What do top-notch movie moguls have in common with top-notch investment moguls? They both make boatloads of money. But, says Alan Haft, who lives in both worlds, the similarities don't end there.
“I've been investing since the sixth grade,” says Haft, whose mother ran a boutique investment firm when he was a child. After college found his way to Disney Studios in Hollywood in 1986 where he worked on movies like “Turner and Hooch” and “Pretty Woman,” starting his own production company shortly thereafter. “I've learned that profitability in Hollywood in many ways mirrors the principals of successful investing,” he says. I convinced him to share a few of his favorite — and most pointed — financial lessons.
Keep it simple
The Hollywood way: If you're in front of a Jerry Bruckheimer or an Amblin Entertainment (Steven Spielberg's) company, you learn pretty quickly you better be able to make your pitch, to tell your story in just a couple of minutes. Put it into a nutshell or it's not going to work.
The Wall Street way: Do you understand what you're investing in well enough to explain it in a few sentences? That's precisely what Peter Lynch — one of the best investors of all time —meant when he said “know what you own.” And he was right. The problem is, Haft notes, people lose site of that maxim in an attempt to diversify their portfolios. They'll load up on dozens of different stocks or mutual funds and then try to keep track of them all.
“Not only is that close to impossible, more often than not passive indexes — like index funds and exchange traded funds — outperform active money managers anyway.” Haft, of course, uses a movie analogy. “Have you ever seen the movie ‘Casino’? When the characters are standing around the roulette wheel and putting their money on individual numbers, that's your broker picking individual stocks. Some are gonna hit. Some not. It's more prudent to cover all the bases. That's what you're doing when you buy the indexes instead.”
Costs count
The Hollywood way: You may read in the newspaper or on the Internet how movies cost astronomical amounts of money to bring from the idea stage to the screen. What you don't read about, says Haft, is the huge amount of time that is invested in chiseling away at that budget. “People in Hollywood know we may only save a few dollars on costumes and a few on makeup, but when you add up all those costs it makes a huge difference.”
The Wall Street way: Particularly in an investment world where double-digit returns are hard to come by, paying attention to the expenses involved in making particular investments — from trading commissions to expense ratios in mutual funds — pays off. “You don't see it, you don't write a check for it, so it's easy to ignore,” says Haft. But it's a huge mistake.
Consider: A landmark study by Terrance Odean and Brad Barber of the University of California Davis showed that women outperform men investors by a rate of 1.5 percent a year. The difference wasn't that women picked better stocks and funds, simply that they traded less frequently and lost less — off the top — to costs.
Cut your losers and ride your winnersThe Hollywood way: When a feature film opens on a Friday, by mid-afternoon the movie company knows within an astonishingly close range what the lifetime revenue of that movie is going to be, Haft explains. If the numbers look poor, the studio slashes its advertising and marketing budget immediately. It reduces the number of screens. “The studio may love that movie. They may have laughed or cried or thought it was great, but they think with their wallets and minimize their risk.”
Case in point: “Basic Instinct II.” The estimated budget on the movie was $70 million, with another $40 million for advertising and marketing for $110 million total. On its opening weekend, the movie opened on 1,453 screens and took in a total gross of $3.2 million — a total bomb. The following weekend it was still on the same number of screens due to commitments made by distributors, but one weekend later it was only playing on 323 theaters, took in an anemic $177,461, and the ads were not much bigger than index cards.
The Wall Street way: You buy a stock because you use the product, love the company, your friend works there, you've actually read the financial statements and you think it has huge potential — whatever.
It starts off OK, but then something happens and the stock price heads down, down and down some more. What should you do? Figure out why this happened. If the whole market is on a slide that's one thing, but if it's this particular company and you've lost 10 to 15 percent, get out. That's not only what Haft does, but it's what many top investors have told me they do over the years.
Don't reinvent the wheel
The Hollywood way: Nearly 40 years ago, Joseph Campbell wrote a book called “The Hero With 1000 Faces.” It says — in a nutshell — that all the great stories from biblical days to the present can be mapped to the same core fundamentals. You have a hero introduced into an ordinary world. He sees a call to adventure and resists that call. Then a mentor (or something) convinces him to do it, to enter the world of unknown, and … well you know the rest of the story.
The Wall Street way: Likewise there are certain investment fundamentals that have withstood the test of time. For instance, if you follow Peter Lynch you buy what you know. If you follow Benjamin Graham (and then Warren Buffett) you look to make sound investments in undervalued companies. And if you follow both you diversify your portfolio and steer clear of chasing hot stocks. “The fundamentals may be basic, but they're what's going to get you rich and keep you rich,” says Haft. They may even help you steer clear of dropping $10 on a bummer of a movie now and then.
Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show" and is also a columnist for Life magazine. She is the author of four books, including "Pay It Down! From Debt to Wealth on $10 a Day" (Portfolio, 2004). To find out more, visit her Web site, .