Thoughtful reviews, the Boulder film scene

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Muscle Shoals

Even if the Muscle Shoals sound isn't on your iPod, you'll like seeing where it came from —Marty Mapes (review...)

Etta sings in Muscle Shoals

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Broke is a slick, fast-paced documentary about the economic mess that the United States is currently in. There are interviews with fascinating people (including some Nobel prize winners in economics). There are ideas about money that are both common-sense and yet unconventional. It’s a nice balance of positive — how people can still make money — and negative — who’s to blame for some of our current messes.

Unfortunately, the film has more polish than substance. Try to boil down the film’s message and you’ll get incomplete or conflicting advice on what to do with your money. If you’re not savvy, you may end up worse off than if you hadn’t seen Broke and taken its advice.

Bullets from a Shotgun

"Don't follow the herd" is only good advice if the herd doesn't follow it
“Don’t follow the herd” is only good advice if the herd doesn’t follow it

Broke covers a lot of topics in a little depth. In the spirit of the film’s shotgun approach to economics, we present three bulleted lists about the movie:

You might learn from Broke:

  • There are a lot of empty houses in this country
  • Some people got mortgages with no money down.
  • Jim Cramer sure is a noisy TV personality
  • A lot of people play the lottery and wrongly believe that it’s an investment
  • Poker is better than the lottery because the payout of the game is better (the interview subject implies that the payout is 1, but that’s only true at your friend’s house)
  • 100% of poker players interviewed are smart and rich
  • 0% of poker players interviewed are losers at the game

You will hear this advice in Broke:

  • You should not play the lottery
  • You shouldn’t necessarily do what Jim Cramer says
  • Don’t follow the herd
  • Darn the government for banning hedge funds and online poker but endorsing lotteries
  • Process is more important than outcome - good process takes care of good outcome
  • The market is like poker in that you can do everything right but till lose, so it’s more risky than, say, chess
  • “Buy and hold” is for suckers

Broke fails to address:

  • If everyone stops following the herd at the same time, then that too is herd mentality
  • Poker is a zero-sum game. Every dollar won is a dollar lost somewhere else. By definition we can’t all be winners. (In the market, however, wealth is created and destroyed.)
  • Two traders advise that you should be willing to take a quick loss rather than riding a stock down. But if everyone wants to take a quick loss at the same time, there will be no buyers for down-trending stocks, and everybody will lose everything.

These last three contradictions have to do with separating yourself from the herd. What Broke doesn’t say, but what is basically true, is that there will always be a herd who doesn’t follow this movie’s advice. Your best bet is to separate yourself from it. Gains are made when the herd makes mistakes and you can profit from them. This advice is only sound if some people don’t take it. In other words, it’s good advice unless and until it isn’t good advice.

Broke in one Sound Bite

The shot that resonated most with me, and which sums up my impression of Broke, features the talking head of an actress. She says she’s content to make 8% in her mutual funds and focus her energy instead on acting. The shot is gone before you’ve even digested it; it’s in a section of the movie calling people chumps for buying and holding.

But buying and holding an index fund or a mutual fund is not the same as buying and holding a stock — another distinction never fully explained by the movie. No less a figure than Warren Buffet recommends buying and holding an index fund for people with other interests than playing the markets.

And if the actress can get an 8% return — a reasonable assumption — then she still beats inflation and retires at a reasonable age with enough money to live indefinitely. Yet the movie includes her perfectly reasonable comment in the section on what people do wrong, without making its case that she should want to play the markets.

The movie blew past her with too many assumptions and too little explanation, and that seems to be the case with the rest of the movie as well.

I found some good nuggets in Broke, (“process is more important than outcome”), but the movie has too much on its mind to really drive home a few important and practical points. And as for those good nuggets, they get lost in the bustle about housing, poker, lotteries, and Jim Cramer.

  • Jason: Marty's review has attracted a little attention from the producer/director/star:

    http://www.michaelcovel.com/2009/09/04/marty-mapes-reviews-broke/

    Marty, I watched the movie the other night and feel that Covel could have done a better job presenting his case. In his book, he presents in depth examples of how professional systematic investors (the people he labeled as traders in his movie) beat the market. I think you'll enjoy his book more than the movie and I'd be interested to hear your thoughts on the movie after reading it.
    September 8, 2009 reply
  • Marty Mapes: I posted this reply on Covel's web site, mentioned in the above comment.

