Insights From The Big Short

Michael Lewis’ new book, The Big Short, is easily my favorite read in months. If you have any interest in financial markets, want to understand what really happened in the financial meltdown, or just want a thriller of a non-fiction story, this is it.

Lewis, as always, is a terrifically engaging writer, and has been for over 20 years, since he wrote Liar’s Poker. Terry Gross had this story on NPR’s Fresh Air and Steven Pearlstein published a review in the Washington Post.

But there’s no substitute for reading the book first-hand. Lewis tells the story through the eyes of some of the players. Between that and my own fascination with financial markets, and especially inefficiencies in them, this was a page turner.

Insights
Some of the best insights from the book come from reading about the principals at Cornwall Capital Management and Dr. Michael Burry at Scion Capital:

1)      Find asymmetric return upside. It comes in many forms such as timing, market or company.

2)      Connect the obvious dots by analyzing the data.

3)      Have the conviction to take advantage of the opportunity.

In particular, Cornwall Capital focused on options that made a linear assumption about a non-linear event. That is, an event that would move a price way up or way down. And with the resulting ability to make “a small bet with long odds that might pay off in a big way.”

When I say obvious, I mean, the data for many of their investments was right there in front of them – it was all in the open, obvious. The data on the CDS’s was fully available, in the open. But one had to connect the dots.

Then, one had, as the old saying goes, to put one’s money where one’s mouth is, and stay with it. While the “experts” told them they were crazy, those who bet against the CDS’s made a mint. Their strategies were vindicated when the market crashed.

Conclusion
Lewis obviously put in the time necessary to understand the financial instruments fully. Then he went back and made that topic accessible and engaging to the reader.

These two abilities: to simplify the complex and to make the mundane engaging are rare talents found both in Lewis and the best businesspeople.

There’s another reason I loved the book: it told the story of some incredible entrepreneurs. These were people who bet against the common wisdom, used their analysis of available data to their advantage, and stuck with their convictions even when the world told them they were crazy.

Of course, they were betting on a Sure Thing. But that’s for another blog post.