The new film Dumb Money, which covers the GameStop GME stock mania, retells the story of David versus Goliath. To directly quote the director, the picture illustrates how for once the “underdogs” triumphed over “Wall Street degenerates.”

As you will see, that is not my take on the matter. But I do not condemn the attempt. After all, Shakespeare’s Richard III kills King Henry VI, his wife Anne, and his brother Clarence—each of which is a dramatic contrivance that lacks a shred of evidence. If the Bard can peddle Tudor propaganda, then surely Dumb Money director Craig Gillespie can tell the myth of the Noble Investor.

Relaying the basics

Nor can I quarrel with the film’s basic story. (By the standards of Shakespeare’s history plays, Dumb Money rates as a documentary.) As it relates, GameStop was once a sleepy stock. Through late 2020, investments made by members of a Reddit forum helped to quintuple its share price. By January 2021, the excitement over the stock’s rise had become a craze. That month, the forum began gaining 3,000 new users per day. By Jan. 28, the daily addition was 1.8 million.

The new buyers jump-started GameStop’s stock price. Those increases forced several short sellers to cover their positions, which could only be accomplished by buying additional GameStop shares. The “short squeeze” was on.

All accurate, as far as it goes. There is, however, more to be said.

Initially right

In summer 2020, the “dumb money” was onto something. GameStop possessed a stock market capitalization of $250 million despite annual revenue exceeding $6 billion. True, the company’s business of selling video game software through retail stores was both unenviable and shrinking. On the other hand, the company was priced for bankruptcy while being only marginally unprofitable and holding half a billion dollars in cash. It was a reasonable, if high-risk, investment.

Conversely, shorting GameStop was a dangerous game. (The Wall Street adage is, “Bulls can make money, bears can make money, but pigs cannot.”) The stock had shed 93% of its value over the previous seven years, as investors realized that the future lay with online merchants instead of brick-and-mortar businesses. Why hold out for that final 7%? When shares sell that cheaply, even modestly good news can double or triple their price. The risk would appear to have outweighed the return.

This, to be sure, is hindsight analysis. But it accurately describes what occurred. From August 2020 through the year’s end, presumably owing in part to purchases made by participants in the Reddit forum, GameStop shares grew from a split-adjusted $0.94 to $4.75. Without stretching the point too greatly, one could state that GameStop’s buyers had been rewarded by emulating Ben Graham in demanding a margin of safety, and its short sellers were penalized for forgoing it.

Eventually wrong

Had that been GameStop’s peak, the stock would have remained obscure and there would have been no film. During January 2021, though, the stock’s price grew 25-fold (!). The business that once sold for 4% of its annual revenue reached a price/sales ratio of 500%. In contrast, fellow retailer Best Buy BBY traded at 60% of revenue, although it was more profitable and carried less debt.

The point at which GameStop went from being credibly valued to irrationally priced arrived on one of two possible dates, depending upon one’s perspective. On Jan. 13 GameStop sold at $5.11, barely up from New Year’s Day. It promptly doubled, in response to the weekend’s news that the company had hired three board directors affiliated with the e-commerce firm Chewy CHWY.

For me, that was when GameStop crossed the Rubicon. By the morning of Jan. 14, the stock had risen 1,000% over the previous six months. Too much, too fast—especially as investors incorrectly assumed that adding directors from an Internet-based firm would speed GameStop along that path. (Not so far, it hasn’t.)

But even those of a more generous mindset would grant that the stock overstepped its boundary the following week, when it doubled by Tuesday, then more than doubled on Wednesday.

Who was long?

GameStop’s abrupt gain did partially owe to the short squeeze on hedge funds that is portrayed in Dumb Money. However, as GameStop’s trading volume in January was 21 times above its December rate, another explanation must be considered: The stock skyrocketed simply because so many people bought it.

That was the SEC’s conclusion after months of studying the topic. Its October 2021 report dryly noted that the trades made by shorts who were covering their positions were but a “small fraction of the overall trading volume.” Without doubt, the squeeze on hedge funds depicted in Dumb Money did occur. But of greater importance was the behavior of the long investors. Powerfully albeit briefly, they trampled all that lay in their path.

By then, Wall Street had joined the party. As detailed by this article from The Wall Street Journal, several institutional giants, including former bond king Bill Gross, joined retail investors in buying GameStop during January’s feeding frenzy. Unlike many everyday buyers, though, the professionals had no intention of staying. They were there strictly to buy high, and then almost immediately to sell higher.

Conclusion

The conventional view of the GameStop saga, largely echoed by Dumb Money, is that the good temporarily defeated the wicked, by turning the latter’s tactic of market manipulation against itself. I view it differently. I see morality as immaterial. GameStop was an initially sound investment that gradually became fully valued, and then hugely overpriced. At that point, anybody who owned the stock was a speculator. Some profited from that gamble, some did not. None of them should be called “investors.”