The line between gambling and investing is artificial and thin. – Michael Lewis in The Big Short
Michael Lewis is the author who wrote both Moneyball and The Blind Side, two books that were made into hit movies. The latest movie from one his books is The Big Short. It’s the story of a small number of investors who saw the 2008 financial meltdown coming, and positioned themselves to profit spectacularly from it.
The book illustrates the disconnect between Wall Street and the investor community. For the brokerage houses, profits are based on the number of transaction fees collected, while investors make money on changes in value of their investments. Without getting too deep into the financial manipulations involved, going short is something investors do when they think an investment is going to lose value. For stocks and other commodities, this involves selling things before you have them (at a high price), then buying them later after the price drops. It’s a high-risk strategy where you can gain or lose a lot of money.
The best example of it I can think of from pop culture is in the Eddie Murphy/Dan Ackroyd movie Trading Places, where the main characters steal a USDA crop report and make a fortune short selling orange futures in the commodity market. In The Big Short, the concept is a little bit different in that main characters see trouble brewing in the market for subprime mortgage bonds and purchase insurance against those bonds losing their value. Because of the big difference between the cost of the insurance and the value of the mortgage bonds, they made a lot of money when the mortgages started going into default – billions of dollars.
Lewis does a good job of describing the intricate financial maneuvers that went on behind the scenes as the crisis approached. In this book, as is the case with his others, he does a great job of describing the personalities of the people involved, providing great insight into what motivates their actions. If you’re a reader who has ever had any doubts about the wisdom of Wall Street, or the competence of corporate executives, then this is the book for you.