I’ve heard so many investing experts try to give an explanation of the stock market. I’ve heard them both before and after my financial education and comeback.
Some are ok. Few are great. Almost none are succinct.
And I say this knowing that I have taken my own stab at providing an explanation of the stock market.
But just last night, before falling asleep, I found The Wolf of Wall Street on TV and decided to rewatch it a bit.
And it was here that I encountered the best explanation of the stock market that I have ever heard. Yes! From a Hollywood writer. I’m as surprised as you are.
Now, I’ve seen this move before. But I was financially oblivious then and completely missed this awesome explanation. But this time it hit home.
As an aside, I know this movie gets touted as one of Scorsese’s best, but I don’t think it’s near one of his best films. The acting is good but the story is superficial to me. Give me Goodfellas any day…
The best explanation of the stock market that I’ve ever heard
I’ll briefly set the scene…
Our protagonist, Jordan Belfort played by Leo DiCaprio, is a young stockbroker for a large Wall Street firm in this scene. This is before he starts his own firm that executes extensive pump and dump schemes that land him in jail.
He is having lunch with a senior stock broker, Mark Hanna played by Matthew McConaughey, who is offering him some advice between hits of cocaine.
Here we go..
Mark Hanna: Name of the game, move the money from your clients’ pocket into your pocket.
Jordan Belfort: Right. But if you can make the clients’ money at the same time, it’s advantageous to everyone, correct?
Mark Hanna: No. Number one rule of Wall Street. Nobody, I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet, nobody knows if a stock is gonna go up, down, sideways or in f**king circles, least of all stock brokers, right?
Jordan Belfort: Mm-hmm.
Mark Hanna: It’s all a fugazi. Do you know what fugazi is?
Jordan Belfort: Fugazi, it’s a fake…
Mark Hanna: Yeah, fugazi, fogazi. It’s a wazi, it’s a woozi. It’s…fairy dust. It doesn’t exist, it’s never landed, it is no matter, it’s not on the elemental chart. It’s not f**king real. Right?
I mean, this is beautiful, right?!
And I’ll paraphrase the follow-up dialogue
Next, Mark Hanna, our mentor, explains to Jordan Belfort his strategy. Basically, is a stock goes up, his client is very happy and wants to cash in.
But he won’t let the client do this. Because that makes it real! Instead, he recommends a new stock. Does he know the stock will do well. Absolutely not! But the client is now addicted. And all the while, the broker is making commissions “out the a$$.”
He follows this up with some unsavory advice for bodily “self care” that he attributes his success to…
How did I miss this before?!
This explanation just totally eviscerates and lays bare the whole stock broker, Wall Street machine!
But we glide over it for 2 important reasons in my mind:
- Most people lack the financial education to recognize this is actually what it going on
- This prescient stock market explanation packages itself within a hyperbolic film so we dismiss it as Hollywood ridiculousness
I’ve talked a lot about the importance of financial education, so this is a bit of a self inflicted wound. One that I have also suffered.
With regards to the second reason, I can’t blame people! This even happened to me initially.
Think for a second about all of the medical misinformation and added dramatics in Hollywood that make us physicians roll our eyes. We know better due to our training but the average viewer does not. It’s tempting to dismiss this dialogue as some more dramatics to make the movie more interesting.
But it’s actually scary accurate!
Let’s unpack the genius of this dialogue
Nobody knows how the stock market is going to move. No one knows which stocks will do well or poorly ahead of time.
Sometimes people get lucky. But correlation is not causation. Even academics can’t get it right.
It’s so hard to believe because there is a whole thriving industry that exists based on the notion that they can predict the stock market! But this is just not the case.
We generally think that the goals of financial advisors are aligned with our own as the investor. Again, this is wrong. Advisors make money from fees and transactions that are loosely to not correlated with the success of the investments.
Even worse, some advisors get paid based on commissions. So they make money for peddling poor investments. The worse the stock, the better the commission. This was exactly how Jordan Belfort ran his firm before it was shut down…
So what’s the answer?
This will not come as a surprise to regular readers. The answer is to invest in the overall stock market passively.
By investing in the overall stock market over the long term, we invest in the overall ingenuity of humankind and the overall U.S. and/or world economy. That’s a safer bet than trying to time the market or pick individual stock winners (Impossible…remember?).
We can invest like this by investing in low cost, broadly diversified index funds. In fact, here are 5 concrete reasons that index fund investing in better than active stock picking.
When you invest passively like this, studies show that you beat active investors 80% of the time. And this is year after year. And previous active winners have been shown to be no more likely of future success than anyone else.
Plus you minimize taxes, fees, and transaction costs. That’s money staying in your pocket instead of the broker’s.
What is the best stock portfolio then?
There is only one wrong answer. And that is an actively managed portfolio.
Bu thankfully, there are a ton of right answers! And it all depends on you…and your risk tolerance.
Your goal should be to determine your asset allocation of stocks, bonds, and maybe real estate. This guide can help you do just this.
Then buy index funds according to that asset allocation and simply rebalance back to the original percentages once a year.
You can see exactly how I invest my stock portfolio here!
Oh yeah…and this strategy goes for investing in any market. Even a bear market! Remember, we are investing for the long term, not the short term. Here are 11 Tips for Doctors to Get Through this (or Any) Stock Market Downturn.
Watch Jordan’s Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!
Now let’s answer my last question…
Are all financial advisors like this?
Are they all cocaine-addled Wall Street narcissists bound for SEC fines and federal prison?
There are good financial advisors. One that will work with you for a flat fee to help you develop a financial plan or to manage your index funds. Ones who focus on education and share similar investing philosophies.
But, two major facts remain:
- Even financial advisors who mean well can be subconsciously biased by incentives that are misaligned with your own as the investor and
- Most importantly, you just don’t need to pay someone a lot of money to manage your investments passively. It’s really easy to just do it yourself
But if you do want to work with a financial advisor, make sure you find one giving good advice for a fair price. Here are 7 Questions to Ask Before Hiring a Financial Advisor to help you find a good one.
Now that The Wolf of Wall Street has taught us how the stock market works, you are ready to learn more!
- Top 11 Financial Mistakes That I Have Made
- My Written Financial Plan Update: New Financial Goals and Priorities
- How Financial Well-Being Made Me A Better Physician
What do you think? What’s your favorite explanation for the stock market? Is it a fugazi or not? Let me know in the comments below!