I went to see the movie the ‘The Big Short” on Christmas Day a few years ago and it has become my new favorite trading movie since then.
The movie is funny and entertaining, while telling a good story. It details three hedge funds that made the right trade at the right time to capture huge profits as the mortgage bond market imploded under defaults. The movie theater was full, but I was often the only one laughing out loud at many of the jokes, because only traders would understand. The movie did take the time to explain credit default swaps and CDOs for the general audience in funny and creative ways, including guest appearances by Selena Gomez explaining how bets on mortgage bond defaults worked. Brad Pitt did a great job convincing me he was an ex-trader, and Steve Carell did a fantastic job playing the world’s angriest hedge fund manager. This was in the league of ‘Money Ball’, and one of the few movies I can watch more than once. This movie was made for traders.
15 Trading Lessons from the The Big Short
- It’s possible to be right about a market move, but your timing can be too early.
- If you trade too big, you can lose all your capital before you have the time to be proven right.
- AAA agency ratings are more to make their clients who sell bonds happy than to protect investors.
- In markets that are not liquid, you can get in trouble by being right but your assets not reflecting it with a big move.
- When there is no risk of ruin to bankers and mortgage brokers they will risk the ruin of their companies and the world economy in pursuit of quick and easy money.
- When there is little ‘skin in the game’ bankers and mortgage brokers take risks that they are not held accountable for.
- Macro traders have to be able to take a lot of heat and losses on their positions before they are right.
- Hedge fund investors want consistent returns on their money and not drawdowns. They are quick to pull their money out during a losing streak.
- You want to have a large risk/reward ratio on your trades. Betting $1 for a chance to make $20 is a good trade.
- There is a lot of fraud in the financial world.
- Financial fraud is almost never prosecuted in the banking world.
- The SEC has little oversight in the banking industry.
- Bailouts can cause you to lose on a trade you would have made money on.
- You have to take your profits off the table while they are available.
- “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” – Mark Twain