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NewAlchemist (50.12)

I am reading The Big Short



May 10, 2013 – Comments (5)

I've been meaning to read this book for a long time and it's very good so far.  Michael Lewis is a great storyteller. In italics are some good quotes from the book on selected topics with my comments directly below.



His first assignment was in Manhattan, as a junior accountant, was to audit Salomon Brothers.  He was instantly struck by the opacity of an investment bank's books.  None of his fellow accountants was able to explain why the traders were doing what they were doing.  " I didn't know what I was doing," said Vinny.  "But the scary thing was, my managers didn't know anything either.  I asked these basic questions - like, Why do they own this mortgage bond?  Are they just betting on it, or is it part of some larger strategy?  I thought I needed to know.  It's really difficult to audit a company if you can't connect the dots"....He concluded that there was effectively no way for an accountant assigned to audit a giant Wall Street firm to figure out whether it was making money or losing money.

In my experience financial companies are the most difficult to analyize.  Look at Apple, how many iPhones did they sell, iPads, Macs, itunes etc.  For such a big company you can easily look at how many iWidgets they sold and do some forecasting.  Financials are a lot more complex and I very skeptical when somebody tells me what a financial is worth.


Home Equity

A home without equity is just a rental with debt.

When you borrow 100% to buy a house, you have 0% equity in the house, you don't own your home, the bank does.



They measured risk by volatility:  how much a stock or bond happened to have jumped around in the past few years.  Real risk is not volatility; real risk was stupid investment decisions.  

So true.  A lot of people measure risk in terms of price, which is fine, until price collapses. 


Warren Buffett

Burry did not think of investing could be reduced to a formula or learned from any one role model.  The more he studied Buffett, the less he thought Buffett could be copied; indeed, the lesson of Buffett was: To succeed in spectacular fashion you had to be spectacularly unusual.  "If you are going to be a great investor, you have to fit the style to who you are," Burry said.  "At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out his own path, and ran money his own way, by his own rules... I also immediately internalized the idea that no school could teach someone how to be a great investor.  If it were true, it'd be the most popular school in the world, with an impossibly high tuition.  So it must not be true".

Warren Buffett is a really popular guy, especially around MF.  I absolutely think you can learn a lot from him but there is such a thing as over kill and there are other great investors.  Buffett said THIS, Buffett said THAT.  Lots of coverage of his favorite stocks, the Berkshire annual meeting, and his famous quotes.  The other day I had to laugh because somebody wrote an article, what would Buffett think about "fill in the blank" stock?    


5 Comments – Post Your Own

#1) On May 10, 2013 at 3:59 PM, Option1307 (29.90) wrote:

Great book, read it a few years back. I agree he is a really good story teller.

Good comments as well! 

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#2) On May 10, 2013 at 5:34 PM, awallejr (82.72) wrote:

A home without equity is just a rental with debt.

That isn't true at all.  First you get tax advantages over renting.  And 2nd, over time that debt gets repaid.  With renting you are letting the landlord grow equity at your expense.

There are assumptions, such as your ability to at least make the monthly payments and you remain employed.

As for Buffett I think his investment style is pretty straight forward.  He buys companies that he thinks will be around a long time.  He then compounds the earnings into buying more companies.  He is not interested in what might happen 3 months from now.  BRK is a classic example of the power of "compounding."

It is close to what I have been advising people to do for years here.  Create a core position that generates income such as the MLPs, BDCs, REITs, quality dividend paying stocks.  As that income is generated re-invest it, not necessarily through a DRIP, and in fact I don't use DRIPs.  I let the cash build up and then redeploy it depending on the options available. Of course you have to monitor your holdings but if you picked wisely you will see that income growing and growing.

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#3) On May 10, 2013 at 6:39 PM, NewAlchemist (50.12) wrote:

@ awallejr

How goes it buddy?  I see your point but this statement was made cerca 2005 when psub prime borrowers were borrowing 100% or in some cames 110% to buy "THEIR" house.  It wasn't their house at all.  Yes, over time it could grow into their house.  Yes, they got tax advantages, yes they got to live there, but it was not their house.

I like your strategy and I don't DRIP either.

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#4) On May 10, 2013 at 6:52 PM, NewAlchemist (50.12) wrote:

Some more material from the book...

 In 1933, during the fourth year of the Great Depression, the United States found itself in the midst of a hosuing crisis that put housing starts at 10% of the level of 1925.  Roughly half of all mortgage debt was in default.  During the 1930's housing prices collapsed nationwide by roughly 80%.  

"Senior Management's job is to pay people," he'd say.  "If they F a hundred guys out of a hundred grand each , that's ten million more for them.  They have four categories:  happy, satisfied, dissatisfied, disgusted.  If they hit happy, the've screwed up:  They never want you happy.  On the other hand, they don't want you so disgusted you quit.  The sweet spot is somewhere between dissatisifed and disgusted.  

"I don't have any particular allegience to Deutsche Bank,"he'd say.  "I just work there."  This was not an unusual attitude.  What was unusual was that Lippman said it.

The less transparent the market and the more complicated the securities, the more money the big trading desks at big Wall Street firms can make from the argument.

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#5) On May 10, 2013 at 7:11 PM, awallejr (82.72) wrote:

this statement was made cerca 2005 when psub prime borrowers were borrowing 100% or in some cames 110% to buy "THEIR" house.

Oh you can thank Wall Street for that.  They just wanted to snag, churn and dump their MBSs for massive bonus's.  You had a pulse you got a loan.  Nothing ever turns out well for the Average Joe when Wall Street gets involved.

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