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What Can Hollywood Teach You About Trading?

From unrealized hype to the misguided sequel: a look at how making trades can be a lot like making movies.

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Irving Berlin wrote a famous song called "There's No Business Like Show Business." While Irving was definitely a genius songwriter, it seems he probably didn't spend a lot of time trading. As it turns out, active trading is actually quite similar to show business. How so? Just have a look at these hard-learned lessons from the hills of Hollywood and see how they apply to the world of Wall Street.

Beware the Buzz

Michael Cimino directed one of the most iconic and revered films of the 1970s:  The Deer Hunter. After it won five Academy Awards (including Best Picture and Best Director), Cimino's next movie was highly anticipated. Yet that film, 1980's Heaven's Gate, is now known as one of the worst financial disasters in movie history. Estimates have put the film's budget at $44 million, and its initial domestic earnings at a staggeringly low $3.5 million.

There have been many buzzed-about IPOs and must-own stocks that have turned out to be duds, but the Heaven's Gate of them all has to be It hit a high of $14 but plummeted—and then plummeted even more—all the way to a low of 22 cents. 

Hype and hope can only get a film or stock so far. A sound trading strategy is usually an informed one so don't forget to do your own research before you believe the buzz.

Sectors Are Like Genres

Remember Clint Eastwood back when he was The Man With No Name? He thrived in Westerns, the former king of cinematic genres. Now the Western is out of fashion, as superhero films are dominating the nation's theaters. 

Sectors aren't so different. In fact, a recent Schwab Sector Views article notes that "over the past 20 years, the consumer discretionary sector has, on average, outperformed the market in November, but then underperformed in both December and January." 

Sectors chart

That's not to say there still aren't good Westerns released these days, or that there aren't good stocks in the consumer discretionary sector during the holiday months. But even if you're not looking to follow the crowd, it's good to be aware of what sectors are in, and which ones are out. In the end, consider looking at both the micro (in this case, the individual stock) as well as the macro (the industry as a whole) so you might get a better picture of the performance.

The Problem with Sequels

Every so often a director comes along, puts together a great cast, and shoots a great movie. Everyone wants more. So they make a sequel. Same director, pretty much the same cast, and it's a continuation of the same story. What happens? Seems like half the time it's a success, and the other half it's a flop. It's a roll of the dice. But sometimes Hollywood can have quite the appetite for risk, even making sequels to sequels. Eventually, the hits become misses.

Trading strategies and stocks can be maddeningly similar: you do a little technical analysis to get your levels in mind, and you get into a trade. By the time you're out of it, you've netted a healthy profit. Understandably, you try it again, looking for a successful sequel. But this time, you come out with a loss. It happens, and there's a reason why "past performance does not guarantee future results" is such a common disclaimer in the world of finance.

Fundamental research (including historical data) can be very valuable, but just because something has worked in the past does not mean it will again. Treat each trade like a new one. Build on what experience has taught you but don't rule out fresh approaches. There are millions of great movies that haven't been made yet. Likewise, there are probably just as many great trades that haven't been executed yet. So as you look ahead in your trading plan, ask yourself how many sequels you'll be seeing in the near future, and how they're likely to perform.

Sometimes the Book, or the Product, Is Better

The Scarlet Letter by Nathaniel Hawthorne has a permanent place in the top tier of the American literary canon. The 1995 film of the same title, on the other hand, can probably be purchased at an area gas station for 99 cents. There are countless other examples of film adaptations that have tanked. And while some of the reasons why can be complex (such as nuanced directorial choices), there are some cases where a movie is just poorly made and the producers are hoping to get by on the title alone.

Likewise, the quality of a company's product is not necessarily indicative of the quality of its stock. You may love what the company produces, but its stock may not yield such pleasing results. When you're thinking of entering a trade, keep your emotions and warm feelings for a company's services or products at bay. Look at the numbers. Look at the data. Look at the stock and then decide if you're about to execute a blockbuster trade, or the flop of the year.

Of course, sometimes it's not about how good a film is, or about how successful a trade is. Sure, it'd be nice if every film you saw was worthy of an award. And it would be great if every trade you executed put a healthy profit in your account. But it's unlikely that's going to happen every single time. 

And that's okay. Because sometimes—a lot of times—it's just nice to go to the movies, no matter what you see.  And maybe that's the best parallel right there: a lot of times, it's just great to be a trader, being in charge, and charting your own course. 

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Important Disclosures

Past performance is no guarantee of future results.