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The Biggest Lesson from The Wolf of Wall Street

The Wolf of Wall Street is a recent movie starring Hollywood actor Leonardo Dicaprio as convicted fraudster Jordan Belfort. I don’t want to spoil the movie for those who have not caught the show (that includes me, though I’ve read and heard enough about it to know what it’s all about) but it’s basically about a fraudulent brokerage firm called Stratton Oakmont that was founded by Belfort.

Stratton Oakmont used pump-and-dump schemes to hype up companies that it was taking public and then used illegal methods to manipulate the share prices of those companies. Belfort was eventually indicted in 1998 for his crimes and subsequently spent four years in prison.

While the movie does seem to be great entertainment, there are also some poignant financial lessons in it. The obvious ones can probably be summed up in the age-old adage, If it’s too good to be true, it probably is.”

There is however, a less obvious, but very important lesson we can take away from the film. The movie mentioned how Stratton Oakmont had taken American footwear retailer Steve Madden public in Dec 1993 and raked in US$23m in a very short amount of time. That’s big money.

But here’s where Belfort and gang were being utterly – in the words of a close friend of mine – “penny wise but pound foolish”. Belfort and his conspirators had owned up to 85% of Steve Madden’s shares when they were running the scheme before dumping it all to make that US$23m. But, Steve Madden’s worth some US$2.2 billion today and 85% of that company would be a cool US$1.87 now.

Jordan Belfort could have been a legitimate billionaire had he held on to Steve Madden’s shares, instead of being a convicted con-man who had to spend four years of his life behind bars. And all that happened because of Belfort’s inability to see what the stock market really is – a market for participants to own pieces of living, breathing businesses.

It’s likely that Belfort saw the stock market as just a place for him to fleece unsuspecting clients, who unfortunately, also carried a similar kind of casino-like mentality with regard to stocks as they were lured by the siren-song of making large, quick gains.

But the thing is, the stock market isn’t a place for investors to get rich quick; it’s a place for investors to patiently build lasting wealth slowly but surely through long-term investing. And that’s the biggest lesson I find to be hidden in The Wolf of Wall Street.

In the long run, the true economic value of a company gets reflected in its share price. But, publicly-listed companies need time to grow their businesses and earn higher revenue, profits, and cash flows, which is what increases that true economic value.

Steve Madden’s a great example. It was making a loss of US$98,000 when it went public. Today, its profits are at US$129m. It’s that kind of growth that allowed the company’s market capitalisation to jump from US$42m in Dec 1993 to US$2.2b.

In Singapore, it’s also sustained growth in the corporate fundamentals of shares that lead to outsized returns over the long-term. Just think of how shares like Keppel Corporation (SGX: BN4), Jardine Cycle & Carriage (SGX: C07), and United Overseas Bank (SGX: U11) have earned their huge total returns (inclusive of gains from reinvested dividends) over the past 22 years.

Keppel Corp

Jardine C&C

UOB

Price: 1 Jan 1992*

S$1.11

S$2.62

S$2.04

Price: Today

S$10.40

S$35.00

S$20.00

% Gains

837%

1,236%

880%

Earnings: 1 Jan 1992

S$161m

US$70.5m

S$262m

Earnings: Today

S$1.85b

US$828m

S$2.93b

% Change

1,045%

1,074%

1,020%

*Prices on 1 Jan 1992 are adjusted for dividends, stock-splits, rights offerings, and spin offs

Source: S&P Capital IQ

As it is, it’s the mentality of wanting to invest in real businesses – not stock symbols – for the long term that helps investors build a foundation for success in the stock markets.

Belfort’s cronies enticed Stratton Oakmont’s clients with promises of making X00% on their investments in very short amounts of time by making bombastic claims about how an IPO share would shoot for the moon. There was simply no thought about the share’s underlying businesses behind those claims.

And those who were just out to chase higher prices ended up paying the price.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.