The stock market has received a lot of attention in the last month, setting the scene for Martin Scorsese’s The Wolf of Wall Street. The film puts the spotlight on the rise and fall of hard-partying stockbroker Jordan Belfort, portrayed by Leonardo DiCaprio. But what lessons are there from the playboy 1990s trader, who at his peak earned $50 million a year before being jailed for defrauding investors of millions of dollars? Surely there is some good to come from it? Guest writer Anthony Fensom looks at the key insights you can take away and apply to your own savings and investment plan:
1. Do your own research
Belfort’s “boiler room” operation used aggressive sales techniques aimed at driving up prices in small stocks, allowing his cohorts to dump their shares at a profit. Brokers were told to follow their scripts and only give customers limited information, with the “pump and dump” scheme causing $200 million of investor losses.
While many of the US boiler rooms have disappeared, there are still plenty of scammers around ready to fleece investors who fail to do their homework before parting with their hard-earned cash.
2. Diversify your investments
From yachts and planes to expensive art and wine, Belfort accumulated all the trappings of wealth during his hedonistic lifestyle, which included an expensive drug habit.
Yet while he may have diversified his investments, many of his victims had much of their life savings tied up in the ‘guaranteed’ sharemarket stocks. Like any other investment, it pays to not have all your eggs in one basket, particularly ‘penny dreadful’ shares, which are infrequently traded.
3. Ignore the hype
Belfort’s Straight Line System of persuading customers to part with their money aimed at building rapport, based on a logical and emotional attachment with the product.
But while a smooth-talking salesperson can generate confidence, it pays to ignore the hype. Investors during both the dot-com boom and recent mining boom were told they were in a new phase that would last forever. In both cases, those who bought cautiously on fundamentals came out ahead of the market bulls.
4. There’s no single formula to long-term success
While Belfort found success on Wall Street, his first venture of a meat delivery business failed, causing him to lose his prized Porsche. Yet after declaring bankruptcy, the Bronx native applied his sales skills to work his way up the ladder and eventually establish his own brokerage firm, Stratton Oakmont.
Now a best-selling author and motivational speaker, Belfort has shown there is no one formula to long-term success.
5. You can rectify financial mistakes
Belfort claims to have learned the lessons of his former life, which he told Reuters represented “the best of what you can do with the gifts that gods give you and also the worst you can do”.
He was ordered to repay investors the $100 million he swindled from clients, an amount he has helped gradually return through advising major financial institutions and lecturing on business ethics. The new movie should mark a major step forward in this debt-recovery process, while also showing that it is possible to rectify past financial mistakes.
6. Get professional advice
Professional financial advice is often viewed with scepticism or mistrust. Most planners are great, but like Belfort, a few give the rest a bad name. However through reform, the government has been making moves to improve confidence in the finance industry. Shop around and do your due diligence to find a planner suitable for your needs. Here’s our Top tips to finding the right financial planner for you.
Not everyone has Belford’s gift of the gab, but there are plenty of lessons for investors from the new movie’s cautionary but rollicking tale.
What are your tips for making prudent investments?