If you haven’t seen this film, it’s a look at the great recession from the perspective of three groups who, unlike many others, saw what was actually happening in the mortgage bond market. They essentially bet against the housing market, to enormous profit. The movie explains some of the complicated products in an easy to understand way, and it’s pretty entertaining. I saw it in the theatre when it came out and really enjoyed it.
For those who haven’t read (or seen) it, The Big Short is the story of a few eccentric traders who anticipated the US housing bubble and worked out a way to profit from it. The book was written by Michael Lewis who you may recognise from some other top-sellers like Moneyball and The Blind Side.
For me, The Big Short highlights lots of important investment lessons anyone can learn from the financial crisis and the protagonists who profited from it.
There is no free lunch in investing
Do Your Homework
Don’t invest in something you don’t understand
Just because everyone believes it, doesn’t make it so
The market can stay irrational longer than you can keep your job
Don’t fall for the hot hand fallacy and chase returns
Be conscious of counterparty risk
False Consensus Effect
Don’t be afraid to question what you are being told
You can be right, but if your timing is off you can be stuck with big losses
The efficient market hypothesis is dead
Shorting the Market Is Very Risky
Stay away from illiquid markets
Eggs and Baskets
Banks will always throw retail traders under the bus if they can improve their bottom line
If it seems too good to be true, it probably is
Every industry has shady characters, but the finance industry seems to be one of the worst