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Movie Money: Margin Call

Financial lessons from a nuanced portrayal of the credit crisis

Movie Money: Margin Call

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On the eve of the 2008 financial crisis, one investment firm discovers that their entire portfolio is worthless. Should they hold on and try to mitigate the damage, or sell all of the bad assets before the market learns of their worthlessness?

In the underrated 2011 flick Margin Call, such a seemingly black-and-white decision gets injected with shades of grey. It’s a taut drama with a stacked roster of A-listers like Kevin Spacey, Stanley Tucci, Demi Moore, and, in an inspired bit of casting, Jeremy Irons (aka, the voice of Scar in the Lion King) as the serpentine CEO John Tuld, who kickstarts an economic collapse to preserve his company’s position then delicately eats a steak in the executive dining room.

Even if you don’t know AAA from subprime, Margin Call offers up some important lessons for novice investors. Let’s dig in:

Lesson: First and foremost, understand where your money is going

Margin Call’s fictional investment firm made the same mistake that many real-life companies did before the 2008 economic collapse: they were too heavily invested in a single kind of flawed product.

Here it is guys, the clearest explanation of why you should be diversifying your portfolio. Invest in a broad range of products and industries, and do as much research as possible on what you’re buying (or ask an expert). This will cut down down on some of the risks in your portfolio, and reduce the overall impact of the ups and downs of the market.

Lesson: If you borrow to invest, you can end up owing more than you’re worth

Betting heavily on a single type of investment was the firm’s first big problem. Their second? They actually borrowed money to snap up as many of these assets as they could get their hands on. Once a junior staffer figures out their investments were worthless  — and that the rest of the world is about to catch on — the firm faces a potential loss greater than their entire market value. Cue the drama.

Under certain conditions, experts might recommend that you adopt a “borrow to invest” strategy. Also called “leverage investing”, it’s where you take out credit to purchase more stocks or bonds. Obviously it’s pretty risky territory, but can be a very powerful wealth building tool under the right conditions. It works for people who have a long investment horizon and have the nerve to watch their account balance go up and down. Ask yourself if you’re comfortable taking on the extra risk.

Lesson: Beware of fire sales

After receiving the marching orders to sell the firm’s soon-to-be valueless assets, trader Will Emerson (Paul Bettany) hits the phones: “Hello gorgeous,” he coos to a female client. “Today, my loss is your gain.” She’s skeptical, and presses him to offer an explanation of why he’s selling. But Emerson just keeps oozing on the charm until she relents.

When assets are sold at heavily discounted prices, it’s called a fire sale. Many investors love finding these opportunities, since they follow the ol’ “buy low, sell high” mantra. They seek out undervalued products and buy them in bulk, hoping to make a quick profit when their price eventually goes up. But before you start hoarding super-cheap stocks, ask yourself why someone else is trying to offload them, especially if they’re in a hurry. Do they know something you don’t?  

Lesson: Crises, even the big ones, can be weathered

At the end of the flick, everyone in the firm is left wrestling with their guilt. Even stone-faced Kevin Spacey is ready to jump ship and retire. But his boss won’t let him. From Tuld’s view, this crisis is similar to all the others. “So you think we might have put a few people out of business today?” he asks.“It’s certainly no different today than it’s ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07, 29, 1937, 1974, 1987, 92, 97, 2000 and whatever we want to call this. It’s all just the same thing over and over, and you and I can’t control it, or stop it, or even slow it.”

It’s a cold perspective from a deeply cynical character, but there’s some truth in what Tuld is saying. Sharp gains and losses are often part of the stock market’s regular cycle, and individual actors rarely have an effect. Historically, the market has provided investors with a bumpy ride. While any investor would be psyched by the returns from the best years, many can’t handle the worst. Keep in mind when you invest that things will fluctuate, and understand that when you’re staring down a massive loss or gain, the market has a way of correcting itself. Think about the long game with your strategy, and try not to act on impulse when circumstances change.

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