The Big Short: What I Learned

I finished reading Michael Lewis’ book The Big Short a few weeks ago and it has really stuck with me. I have previously written about the book in a post dated June 19, 2010.

If you want to understand, in depth, about the sub-prime mortgage crisis and those few individuals and institutions that really predicted the implosion and made huge sums of money, this is a great read. The book is well-written and you’ll learn a lot at the same time.

What has had the most impact to me, after considering the book for a while, is the Big Picture of how these few players were successful. To me, this is the benefit of reading the book, and thus, for our clients.

These investors (some were individuals, some started as individual investors and then formed hedge funds, some were institutions; I’ll use the word investors to encompass them all) who were featured in the book were independent thinkers. They did not follow Wall Street. They followed their own thoughts. They were very disciplined and incredibly patient. They placed huge bets, in the hundreds of millions of dollars, which did not pay off for a number of years. This took a great deal of conviction, when many others, including their own fund investors, questioned their “wisdom.”

One hedge fund manager who was profiled had phenomenal returns for many years, so institutions were very willing to invest with him. As he invested more and more against the sub-prime markets, these investors grew very impatient with him. They demanded their funds back, but he would not allow them to (hedge fund rules). In the end, he made them all millions. But had they gotten their money back as they wanted, they would not have profited. If it was not for the manager’s forceful patience and insistence that he would be proven correct in the long run, these investors in his fund would have missed out on his tremendous thinking.

The lesson for us is that we should not follow what we hear on TV, in the papers and what market “experts” tell us. After years of careful research and thought, we have adopted and adhered to a disciplined investment philosophy which is fundamentally sound and rationale. It is academically based and not based on “predictions” and calls on what the market will do in the next week or few months.

It requires discipline and patience, but will be rewarded in the long run. With proper planning, it will provide our clients with a sense of security. It is a clear philosophy, which can be understood.

As we discuss with clients the ups and downs of the market in the future, the lessons of The Big Short will be a way to clarify why patience and discipline are so important. It is our role as your advisor to assist you in maintaining these qualities, which will lead to a more successful investment experience.

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