Why Great Investment Ideas are like Independent Films

By TradeSmith Research Team

The 92nd Academy Awards ceremony, also known as The Oscars, was held on Feb. 9, and this year something new happened. For the first time ever, the Academy Award for Best Picture went to a film not in the English language.

“Parasite,” a dark comedy from Korean director Bong Joon Ho, won big, and the entire country of South Korea celebrated. But a small group of investors had even more reason to celebrate: A tiny South Korean hedge fund had invested $500,000 in the production of “Parasite.”

The fund, managed by Ryukyung PSG Asset Management Inc. in Seoul, reportedly held just $2.6 million in assets. But with this investment, they hit a grand slam.

On the whole, “Parasite” reportedly cost about $11 million to make — practically nothing by Hollywood standards — and had racked up $165 million in global sales prior to Oscar night.

Now that it’s won the Academy Award for Best Picture, “Parasite” will rack up far greater sales, and will likely enjoy a very long tail. The total gross could run deep into the hundreds of millions.

For those who helped finance the film, the total return on investment will be in the multiple thousands of percent. When all is said and done, it could even top 10,000%.

The math here is interesting, and relevant to investors, because the very best investments are like independent films. The initial cost is low, the risk is small, and the return is potentially huge.  

In the movie business, you have “tentpoles” or “blockbusters” at one end of the spectrum and independent films at the other.

Blockbusters tend to be franchise films with huge budgets. Think: Disney characters, comic book superheroes, and sequel after sequel.

These films have a high probability of making money, but they are insanely costly to make — and the flops are financial disasters. One of the biggest hits Disney ever took was the mega-flop “John Carter,” a movie whose all-in costs were estimated at $300 million.

As blockbusters become ever more expensive to make, Hollywood becomes ever more cautious and formula-driven. As a result, they crank out more sequels, more franchise add-ons, and more of anything that feels safe in terms of generating a return.

Independent films are a completely different story. Compared to blockbusters, they cost almost nothing to make. Because the costs are low, directors have far more leeway to be creative and original.

Every so often, an independent film becomes a major breakout hit — movies like “The Blair Witch Project,” “Get Out,” and now “Parasite.”

When this breakout happens, the return on investment is massive, and low risk, because so little risk was taken in the beginning. Then, too, because independent films run on very small budgets, a film doesn’t have to be a monster success to make its money back; even if the film just does “OK,” it can often recoup the low-end budget costs. 

The best investments are like independent films because they tend to be low-risk from the start — with potential for a huge return on investment — whereas blockbusters tend to be high-risk from the start.

Take the movie “Parasite,” for example, with its initial cost of $11 million. Now that the film has won an Academy Award, another big round of marketing and distribution will kick in to generate the next $100 million in gross sales. But the capital spent on that round isn’t really risk capital: It comes via the cushion of profit from the $165 million already made.

What’s more, the additional marketing costs for “Parasite” will be low risk, and arguably close to zero risk, because the film is already a proven audience hit and the Academy Award generated huge media buzz. 

This also demonstrates how a great investment works.

When an investment position starts to do well, there is a margin of safety created by the initial cushion of profits. As the logic of the investment is confirmed — and it’s clear everything is working — there is less risk of adding more to the position.

In this way, the first round of investment creates a cushion of profits that finances further rounds of investment — but only after the position has proven itself.

Over time, a small initial position can then generate significant returns, in the same way an independent film with a tiny budget can deliver massive profits relative to the low upfront cost over the course of its full life.

In comparison, the blockbuster or tentpole approach to movies and investing is far less appealing. It requires making a very large bet, immediately and up-front — like spending $200 million up front on a big franchise film for a modest return on investment (a smaller percentage return on a large pool of committed assets), with a much higher cost of failure if the movie flops.

The challenges of great investments are comparable to independent films, too: Both require a creative eye, a natural contrarian streak, an ability to judge risk, and a willingness to travel off the beaten path.

This is also why great investments, like independent films, are more likely to be found in out-of-the-way places, and not in the market spotlight. To extend the metaphor, the big research houses and the big investment banks are like the giant movie studios: They use their big budgets and conventional analyst teams to focus on big, well-known “blockbuster” type stocks — the names everyone knows.

But you can find more intriguing opportunities, the independent films of the investment world, by following along with the world’s best billionaire investors (who often seek out high-potential stocks few have heard of), and by using algorithmic screening tools like Ideas by TradeSmith and TradeStops.

TradeSmith Research Team