Finance Lessons from the Wolf of Wall Street

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Martin Scorsese's film, 'The Wolf of Wall Street' is based on the real-life experience of the convicted white-collar criminal, 'Jordan Belfort,' who turns securities fraud and market manipulation into a raunchy comedy through his investment company, 'Stratton Oakmont.' Long story short, the movie is about the 'wolf' who makes a fortune by selling blue-chip stocks, penny stocks and IPO stocks.

Leonard Di Caprio plays the character of stockbroker Jordan Belfort (the protagonist or 'The Wolf'), who makes his fortune by selling stocks, especially penny stocks. The movie is based on Belfort's memoir and vividly presents both the phases of his life - the time when he was a pure hedonist and a remarkable player in the bullish market, and his ultimate fall when he ended up convicted and imprisoned for fraud and money laundering.

In the movie, Jordan starts his career with a brokerage firm in New York City. Soon after joining the firm, he sets forth to learn the relentless nature of the business. The emphasis of the firm is on selling stocks and generating commissions, rather than educating and advising the customers about the investment products.

As a consequence of the significant market decline in October 1987, Jordan loses his job and starts working with a small firm that sells penny stocks. After realizing that the commissions on penny stocks are subsequently higher than the stocks traded on major exchanges, Jordan conceptualizes the establishment of his own firm.

At the request of a low-paid neighbor, he expands his operation and recruits several employees who have minimal financial knowledge and smutty interpersonal skills but a strong desire to succeed in their careers. Eventually, the firm sells blue-chip stocks and even starts initial public offerings (IPOs). Jordan emerges as a debonair business tycoon by training his employees in effective selling techniques.

During this time, he started taking drugs to streamline his focus on making money, but it blurred his sense of ethical behavior. He also violated the securities regulations while selling stocks, for which he gets convicted. After serving his time in prison, Jordan rises like a Phoenix - molding his strengths of sales and communications into being a motivational speaker.

Interestingly, if you read between the lines, The Wolf of Wall Street offers a handful of crucial lessons in the business and financial domains.

Lesson #1 Stop Paying Fund Managers to Invest Your Hard-Earned Money

Many people, who aren't aware of the stock market, hire "experts" like financial advisors and fund managers to manage their money.

People looking to invest their money should usually opt for one of these two options - either do your research or invest in the passively managed index funds. It's better than hiring an expert to decide what happens to your money.

The reason is simple - mutual fund managers are not empowered by advanced AI algorithms and machine learning technology. They are humans who are trying to reduce the risk in investment by diversifying the fund's portfolio across stocks.

Lesson#2 If It's Too Good to Be True, It Probably Is

Jordan Belfort earned millions of dollars through a "pump and dump" penny stock scam. The scam was slightly different and more involved than the typical illegal method of selling shares of non-existent companies because Belfort's firm was persuading the investors to invest in real companies instead of non-existent ones.

Penny stocks are cheaper and don't trade on major stock exchanges, as the companies that issue them typically don't publish financial statements. Since the market capitalization, stock price, and the daily volume of these stocks are quite low, they are highly vulnerable to manipulation. For example, a sudden large volume of purchase or sale could cause the price to drop by triple-digits in a single day.

10 Unforgettable Financial Lessons From The Wolf of Wall Street
The notion of "pump and dump" was pretty simple - his firm used to accumulate the shares of these thinly-traded companies, stash them into secret accounts, and 'cold call' the investors to convince them that these companies were potential stocks for investments. The influx of purchasing orders would rapidly inflate the price, assuring investors that the shares are showing bullish behavior.

The best defense for everyday investors against these kinds of financial predators is to remember two things:

  • If a firm believes that a stock will shoot to the moon, they will not share that information with you through a phone call or email.

  • Understanding the simple stock market fundamentals, such as market capitalization, volume, revenue, and earnings growth can help everyday investors in making their investments cautiously.

Lesson #3 Don't Let Success Affect You

Jordan Belfort couldn't handle the quick success, and he abused his life with drugs, lewd behavior and scams. Belfort's line in the movie, "On a daily basis, I consume enough drugs to sedate Manhattan" reflects the extent of his addiction.

This film teaches the lesson that everyone can't handle the overnight stardom. Moreover, it can lead people on the path of destruction.

Lesson #4 Set Clear Goals for Your Investments

Just like Belfort who knew that he wanted to become a wealthy person, you also need to know what you want from your investment. Segregate your goals by the size and timelines and invest accordingly.

Lesson #5 Be Your Own Investment Expert

Follow the fundamental rule of 'Do It Yourself.' It's not rocket science! Research adequately about different financial instruments; start investing in small proportions.

Lesson# 6 Representatives of the Financial Firms Are Sales Professionals, Not Financial Advisors

In the movie, Leonardo Di Caprio as Jordan Belfort trains his team of employees to sell investments. He does not educate them about the risks involved, their suitability for a particular portfolio, and other advisory regulations. The emphasis of the firm is solely on pushing the product to the client. Representatives are more worried about commissions than the financial health of the customer.

Lesson #7 There Is a Difference Between Legal and Ethical Behavior

Many of the ethically questionable behaviors are shown as perfectly legal in the movie.

For example, selling penny stocks is legal; but not informing the investors about the speculative nature of the stocks is unethical.

Lesson #8 Diversify the Investments

As an investor, you should never put all your eggs in one basket. Diversify your portfolio instead - investing across different stocks can be more fruitful.

Lesson# 9 Long-Term Success Can't Be Accomplished Through a Single Formula

While Belfort succeeded on Wall Street, his first venture of a meat delivery business had failed, due to which he had to sell his Porsche. He started afresh, tasted both success and failure. Even after going bankrupt, Belfort applied his sales skills to step up the ladder and eventually became a best-selling author and a motivational speaker.

Lesson # 10 Financial Mistakes Can Be Rectified

As he once shared with a journalist of Reuters, "You can do the best with the gifts that God has given you and also the worst can be done," Belfort had learned his lessons from his former life.

He was ordered by the court to repay $110 million to his investors out of the $200 million that he had swindled from the clients. He regained this amount by advising major financial institutions and lecturing on the business ethics; he fulfilled the promise and paid back the money to the victims of his scam.

So, yes, he made a financial mistake, but rather than becoming depressed for being bankrupt, he found a way to rectify it.

To Sum Up

Every person learns from his or her own mistakes. Have you ever reflected on yours? Moreover, did these financial lessons strike you when you had watched this oscar-nominated movie?

Well, you might want to go back, watch it again and have your 'eureka' moment.


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