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    Well, actually: Our ‘Dumb Money’ movie review

    enSeptember 21, 2023

    Podcast Summary

    • Understanding the Risks in InvestingInvestors should be aware of the risks they're taking and manage them effectively to achieve risk-adjusted returns.

      Maximizing expected return is not the only goal in investing. The discussion revolves around the risks involved and the importance of managing them, as exemplified in the "Dumb Money" movie about the GameStop saga. The film highlights the actions of retail investors, led by Keith Gill, who saw potential in GameStop's undervaluation and caused a short squeeze on hedge funds like Melvin Capital and Citadel Securities. This event showcased the power of retail investors and their ability to influence the market. However, it also underscores the risks associated with such investments and the importance of understanding the underlying dynamics of short squeezes. The key lesson is that investors should be aware of the risks they are taking and manage them effectively to achieve risk-adjusted returns.

    • Complex relationship between market makers, brokerages, and individual investorsMarket makers act as intermediaries, providing liquidity and making profits. They pay brokerages for trades, benefiting both parties. Concerns arose during GameStop mania about payment for order flow potentially disadvantaging retail investors.

      Key takeaway from our discussion on the movie "The Big Short" and its portrayal of the world of hedge funds and stock market manipulation is the complex relationship between market makers, brokerages, and individual investors. Market makers act as intermediaries in financial markets, providing liquidity and making a profit by buying and selling securities. They pay brokerages for individual trades, which benefits both parties as it allows market makers to make profits and brokerages to attract customers. However, concerns were raised during the GameStop mania about payment for order flow potentially leading to retail investors getting disadvantaged. This is just one aspect of the intricate financial world explored in the movie, which also touched upon topics like social media's role in market manipulation and the debate over whether recent market events represented a revolution or a class war. Overall, the movie provided an entertaining and insightful look into the world of high-stakes finance.

    • The movie oversimplifies payment for order flow and creates unnecessary suspicionDespite the movie's conspiratorial portrayal, payment for order flow has led to tighter spreads and lower fees for retail traders, and the Robinhood trading freeze was due to market structure reasons, not a conspiracy.

      The movie "The Short Squeeze" portrays payment for order flow in a shadowy and conspiratorial light, reflecting the attitudes of some during the GameStop stock mania. However, the argument over payment for order flow is about market structure and efficiency, and it has never been better for retail stock traders due to tight spreads and low fees. The Robinhood trading freeze during the mania, heavily implied to be a shady coordination between Robinhood and Citadel, was actually due to market structure reasons and not a conspiracy. While it's true that Citadel took a position against GameStop in Melvin Capital, hedge funds are highly competitive and it's unlikely they would collude. The movie's portrayal of these events oversimplifies complex market structures and creates unnecessary suspicion.

    • Robinhood's clearing house requirements led to halt on GameStop tradesThe GameStop saga was driven by financial mechanics, not class warfare or malicious intent, and resulted in unprecedented retail investor participation and market volatility.

      The GameStop saga was not about class loyalty or malicious intent towards retail investors, but rather about the financial mechanics and risk management involved in trading through platforms like Robinhood. The halt on buying GameStop stocks was due to the clearing house requiring more funds from Robinhood to ensure the trades would be honored, as the stock price saw extreme volatility. The movie "The Short Squeeze" presents ambiguous information about potential untoward actions, but letters exchanged between Citadel and the movie's writers suggest changes were made. Ultimately, the event was a revolution in the stock market, as depicted in the film, with unprecedented retail investor participation and volatility.

    • GameStop saga: Not a revolution but a complex situationThe GameStop saga was a complex financial situation with winners and losers on both sides, not a revolution as often portrayed.

      The GameStop saga was not a revolution as it is often portrayed, but rather a complex situation where some retail traders drove up the prices of certain stocks, only to have others buy at inflated prices, resulting in losses for many. The internal inconsistency of the "little guy versus the big guy" narrative doesn't hold up, as market makers make money from every trade, and some retail traders even lost money in the trade. Furthermore, the executives of the companies involved took advantage of the situation to sell more shares, diluting the value for existing shareholders. Melvin Capital, the hedge fund that was heavily shorting GameStop, ended up being the biggest loser in this scenario. It's important to remember that not everyone in the retail community made money from this trade, and the CEOs of the affected companies were the real winners, having to adapt to the new "meme stock" era by selling shares to eager buyers, regardless of the actual value of the company. This situation raises interesting questions about corporate governance and how a CEO should run a company when the stock price is trading at unrealistic levels. However, it is essential to recognize that this was not a revolution, but rather a complex financial situation with winners and losers on both sides.

    • The Power of Independent ResearchStay informed and make investment decisions based on deep analysis, even if it goes against popular opinion. Examples like Keith Gill's success with GameStop stock and the UAW strike illustrate the potential rewards of independent research.

      The importance of doing your own research and making informed investment decisions, even if it goes against popular opinion. The example of Keith Gill, or Roaring Kitty, illustrates this well. Despite being an average financial analyst, he identified the undervaluation of GameStop stock and profited significantly from it. However, not all meme stocks, like Bed Bath and Beyond, have had positive outcomes. The uncertainty in the market can lead to both opportunities and risks. In the case of the United Auto Workers' strike, they have taken a strategic approach by only walking out of certain factories, giving them flexibility and potentially leading to interesting outcomes. Overall, it's crucial to stay informed and make decisions based on deep analysis rather than following the crowd.

    • Discussing investment strategies and contrarian long positions on Jay PowellDespite uncertainty and conflicting opinions, the hosts believe Powell's cautious approach to inflation is appropriate. They also mention the concept of 'epistemic nihilism' and 'uninformed flow' in the financial markets.

      The hosts of the Unhedged podcast, Rob and Alex, had a discussion about their investment strategies and their contrarian long positions on Jay Powell, the Chairman of the Federal Reserve. They believe that Powell's cautious approach to inflation, despite uncertainty and conflicting opinions, is the appropriate stance given the current economic climate. They also mentioned the concept of "epistemic nihilism" about inflation, meaning that there is a lack of understanding or consensus about how inflation works. The podcast also touched on the idea of "uninformed flow" in the financial markets, where large institutions pay brokers to execute trades on their behalf, regardless of their level of knowledge or expertise. The hosts concluded the episode by expressing their support for Powell and their long positions on him, acknowledging that it may not be a popular stance but one that they believe is well-informed given the current state of uncertainty in the market.

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