The film highlights the carefree and hedonistic lifestyle of freshmen brokers during the late 90’s bull market. It also delves into the methods by which they convince parties to fork over their money for penny stocks that we later find are fictitious or never even bought and sold. There are definitely elements of Bernie Madoff but also the typical penny stock pump and dump.
Nevertheless there are some incredibly valuable lessons to learn from this highly entertaining film. Day traders and investors will appreciate it for a different kind of action and drama that most films cannot provide.
Lesson 1: “Why is Someone so Anxious to Sell me an Investment?”
We are not just talking about stocks here but any investment. If someone is so anxious to sell me a security or speculative instrument, what’s in it for them? Obviously there must be some benefit. I was always taught, “ain’t no free lunch.” Although somethings appear completely free, some sacrifice must be made in order to obtain them.
If a talking head is raving about their special insider report, something like Action Alerts Plus, how do they benefit? Usually, they are compensated monetarily. For average brokers this makes sense and now that we do all of our trading online there is less worry about being sold. More importantly, we have to discover if they are selling and there is little to no benefit for us.
Lesson 2: “If I’m Buying, why is someone else Selling?”
This may sound like the same question, but look carefully at the wording. Remember when you are buying a stock or other financial security you are buying from someone else like yourself, another investor. You are not buying from a broker. They act as an intermediary.
The other person(s) selling has some reason to get rid of what they are holding. It could be that they have already made their profits and are cashing in for a big payday or retirement. Perhaps they are changing strategies at the advise of their research or a financial adviser. Perhaps they see something you don’t and are getting out of it before too late. Perhaps they missed something you did and do not realize the stock is going higher!
Lesson 3: Water cooler Stocks might make better stories than they do good Investments
All throughout the film, brokers at JT Marlin are attempting to sell potential and existing clients on the incredible story of a biomedical company that is going to be taking over the surgical world. Seeing the film it is obvious how fraudulent their actions are but this happens all the time in real life.
Talking heads on the large networks like CNBC and users on forums and message boards love to tell a good story. I am no exception to this. However, one has to be able to take the research and data from the story. We have to be discerning and learn we cannot invest on each and every good story alone.
Lesson 4: Humans can Sacrifice a lot of what really matters to us for a Quick buck
Without giving away too much from the film, characters struggle to regain losses at the expense of their income, their savings, and ultimately loved ones. For most of us investors and day traders this doesn’t become a problem. We know money management or we do not have enough money for this to be a problem.
The problem arises though when we sacrifice all of our time and energy research or checking up on our stocks. We have to limit our time spent watching tickers and doing research. We have to have goals so that we know when we need to be watching and when we can be enjoying our lives outside of our portfolios.
Lesson 5: Know when to call it quits on a Stock or Losing Investment
We see several instances in Boiler Room of characters scammed by JT Marlin who do not know when to call it quits. As investors and traders we develop a nasty habit of trying to correct every loss or bad decision by turning them into zero or gains.
Many investments and stocks are going to lose money. Many times we are going to pick losers by our own choices and random luck. We must develop the discipline to take a loss and move on. Minimizing losses is an art all in itself and is a very integral part of investing.