If you’re remotely interested in economics or finance and haven’t read Michael Lewis’s The Big Short, you’re behind in the game. Actually, I’m currently 50 pages from the end on a flight from Minneapolis to Boston, but my mind is forcing me to write this as opposed to finishing reading at the moment. That tends to happen to me. I hear it happens to all prodigies in every facet of geniushood, but I’m not sure.
The Big Short is a phenomenal description of the economic collapse of the past four years, through the eyes of several Wall Street investors who saw the financial Armageddon on the horizon, shorted (bet against) basically the whole market and ended up, well, I guess I’ll find out when I finish the book, but I essentially know the ending. Only one scenario makes sense.
I will warn you that if you don’t have a decent economic/financial background, it does get relatively technical, even though Lewis (hands down the best nonfiction writer of this generation of authors) does make it as easy as possible for the “average” reader to understand. Nevertheless, credit default swaps, collateralized debt obligations (CDOs) and asset-backed securities get a little confusing if you barely understand the principle of an interest rate. Then again, even the CEOs of Goldman Sachs, Morgan Stanley and AIG probably still couldn’t explain to you today what they mean, so it’s not exactly fair to feel stupid while turning the pages utterly confused.
To me, the economic collapse is both terrifying and encouraging at the same time. The main lesson I took from the book is to always do your homework; educate yourself so that you can trust yourself and don’t have to rely on others.
The collapse occurred largely because of a combination of ignorance and greed, but more of the former than the latter, in my mind. Among several others, the bond rating agencies, Moody’s and Standard & Poor’s fucked up. Bad. These two agencies – as far as I understand from the book – mis-rated billions of dollars’ worth of mortgage-backed securities in these CDOs. It’s another language, I know. As Lewis explains it, it’s basically a roulette game, except with odds that would put the casino (in this case, a company like AIG played the role of the casino) out of business after losing just a couple bets.
According to the book, shorting (betting against) these CDOs was the equivalent of a 200:1 bet on something that was almost certain to happen. Lewis describes it as buying multiple claims of fire insurance on a house that was already bursting in flames, all because of these mis-ratings by the agencies. And only a handful of people saw it like that.
The real problem was that the bond traders at firms like Goldman, Morgan Stanley and Citigroup trusted these agencies like Mother Teresa without doing their own homework on the securities in which they were investing. They assumed that the ratings were accurate; and we all know what happens when you assume. Except that these assumptions didn’t just make asses out of them, it ended up costing their firms hundreds of billions of dollars and subsequently, millions of Americans their jobs.
See, what I’ve come to realize is that the U.S. economy is extremely top-heavy. For example, Tom Brady, manager of Bro Haus Hedge Fund, trusts the S&P rating of Camp Cedar CDO, invests in it and loses billions when 10 percent of the houses in the “obligation” default on their mortgages. Smith no longer takes his stretch limo to his Wall Street office in Manhattan and he no longer goes to that steakhouse uptown every other Friday with the boys. Now the limo driver and the server at the steakhouse, middle-class Americans make that much less, so they cut back on their expenditures. And the employees at the places formerly consumed by those two individuals begin to struggle more, and so on; it’s the epitome of the domino effect. In my mind, that’s our economy in a nutshell. Please let me know if you think otherwise – I mean that in the least cocky way possible.
So what this collapse should have taught us is to check, double-check and do your homework before making any financial or business decisions. It’s terrifying because what essentially happened was that the greed and ignorance of money managers and rating agencies in this country led to the collapse of recent past. Because of poor judgment on the part of people like Brady at Bro Haus, hard-working cashiers everywhere lost their jobs, many of whom probably couldn’t spell “collateralized debt obligations.” To me, that’s terrifying and terribly unfair. Well, we’ll call it “unfortunate.”
What we’ve also learned is that people – even some of the most educated and well-paid individuals in the world – make mistakes. Like you and I, they fuck up. But I see other people’s mistakes, ignorance and laziness as personal opportunities for business, not just in the trading world, but for all businesses. A lot of businesses are based off at least one of those three premises. Perhaps it’s just the competitive nature in me (scratch that, that’s definitely what it is) but I see businesses and people who run them all the time and quite frankly, I think I could do a better job than many of them. Or at least I know I have a better work ethic than them and would therefore generate more profits.
That’s essentially what equity trader Steve Eisman did, which is not only refreshing but downright inspiring for hard-workers everywhere. He worked hard, did his homework, lost countless amounts of sleep over seeing a life-changing opportunity, traveled the world seeking smart (and rich) individuals to back him and he made a killing when everyone else thought he was off his fucking rocker. He realized he understood things that almost no one else in the world understood, put his money where his mouth was and said, “I’m the best,” to himself, “fuck what everyone else thinks.” And now he’s billions of dollars richer.
That’s why I play poker. No, playing $1-$2 No Limit Texas Holdem isn’t going to make me billions of dollars wealthier. But I play to win, because I’m confident that I can outplay the other stiffs at the table. And to be honest, I often do.
I played 23 hours of poker at Ho Chunk Casino in Baraboo, Wis. this summer (no, I never made the 45-minute trip alone and yes, I know my grandfather is rolling his eyes at the computer right now). In those 23 hours I made about $400 – and it would have been more like $1,000 if I didn’t lose KK to QQ on the river for a $400 pot. For those of you non-poker players, that’s about a 96 percent chance to win $400 at 1:1 odds. In other words, unless you’re shorting CDOs (apparently), it doesn’t get any better than that. But the queen came and fucked me. That’s poker.
But the point I’m trying to make is that if you do your homework, you know your shit and you’re confident about it, the opportunities out there are endless. That’s how I see it. Many aspects of life aren’t all that different than No Limit Texas Holdem. That’s essentially why I get up every morning – to see how I can better myself and what new challenges lie ahead.
I may never make billions. Odds are, I won’t. But with that mindset, I feel like success lies in my future. And if you think like that, I’m pretty confident that it will for you, too.
But it won’t come easy; it didn’t for Eisman and friends. He put the time and effort in to make his billions. Plus he had the balls to actually pull it off.
Sweat equity, my boy Mark Cuban likes to call it. After reading Lewis’s (the second person I’d like to meet in the world behind Cuban) bestseller, I’m ready to pour out a little sweat equity to begin my professional career five weeks from now. Let me know if it motivates you that way, too.