Book Review: The Big Short
The first investment rule I learned was “Never invest in a business you cannot understand.” It’s a simple investment rule.
If you don’t understand the business, then it’s impossible for you to know if it will succeed or fail. You can bet (in some states) but don’t call it investing.
Michael Lewis’s story about the winners and losers of stock investing during 2008 and 2009 boils down to people making decision and “investments” that they didn’t understand.
- Wall street investors were engaging in credit default swaps and CDOs with little to zero understanding of what they were trading.
- Many individuals were foolishly buying homes and taking mortgages they didn’t understand. Unfortunately, even responsible people who took out reasonable mortgages that they understood were victims of the macro-economic downward spiral of the economy.
The greatest problem with “too big to fail” is that it changes Wall St. risk/reward ratio. Executives know that being riskier is better for them in the long run, it increases the reward and the downside is that the USA taxpayer pays more taxes.
My takeaway from Lewis’s book is to recall Buffett’s greatest piece of advice:
- Never invest in a business you cannot understand.
- When investing in technology, it’s not enough to understand the business model, it’s imperative to understand the technology; And, it’s not enough to say WOW that’s amazing technology, it’s important to understand the business model.
- Great Technology? E.g. Social, Security, Privacy, Analytics? Eg. GoPro, Fitbit, Etsy, Dropbox, Evernote
- Business Model? SaaS, Advertisement, Premium, Platform, Broker?
- Both + a MOAT?
I highly recommend the book. I haven’t seen the film.