The Big Short – Patience Rewarded

With the ‘Brexit’ in/out campaign finally and also thankfully coming to its climax (by the time you read this the vote is likely to have occurred) there is very little else in the minds or focus of either investors or markets alike. You’ll be glad to know it’s a subject I have deliberately avoided here.

We recently wrote a blog on how Hollywood often profited from both the real life follies and also the perhaps less factual stereotypical image of Wall Street entities and characters. It reminded me that I personally had not seen the film ‘The Big Short’ yet, nor had I read Michael Lewis’ book by the same name and which inspired the subsequent motion picture. I soon put right the latter.

I’ll not spoil too much of it but the book is a fascinating piece of non-fiction focusing on a select band of investors who, somewhat independently, predicted many elements of the 2008/9 ‘Credit Crunch’ and positioned their portfolios and funds accordingly to make fantastic gains during a period when everything around us fell in a very sorry heap. They saw the bubble created in US Mortgage Bonds and subsequent exotically created products as being unsustainable and went to great lengths to understand how and why investors were so in love with them. They discovered the various tricks lenders were playing on poor credit mortgage borrows, who were highly unlikely to afford repayments once teaser rates expired, and also the tricks investment banks employed to ‘con’ ratings agencies in to believing the deeply complex packages they were creating using mortgage bonds were secure. They knew that only marginal losses were required to create serious problems but that the market in general was not anything like as diligent in its research and relied heavily on just the various credit ratings.

The real life characters in the book had to be incredibly patient, knowing (they thought at least) what was coming but not knowing when it would eventually happen. They faced serious reputational damage (in many cases previously very well regarded reputations) as they lagged market returns for extended periods and suggestions they had ‘lost it’. Most were investing large portions of their capital in annual premiums on Credit Default Swaps, essentially insurance policies for losses on underlying bonds and products. Eventually their patience and that of any remaining investors was handsomely rewarded, they made billions, in some cases multiple billions, in what were essentially very asymmetric bets.

Whilst it took a long time to play out they were rewarded for sticking by their guns, sticking to their views and not getting caught up on the bandwagon, philosophies all investors should probably take heed of and bear in mind. Whilst often taking advantage of short term anomalies, sticking to our long term guns is a philosophy we generally abide by at Vertem, stay independent of thought, be patient and allow events and markets to eventually rationalise. The patience is often hard for us and harder for investors but is usually well rewarded in the long term.

I can’t recommend the book highly enough and cannot do justice to how interesting it is and at times amusing. Another you really must add to your reading list by the same author is ‘Boomerang’ which looks at the differing ways different countries and cultures either took advantage or operated in during the credit boom and how life has changed since. You don’t need a particular interest in finance to enjoy it, again it is fascinating, eye opening and at times so funny you may, like I, spit your coffee out in amusement.