Lesson for Retail Investors from the movie : THE BIG SHORT

The movie ” The Big Short “ is the big screen adaptation of the Michael Lewis’s book about the disturbing period of Great Recession of the year 2008 and some people who generated huge profits while the economy collapsed.

Michael Lewis earlier earned huge accolades for his previously written books – ‘Moneyball’ and ‘The Blind Side’. The Big Short is a story of eccentric traders who anticipated the US housing bubble and generated huge amount of profits out of it. It is a story of those fund managers and bankers who created rubbish securities backed by mortgages. The movie has beautiful ladies – Margot Robbie and Selena Gomez explaining about subprime loans and Collateralized Debt Obligations (security on a security). The story consists of eccentric traders and financial organizations betting blindly for the very selfish motive of making money.

Even though ‘The Big Short’ is all about the big blind bets by people with lots of money and the actual crisis on the US economy which gradually affected the whole world, there are some very important lessons to be learnt by every retail investor:

1. A mob has no brain:

The movie shows several investors betting blindly on housing market. Instead of being part of flock of sheep, they could have stopped and analyzed that something fishy was going on in the market. The bankers creating unnecessary derivatives, investors investing copiously without having any prior sane thoughts, mortgage companies coming up with risky securities and entering public markets with sky-rocketing valuations and the whole economy in a party hangover. Nobody cared about the after effects, or I would say, the side effects of all these practices. People kept on lending money, others kept on betting and so on and so forth. And when their hangover was finally over, they saw themselves in the most unfortunate pit of distressed economy.

2. All that glitters is not gold:

The movie shows an exotic dancer claiming to own five houses in front of a hedge fund manager named Baum (played by Steve Carell) and Baum is left puzzled. An exotic dancer cannot be possessing five houses as her source of income is not regular. Just like her, several people bet their life stakes and availed subprime loans – loans that were offered at a rate above prime to individuals who do not qualify for the loans at prime rate due their credit history. Investors saw this as a golden chance of making huge amount of money and becoming rich without even thinking for twice that if it was that much easy to get rich, everyone would be.

3. Do a thorough research, after all it’s your money:

Christian Bale plays a socially challenged computer geek fund manager while Steve Carell played a role of another fund manager. And both of them did a proper and thorough research on CDOs (Collaterised Debt Obligations) and subprime mortgages and came to a common conclusion that the economy was gonna collapse due to huge market crash. After all, its your money that you are investing. So, it is strongly advisable to go for a proper research of the securities and various investment products. Even if you don’t understand what you are actually investing in, it is strongly recommended that you should not invest. A proper know how of something is a must. Mere mouth publicity regarding something does not hold good. It is wisely said that, half knowledge about anything is dangerous, so without proper research, it’s a just a gamble.

4. Even credit ratings agencies are here to make money:

It is brilliantly portrayed in the movie that even credit ratings agencies were paid by the banks for subprime loans. If one agency refuses to rate the products, banks simply take their business to other agency. In the movie, S&P rates those faulty loans AAA and that is something very foolish. Investors banked on credit rating agencies for making smart and effective investments. Hence, it is an very important lesson to learn that even rating agencies are a business to make money. Therefore, instead of trusting blindly on the products rated AAA or similar, one must check for the product history. And if the product is new to the market, one must show patience, sit back and analyze before making any investment.

5. What goes up must come down:

It is the law of financial markets that what goes up must comes down. Prior to 2007-08, people of America were having world’s greatest party as they had access to huge sum of money, and if not money, they had mortgage backed securities and loans with very less and easy credentials to bank upon. The valuations of these bank products were sky-rocketing, even the exotic dancers claimed to have own five houses just because of the backing of subprime loans. But in the year 2007-08, it was a catastrophe in the US economy. Due to this, an estimated 8.7 million people lost their jobs, the stock market tanked and the Americans lost a total of about $1 trillion which was a huge blow to the US economy.

6. Always keep your eyes open:

Try to be a market watchdog. Try not to trust your financial advisors and brokers blindly. Find out as much as about them – their experience, their license, their reputation and qualification. Learn to understand the market fundamentals and cultivate the ability to act prudential. After all, it’s your life savings that you are putting in.

Conclusion of The Big Short Movie –

In the end, I would say take charge of your money and don’t get influenced just because a plurality believes in something. Do proper research and try to use logical approach while making an investment as there exist hell number of frauds in the markets. At last, I would end with a quote of Mark Twain- “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”

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