The founder of a $12.5 billion investment fund calls, very angry, the builder he hired to demolish the house he just bought facing the sea. It is next to his other mansion and he wants to build a tennis court there to play with his family, because it is the beginning of 2021, in the middle of the pandemic, and you can’t go out much. In the middle of the fight he receives another call, which makes him run across the garden that separates his two properties to his desk:
—It seems there is a guy who is moving all the purchases.
—What guy?
—A certain Roaring Kitty (kitty that roars, in English).
The man staring blankly at a huge rising line on a chart is bearish investor Gabe Plotkin, and the scene is fiction, but it belongs in a movie. (Dumb Money2023) that tells a true story: that of rally of Reddit, when in 2021 an army of investors caused funds like Plotkin’s to lose billions, investing in stocks that seemed doomed. These weeks, the movement that managed to bend the arm of Wall Street has had a short-lived resurgence.
dumb money (dumb money, in Spanish) is, in addition to the film’s title, how Wall Street bankers refer to retail investors. And Roaring Kitty is Keith Gill, a streamer and youtuber who began defending in 2021 on the Reddit forum that the shares of the Gamestop video game store chain were undervalued. In the middle of the pandemic, he was convinced that a physical sales business—whose main product can be purchased without having to leave the couch—had a lot of potential. He was right.
Gill managed to get a whole legion of small investors to use their pandemic savings to invest in Gamestop through free platforms. This euphoria was transferred to other stocks punished by modern times, such as BlackBerry or the AMC cinema chain, which were the focus of funds that were betting that they would fall. The movement went from being an investment trend motivated by a convinced forum member to becoming a social crusade: the silly money, against the ties of Wall Street.
Thus, a man armed with a webcam made Gamestop shares go from five to more than $120 from his basement and forced the funds to close bearish positions of more than $10 billion. And, incidentally, he managed to make his $50,000 investment reach, for a moment, almost $50 million. In June of that year, after testifying before Congress for an investigation into stock manipulation, Gill disappeared from public life with approximately $30 million in his pocket. Until last Monday.
Three years later, he uploads an image in which a man is seen playing the console and sitting up. A meme that comes to say that things are getting serious. The euphoria begins: small investors see in that tweet the return of their particular messiah and start buying Gamestop shares and other meme values, such as AMC. The video game seller soars and its price is suspended dozens of times. In two days it rises 170%, and once again puts bearish funds that seem to have forgotten the lessons of the pandemic in trouble.
The tool of the bears is the short position: they borrow a stock and throw it into the market. When it goes down, they buy it back and return it to the lender. The difference between what you paid and the buyback is your profit. It is riskier than conventional investing: a security can only go down until it is worth zero—a containment dam—but it can skyrocket to infinity. And, with every penny that rises, the bears lose more. Furthermore, when they see that they rise, they usually close their positions by compensating them with purchases. And so they help, like a snowball, for the stock to continue rising.
Networks and the “unfounded sense of control”
That a meme moves millions seems irrational. This is what Juan José del Valle, head of analysis at Activotrade AV, defends. It also seems that hundreds of users analyze each of the videos with unconnected fragments of films that Gill has uploaded this week, like someone reading the palm of a hand. “The use of technology through networks has in recent years caused small investors to have overconfidence or an unfounded feeling of control,” says Del Valle, who clarifies: “It is the big ones again who take the lead.” bigger and better part of the pie.”
But, just as Gill defended in 2021, other analysts believe that there are grounds to justify the increase. The main one may be the most basic: the law of supply and demand. A well-bought stock rises. And, as with Elon Musk, there are voices that manage to move investors. If Gill returns, someone with an eye can predict that the stocks he is associated with will rise. It is the rationality of the irrational. “Specific analysis is a challenge,” emphasizes Oskar Bernhardtsen, Investment Strategist at Saxo Bank. “If you jump in, you risk losing, but these trends can also continue to rise.”
This new rally It has not, however, had the magnitude of 2021. The enormous savings from confinement and the platform boom were the perfect environment, and both are surpassed. The movement is languishing: Gamestop hit a high of $64 per share last Tuesday, and is now trading close to $20. AMC, for its part, continues to alternate strong rises and falls, but far from the peak reached that day, when it doubled its value. Of course, its administrators have taken advantage of the unexpected investment generosity to reduce its debt with a private agreement.
Now that the euphoria has dissipated, it remains to be seen what the extent of this attempt has been. Although they have lost more than 1.2 billion, the bears have come out better than three years ago: Plotkin, the angry investor with whom he opened Dumb Money, ended up closing his fund due to the losses caused by the rally from Reddit. The new small revolution has caught the bankers more prepared. And it is likely, in fact, that new short positions have been opened on the company, now that its value has been artificially inflated. The renamed rally from Reddit, now from dumb money”.
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