The Wolf of Wall Street was in many people's opinions a celebration of the bad life - drugs, sex, expensive toys, opulent homes and super expensive suits.
As we watched on as Leonardo DiCaprio spruiked, "The way I look at it, their money was better off in my pocket," many of us couldn't believe that world existed quite like that. But it does. And it's right here on our doorstep too.
In 2003, Steven A. Cohen's SAC Capital Advisors pleaded guilty to criminal charges as part of a $1.2 billion deal to resolve a long-running insider trading investigation.
In 2013, Aleksander Efrosman, the former hedge-fund manager who fled the U.S. after swindling his clients out of $5 million and gambling away most of it at a casino, was sentenced to more than 15 years in prison.
Again in 2013, Lloyd Barriger, who operated Gaffken and Barriger, a Monticello, New York-based investment fund, pleaded guilty to securities fraud, defrauding investors in a $12.6 million scheme.
The list goes on and Australians are not immune.
What happens is hedge funds and stockbrokers are employed to be great sales people.They can in fact sell ice to an eskimo. In 1998 when the dot com boom occurred, I was personally privy to just what goes on behind the scenes of luring investor money:
- Public relations campaign: drive awareness, solidify the company as being credible (if you read about it, then it must be true), build the profile of the CEO, and go into media over-drive when capital raising and on-listing. The smoke and mirrors campaign gets the general public in and the higher the profile the CEO or the board, the more likely the public and other investors are to put their hard earned cash in. But beware, as the price of the shares goes up on day one, they are just as likely to take it back out while the less astute investors come in and buy stocks at a premium. Days later, they buy back in at a lower rate.
- Ability to sell the story: where is the business going and how is it going to make money. If you have a great sales person talking to stockbrokers and investors, thenthe story is sold and it's game on.
- Acquisitions: By aggressively acquiring companies, people falsely believe that the company is doing things. When you look at Photon, which I personally watched closely and was quick to predict to my hedge fund friends that it was impossible for the company to work, they acquired companies like it was going out of fashion, only to find that the company became almost worthless. The original companies that were involved including the board and CEO were laughing all the way to the bank, yet the investors who had no idea fell prey, losing their cash in return.
- Market manipulation: In an interview by G. Hudson, CNBC's Jim Cramer confirmed"market manipulation is a fact". Cramer said that one strategy to keep a stock price down is to spread false rumors to reporters. Another is to hype it up by talking it up!
As I read the financial papers for the first time in ages in Australia, I find myself thinking about what is behind the article. Is it a PR person, pushing articles to a particular journalist time and time again or is it an article that the journalist has sourced for themselves. The ladder, it appears is becoming less and less likely.
The new rise of the activist investor also is quite interesting to watch. I watched in the past few years a friend of mine make a reportedly billion dollars from being an activist investor, only to lose it all 18 months later. Unfortunately, its not just their money, it also is the super funds of Mums and Dad's out there with little idea other than to read up on stocks on the Internet and in the newspapers. With a great insight into this situation, I realized that when this person was successful, his personal life was stable. The minute it became unstable, his decision making capabilities diminished and wrong choice after wrong choice saw his fortune and that of others come tumbling down. Desperation set in until eventually he hit rock bottom - all while his personal life was all over the shop. Should this not have happened, I am sure his fortunes and that of others would have been in another position.
My lesson in that is its not just following those who do well on the market, but also watching more closely as to how stable the lives are of the people you are entrusting to "play" with your money and what impact that has on their ability to make the right stock and investment decisions. Get to know your stockbroker intimately and pull out when you think they are losing control. There's no harm done then!