I have a question for you.
When you go to the movies, what are you looking for?
Hope? Inspiration? Positivity?
Well, if these values are important to you, I can tell you right now: you definitely won’t find them in The Wolf of Wall Street.
In fact, this film may very well be the most immoral story I’ve ever seen.
The characters here are self-centred and egotistical. Their journey is a wild descent into depravity. Their lifestyles are filled with sex, drugs, and lies.
In other words, these characters represent everything that’s wrong with modern society today.
And yet…intriguingly enough…I found The Wolf of Wall Street to be one of the most emotionally truthful stories I’ve ever seen.
Well, emotionally truthful in a devastating way.
Martin Scorsese is a director who’s a keen observer of human nature. And he’s made a career out of examining the moral quandaries of the criminal mind.
So, true to form, he goes straight for the jugular here — taking a look at the razor’s edge between greed and fear.
It’s tragically comic.
Source: PR Week
There’s a particular scene in the movie that’s fascinating to watch. Jordan Belfort (as played by Leonardo DiCaprio) is in his element. He’s just set up his own boiler-room brokerage. He’s hungry for clients. So he picks up the phone and calls a potential lead, trying to reel him in:
Jordan Belfort: Hello, John. How are you doing today? You mailed in my company a postcard a few weeks back, requesting information on penny stocks that had huge upside potential with very little downside risk. Does that ring a bell?
John: Yeah, I may have sent something.
Jordan Belfort: Okay, great. The reason for the call today, John, is something just came across my desk, John. It is perhaps the *best* thing I’ve seen in the last six months. If you have 60 seconds, I’d like to share the idea with you. You got a minute?
John: Actually, I’m really very—
Jordan Belfort: The name of the company, Aerotyne International. It is a cutting-edge high-tech firm out of the Midwest awaiting imminent patent approval on the next generation of radar detectors that have both huge military and civilian applications. Now, right now, John, the stock trades over-the-counter at 10 cents a share. And by the way, John, our analysts indicate it could go a heck of a lot higher than that. Your profit on a mere $6,000 investment could be upwards of $60,000!
John: Jesus! That’s my mortgage, man.
Jordan Belfort: Exactly. You could pay off your mortgage.
John: This stock will pay off my house?
Jordan Belfort: John, one thing I can promise you, even in this market, is that I never ask my clients to judge me on my winners. I ask them to judge me on my losers because I have so few. And in the case of Aerotyne, based on every technical factor out there, John, we are looking at a grand-slam home run.
John: Okay, let’s do it. I’ll do four grand.
Jordan Belfort: $4,000? That’d be 40,000 shares, John. Let me lock in that trade right now and get back to you with my secretary with an exact confirmation. Sound good, John?
John: Yeah, sounds good.
Of course, this scene is played for laughs. It’s dramatised for our entertainment. But the essential truth remains intact — this is what the razor’s edge between greed and fear looks like:
- Jordan Belfort has just scammed an innocent investor. His immoral sales technique is based on nothing more than hype and speculation.
- Belfort plays up the potential gains. He plays down the potential risks. And in doing so, he seals the deal.
- This scene is masterfully staged. It sums up the giddy excitement — the adrenaline rush — of buying a penny stock.
Source: Cambridge Dictionary
Now, here are some of the characteristics of a penny stock:
- A penny stock is usually listed as OTC — over-the-counter. This means that you may not find it available on the larger, centralised exchanges like the New York Stock Exchange or the Nasdaq. Instead, a penny stock can usually be found through the smaller, decentralised broker-dealer networks.
- A penny stock is usually issued by a start-up company with a tiny market cap. Such companies are embryonic, mainly existing in the early stages of development.
- A penny stock will lack market depth, market liquidity, and market transparency. As a result, the stock will be thinly traded. This makes it difficult to buy or sell shares at a fair price.
- A penny stock can be incredibly volatile. It can move up and down sharply, depending on emotional sentiment. This makes it a high-risk, high-loss investment.
Source: MarketWatch
So, how dangerous is a penny stock, exactly? Well, what you need to understand is that a penny stock is vulnerable to manipulation:
- This may take the form of a pump-and-dump scheme. This happens when scammers buy a large number of shares in a penny stock. Then they promote it ferociously to other investors, driving up the price.
- Once the price has skyrocketed, the scammers immediately sell the penny stock they own. This causes the price to crash suddenly, leaving innocent investors in the dust. Easy come, easy go.
- It’s important to understand the mentality behind pump-and-dump schemes. For example, the golden rule in our fair-minded society is usually this: ‘Do unto others as you would have them do unto you.’
- However, for scammers who manipulate penny stocks, they live by a twisted version of that golden rule: ‘Do unto others before they do unto you.’
For this reason, I am suspicious of most penny stocks. For every investor who claims that they’ve made a profit off them, there at least 100 others who have found themselves seriously burned:
- In 2017, Oxford University published a study called The Twilight Zone: OTC Regulatory Regimes and Market Quality. The authors took a look at 10,000 penny stocks from 2001 to 2010.
- What they uncovered was astonishing: in that time frame, the average annual return for these stocks was –27%.
- In other words, almost every penny stock will fail in the long run. In fact, the failure rate is almost 100%.
What most people don’t realise is that the extreme volatility of penny stocks can destroy wealth within a very short period of time. Wild price swings can make it difficult to recover from any losses suffered:
Source: Pinterest
- Is this a casino? Is this gambling?
- Short answer: yes.
- So, the average investor will need to consider their risk profile *very* cautiously before touching a penny stock.
- You have to remember: there’s a reason why Jordan Belfort ended up going to prison for market manipulation and securities fraud.
- Upon his release, he freely admits: ‘I got greedy. Greed is not good.’
- Maybe there’s a lesson in this for all of us.
It’s time to have your say
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Regards,
John Ling
Analyst, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)