    Thanks for taking the time to respond.

    You've mistakenly said that I am a defender of buy-and-hold. What I said was that Warren Buffet is a defender of buy-and-hold for people like me and the actress you interviewed who are not comfortable or not interested in trading. (And thanks to commenters Jamal and David for clarifying further what Buffet said. Actually, don't thank Jamal since he called me a mean name.)

    You imply that the 8% number your actress mentions is not reasonable. You and I both know it's a historical average. And all three of us know that it's a long-term average, not something we're guaranteed to get every year. So what number should she and I use instead when estimating our retirement over the course of a career?

    Or is it something other than the "8" that you object to (perhaps the assumption that there can be a single number)? Or is it that we don't actively participate in our investments? What I think your actress was getting at -- and what resonated with me -- is that we like doing other stuff; we don't want to spend our time trading. I bought my bike from a shop that offers good service because -- even though I used to maintain and repair my bike myself -- the experts can do a better job, faster, than I can. I have a financial planner for the same reasons. If your actress and I are making a mistake, we would both like to know what we should do instead.

    Perhaps her (and my) desire not to have to think about our investments is a good business opportunity. Create a fund based on processes from your book and from the Nobel prize-winners you interviewed, and she and I can buy (and hold) shares in that fund.
    September 8, 2009 reply
  • Marty Mapes: Just a personal note: as a film critic I've been taken to task for not knowing details about specific comic books, about music producers, about geography, and for not having read every novel ever turned into a movie. And now I'm an idiot for not offering a better financial strategy than a man who's written books on the subject.

    You are all correct. I'm not an expert in every field. And in YOUR field, I am particularly dim.

    But I think that's part of what I love about film: it's a great education. Because of the Fanny trilogy I researched the director's life in Provence in southern France. Because of The Great Escape I read about the German POWs who tunneled out of a Colorado prison during WWII and tried to make it to Mexico. And because of Broke, the next book on my list is called Trend Following. September 8, 2009 reply
  • Michael Covel: Marty,

    In no particular order…

    1. What is the conflicting advice in the film?
    2. You think the point of Cramer in the film was that he was “noisy”? That’s it?
    3. How do you think the poker players got “rich”?
    4. Do you really not see the hypocrisy in a government promoting lotteries, but banning poker? Does it make sense that the government is in charge of social security, allows mutual funds to tout returns everywhere, but non-mutual funds are not allowed to even speak of their performance? The mutual fund lobby makes sure, along with the government, that people stay in mutual funds…even when they get no return and pay huge fees.
    5. Explain this: “If everyone stops following the herd at the same time, then that too is herd mentality”.
    6. Explain this: “Poker is a zero-sum game. Every dollar won is a dollar lost somewhere else. By definition we can’t all be winners. (In the market, however, wealth is created and destroyed.”
    7. If you buy and hold an index fund, regardless of what anyone says including Buffett, I am sure you and millions of others now see it was not the panacea promised?
    8. Last but not least…”experts”. Hasn’t the last year proven once and for all that many of the so-called experts in the markets were not experts?

    Mike September 9, 2009 reply
  • Marty Mapes: Here are my easy answers where we're on common ground. I'll think about the other ones and give you a more thoughtful reply later.
    3. I didn't mean to imply that they were already rich. I don't doubt that they are rich because they are good poker players.
    4. I do see the hypocrisy.
    5. In this metaphor, herd behavior is "what everybody is doing." If everybody stops doing something, then by definition the herd, per se, stopped doing it.
    6. Are you trying to test me? You're making me nervous. At a poker table, the same number of dollars leave as arrived. In a market, values themselves can grow or shrink. Beyond that, I will have to defer to someone who knows more than me.
    7. Yes. I agree that people who do well in the markets are not the ones who buy and hold. My point is that I would rather not spend the time, money, or emotional anguish doing so. I would be a bad trader. I would much rather accept a smaller return and have someone else manage my money than have a heart attack from the stress.
    8. I don't think I would have acknowledged anyone as an expert last year. I like that you identified successful people in the movie by whether they were up or down in October of 2008.
    September 9, 2009 reply
  • Michael Covel: 5. For many well entrenched reasons, there will always be a “herd”. Human behavior will always create bubbles…that will always eventually pop. My film will not stop greed and fear, but it will give those who want a way out of the pack, options to ponder. September 10, 2009 reply