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Lessons From 'Monster of Wall Street'

I started watching the monster of wall street on 4th Jan 2023. The name compelled me to watch the documentary. It is based on the biggest Ponzi scheme in human history. $60billion went POOF and small investors lost their life time worth of savings and even homes. The SEC (SEBI equivalent of USA) got a whiff of something fishy when the scheme was at just $444million size (almost as big as Harsha Mehta's scam) and let this culprit go 'scratch less', frying a small fish instead. This culprit I speak of- Bernie Madoff- was considered to be the God of financial market at the time.

There are some things which have been unraveled in the documentary, some red flags noted, and I want to use them to share 'tips' with you so you can make better decision about stock market advise and investment when dealing with external parties.

Unregistered Investment Advisor

This is the first red flag that came up in rhis documentary and in the Harshad Mehta documentary. When you depend on someone to give you advise about the stock market in India, always ensure they are Registered Research Analyst. If you are giving your money to someone in India, ensure they are registered and eligible to interact in that capacity. In doing so, you may end up paying slightly higher fee or commission, but you safe guard your capital. Remember- the fraud operates away from the radar of regulatory authorities like SEBI (SEC in USA). Not every unregistered advisor is a fraud but every fraud is an unregistered advisor or has an unregistered business. Bernie Madoff operated as a unregistered investment advisor and ran a unregistered investment fund. He was not in compliance with SEC and kept running his Ponzi scheme, growing exponentially without anyone questioning why his overpromising business was not a registered entity or why he himself was not registered as an investment advisor.

Appearances deceive

Isn't it obvious? Yet, we often mistake someone's outward goodness for their inward purity. In the Bernie Madoff documentary they have shown both the sides of Bernie Madoff. The good side was his legitimate business - the trading desk, through which he pioneered the digitalization of the stock market, served on the board of NASDAQ for 3 terms, he was donating heavily to charity, was kind and generous- what a saint! His trading office was in the iconic Lipstick building in Wall Street where everything was always perfect, nothing was ever out of order or odd.The bad side, was not far away or hard of find- no one just ever looked for it because everyone gave in to the good side- including the SEC. After the victory with SEC, there was no stopping this culprit. His illegitimate business was operating right out of the lipstick building and was nothing like the pristine perfection of the trading business. Bernie Madoff started with $30thousand dollars and scaled up to $60 billion in his under-the-table, unregistered advisory business. Just because something looks so good on the outside is no reason bypass the basics. If only all those people had refused to invest with Bernie because he was not a registered analyst, if they had respected the laws set in place, they would not have lost their money to a serial financial killer and sociopath.

Over dependence on print media

Bernie Madoff was popularised by newspaper articles which publised widely and openly that SEC looked into this guy and found no reason to call him a fraud. Perhaps SEC's mistake would not have cost the innocent investors their life time worth of earnings if print media hadn't blown the news of Bernie Madoff's fake innocence out of proportion. The naive people turned to the papers to do their 'due diligence', not knowing that what the papers knew was not news but a beliefe, which was no better than their ignorance. The papers, news articles, lengthy research reports create an illusion of knowledge. They may or may not be intented towards it but they do misguide actions.

I realized the shallowness of news articles when I was kid. An incident of which I had the first hand account made it to the local newspaper front page. From the story to the characters, everything was wrong. I therefore never take news at face value. Over my decade of practice as an active trader, I have realized that 99% of the information circling in news channels, WhatsApp forwards and business websites is noise, not news. Whatever little valuable news is out there, it almost always presents itself at the wrong time. Finding the right news at the right time is as difficult as finding a needle in the haystack. So why bother? Especially when there is an alternative way of finding the right stock at the right time (stocks which are about to rally) though price and volume analysis. I don't find useful information 100% of the times I look at my charts, but whenever I come across useful information, it is profitable more than 68% of times. Why 68%? Because this is the success rate of my stock recommendations made on the basis of price and volume action aka technical analysis.

These lessons are from the first episode of the new documentary series on Netflix bearing the title 'The monster of Wall Street'. -Kavita Agrawal CMT CFA SEBI registered Research Analyst.


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