So you just started your HSX portfolio, and you’re trying to pore through the hundreds (thousands?) of movie stocks in an attempt to decide what to buy. Click on one, and you see that a Nicolas Cage starrer to be directed by John Woo is trading for $15. What a steal, right? Or maybe you come across a newly IPO’d Keanu Reeves baseball movie at $8. Sweeeet. Or even a Tom Hanks remake of a very popular childrens’ book at (gasp!) $2.50! Amazing, ain’t it, all this free money just lying around? This is just a gold mine waiting to be tapped, you think, eager to prove just how easy it is.

Well, you’re right, and you’re wrong. You’re right in that you can make money very quickly on HSX, several order of magnitude faster than in the real world stock market. My good friend and fellow broker Huy has estimated that, if you know the ropes, you can easily go from $2M to $200M within one year. His take:

I think a Target ROI of 2% per day is a achievable up to $20m. In fact, if you want to reach $200m in a year, a 2% target for four months (up to $20m), a 1% target for a further six months (up to about $130m) and a 0.7% target for the final two months will get you to $200m.

ROI means “return on investment” (aka “rate of return”). Basically, Huy is saying that a portfolio of $2M can reasonably expect to rake in 2% of $2M, or $40,000, per day in profits, on average. At the time of this writing, my four-month-old portfolio has grown from $2M to over $40M, so Huy’s benchmarks are certainly attainable. (I don’t even daytrade.)

However, you’re wrong, in that you won’t get there by investing in movies that aren’t coming out in the very short future (next month or so). There are several reasons why investing in long-term movies isn’t the best way to go.

1. Just because a film is listed on HSX doesn’t mean it will necessarily be made.

My very first HSX purchase was Superman Reborn (SPRMN). At the time, it was believed that Nic Cage would star and the script would be penned by Kevin Smith, so I thought that it was a shoo-in to be a good buy at $18. Well, that was 3 years ago. Since then, Cage has dropped out and the Smith script was canned. It’s still trading (currently at $176.19) today, no closer to being made. Other luminaries in this category include The Godfather, Part IV (Mario Puzo died a couple weeks after this was IPO’d) and perennial favorite PINK2 (hint: think Molly Ringwald, not Inspector Clouseau).

2. Just because a film is being made doesn’t mean it will necessarily see the inside of a movie theater.
Take the movie All the Rage, a hard-hitting drama about gun violence with an all-star ensemble cast, including Joan Allen, Andre Braugher, Jeff Daniels, Anna Paquin, Giovanni Ribisi, Gary Sinise, and David Schwimmer. OK, maybe forget about David Schwimmer. But you get my point. What happened? ARAGE went straight to Showtime and delisted at $0. Movies in production go directly to video or directly to cable all the time; buyer beware.

3. Just because a film is being released doesn’t mean it will be released nationwide.
What if I described a film starring Ed Harris as a priest who’s assigned to investigate supernatural religious phenomena and Anne Heche as a woman whom he gets involved with? Sounds kind of like Stigmata, no? Well, I just described The Third Miracle, which never played in more than 30 theaters on its way to a $0.60 delist. Are Harris and Heche not big enough stars for you? How about a comedy starring Liam Neeson as a DEA agent, Sandra Bullock as a kindly nurse whom he gets involved with, and Oliver Platt as an insecure crime boss? That’s Gun Shy, which played in fewer than 300 locations while scraping up $1.58M.

And, as if I haven’t scared you enough. . .
4. Just because a film is released nationwide doesn’t mean it’ll make money.
There’s a movie about the macho world of air traffic controllers, starring John Cusack, Billy Bob Thornton, Angelina Jolie, and Cate Blanchette. Great cast, potentially interesting subject. . . Pushing Tin did $3.6M opening weekend. Over 40% of widely-released films in 1999 opened under $6M, including films headlined by Michelle Pfeiffer, Katie Holmes, Neve Campbell, Robin Williams, and Jodie Foster.

Ah, you say, I get the point about uncertainty. One can never really tell what kind of money a movie will make until you actually see a trailer or, better yet, the TV ads. But what about movies that we all know with metaphysical certainty will be big money-makers? This brings us to the most important reason why small portfolios shouldn’t get into long-term movies:

5. You have to wait way too long to get your money!
In other words, your return on investment is too low. Say you’ve found a $10 stock that, even after the above caveats, you still feel is a guaranteed bet to adjust to ten times its current price when it comes out in one year, and you sink your entire $2M into it. (It’s actually pretty much impossible to find a stock that’s a good bet for multiplying ten-fold in the next year, since all of next year’s big movies are bid pretty high already – check the prices of the Matrix and Star Wars sequels, for instance – but never mind that.) Furthermore, let’s say you’re right. Congratulations, you now own a $20M portfolio. In the real world, this would be a great performance, but in the HSX world, a trader who followed the Huy track described above has made it to $200M. Who’s laughing now?

Basically, the point is that sinking money into a stock and letting it sit there for a year, or even a couple months, is almost always a relatively poor way of harnessing the power of the money-making machine that is HSX. Instead, you should initially focus on movies coming out in the near future. Not only are openers a good opportunity to make money (the average opener adjusted by $10.61 in 1999), but fluctuations are much larger on these stocks, making it possible to ride a stock several times: buy at $30, sell at $35, rinse and repeat for maximum HSX enjoyment! Check the graph of a movie that opens this week, compared to a movie that’s a year off that hasn’t been in the news lately, if you don’t believe me. Once you get the hang of it, you’ll be on the Huy track straight to the top.

More info:
Follow the links for more details on the concept of ROI and ROI over time. For a good list of release dates, you can try either the HSB&R release schedule or Cinematter.