-around good guy and legendary founder of internet pet-supply company Chewy has placed a bet on the stock by buying lots of shares.
So, the Davids of WallStreetBets begin buying and buying, causing the once beleaguered dying-racoon Gamestop stock to start going up and up. This is making the hedge-fund Goliaths on the real Wall Street very nervous. Nothing like it has ever happened. It’s not in the algorithms they’ve carefully designed. They’re starting to bleed money, and in some cases, even risk insolvency. The Davids are manipulating the market against the true market manipulators.
This part of the story is kind of like, say, you’re the nerd in high school and the star fullback has been mercilessly taunting you, and one day you walk up and poke him in the eye with a #2 pencil (eraser side!) from your pocket protector (Ok, and a bunch of your nerd friends do too). Everyone laughs at him, bent over in pain, and for that one sweet moment you relish in having what you dreamed about. You’re the star of the show, on top of the world, for just seconds. Until that bully stands back up, and, well, we know what usually happens next.
It’s fascinating to watch how this transpires. As the big David vs Goliath fight plays out, it gets the attention of major influencers like Elon Musk and Jim Cramer, who has a big viewership for his investing show. This only serves to add more fuel to the fire. As the Gamestop shares fly up to values many times what the Davids originally paid, of course there’s temptation to cash out while they’re ahead. These aren’t rich people, not by hedge fund standards, anyway. Led by RoaringKitty, they urge each other to not sell out, and continue to buy.
We won’t spoil the ending for you, but will say that a few shocking things transpire. Well, knowing how dirty the investing game can be, especially when massive amounts of money are at stake and powerful people are being poked in the eye by nerds with #2 pencils, it’s not all that surprising. At one point, the dorky school principal shows up (Congress) for more sad hilarity.
The moral of the story is that if you’re into the rush, adrenaline, and excitement of alternative investments, crypto, or day trading, you should tread carefully. We tell our clients that’s fine, as long as you do it inside a personal brokerage account set up to have fun and learn. Never do this with your important money for retirement, kids’ education, or other important life goals. Consider it a hobby or entertainment expense, like playing poker, and expect to lose it at some point.
Eat the Rich is a fairly high-level overview of what happened during those few months, with some well-done School House Rock-style entertaining explainers for those who aren’t up on the investing lingo. It leaves out a lot of details, and in the interest of accuracy should have had over three episodes to cover those details. There’s a movie coming with Seth Rogen and Pete Davidson on the saga, and we’re excited to watch that as well. Until then we have this docu-series, which was entertaining because of the wild David personalities featured, and the hedge fund managers interviewed (who came off exactly as you’d expect).
But was this really what happened? There are inferences given as to whether the hedge funds strong-armed RobinHood, and whether RoaringKitty himself was a part of the system and strategized from the start to enrich himself at the expense of others. As well, did the moderators of WallStreetBets sell out, forcing members to yet another subreddit called SuperStonk? Was Netflix influenced to portray this story in a certain light? A big moral to this story is to be very careful, on the internet especially, as people (or apps) may not be what they seem. They may be like that predator that dons a rainbow wig and bulbous fake red nose to get closer to their intended victims.
There are around 30,000 hedge funds globally. In 2021, only three of them beat the S&P 500, which returned over 26% (over 28% with dividend reinvestment). That’s a bit unfair, as a hedge fund’s job is to provide positive returns under any market conditions, not just the up years. However, it’s very difficult, nigh impossible, to beat “the market” over the long haul.
So, how do you beat Wall Street? When we’re advising clients and/or managing their investments, we take a proven and careful approach. We gauge their risk tolerance level, time horizon for when they’ll need to use the money, and how much they’ll need, and form that into a careful plan to do our best to make it happen. That involves just a couple of low-fee, diverse ETFs from proven companies like Vanguard. It’s simple to understand and manage, and often, in the long run, beats the house. And yeah, it’s boring, but it leaves more time for scuba diving or skydiving :-)