What Investors Should Takeaway From The Wolf of Wall Street

Another Wall Street movie about debauchery and extreme greed. Another classic performance by Leonardo DiCaprio which helped him clinch the best actor award in the recent Golden Globe awards ceremony. Another Martin Scorsese masterpiece. I’m referring to one of the latest films to hit the theatres, The Wolf of Wall Street.

My colleague Chong Ser Jing had shared a poignant takeaway from the film a few days back, but I just watched it recently and felt strongly that there is more that investors can draw from it. So, here goes…

Ignorance Does Not Pay                                                      

In the movie, Jordan Belfort (played by DiCaprio) sells penny stocks to unsuspecting clients using a pump-and-dump scheme. He is such a sweet talker that he could possibly sell anything to anyone but unfortunately, he does not have any regard for the financial well-being of his clients. The only thing he has set his mind on are the 50% commissions he can make from each sale.

The key takeaway for me was that financial education is paramount. We cannot leave our financial destiny solely in the hands of others, who may not have our best interests at heart.

We saw how the collapse of the American investment bank Lehman Brothers in 2008 precipitated the crumbling of financial markets worldwide. Many retirees in Singapore were not spared as they had lost some of their retirement savings that were invested in Lehman-linked Minibonds; as many as 10,000 people had bought S$501 million worth of products that were linked to the now-defunct investment bank.

Such an episode taught many that doing their own due diligence, before investing, is essential.

Invest in Ourselves, First

Ser Jing had noted during his New Year’s Eve post at the end of 2013 that the most important investment to make for 2014 is to invest in yourself. As we gain financial knowledge by investing in ourselves, we will realise that there is hardly such a thing as a ‘guaranteed’ investment, as many “investments” claim to be.

When someone says that an investment is guaranteed, it should prompt you to take a good, hard look at it. Many ponzi schemes perpetuate by guaranteeing returns. Even the world’s greatest investor, Warren Buffett, does not guarantee returns when you invest in his company, Berkshire Hathaway.

By reading books on the great investors like Warren Buffett, Peter Lynch and Sir John Templeton, an idea for a better way to invest that gives investors good odds of success will start to emerge. We will begin to realise that behind every ticker symbol is a business and that stocks are not mere pieces of paper which we trade every day.

We have to understand the business, analyse management and look at the valuation of the company. A low-down on how to evaluate stocks can be found here. If the investors who had invested with Jordon Belfort understood such things beforehand, his pump-and-dump scheme wouldn’t even look attractive in the first place.

Also, just because a stock price is rising does not mean the value of the business is going up. Stock prices can rise in the short-term for all kinds of reasons and that’s what Benjamin Graham, the intellectual father of value investing, once noted.

To Graham, the stock market behaves like a voting machine in the short-term, pushing up prices for whatever is popular with the masses, but in the long-term, it acts like a weighing machine as a stock’s price and its business value usually converges. In The Wolf of Wall Street, investors were made to invest in companies just because their prices were going up; they did not understand that the stock market acts like a voting machine in the short-term.

Here at The Motley Fool Singapore, we have many articles to educate the masses. We have the Tug-of-Fools series where companies such as CapitaLand (SGX: C31), Singapore Press Holdings (SGX: T39) and Singapore Airlines (SGX: C6L) are analysed from both the bullish side and the bearish side. We have the Foolish Face-Off series where we pit the business fundamentals of two companies against each other in a friendly bout. We also have Would Buffett Buy…? series where we discuss if the Oracle of Omaha will be interested in a certain company based on their business strenghts. There is a flavour for every investor.

Foolish Bottomline

There will always be those who do not have our best financial-interests at heart. With proper financial education, we can protect ourselves from the next Jordon Belfort. Secure your financial future by educating yourself, one day at a time.

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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 contributor Sudhan P doesn’t own shares in any companies mentioned.