3 Investing Lessons from “The Big Short”

How to Profit from Lessons in the Film "The BIg Short"All traders and investors worth their salt should take themselves on a movie date and watch The Big Short.

Here’s what you’ll learn (no spoilers, I promise) from the movie, and how you can apply those lessons to make money in the right here, right now.

It’s a fantastic movie, not to mention a powerful reminder that those outside of Wall Street have a big advantage over those who work there.

More on that in a minute. First, here’s the gist of the movie…

The film is based on Michael Lewis’s powerful book of the same name.

The Big Short is a complex story told well and simply with humor and dramatic tension—a must-see for anyone with any interest in Wall Street, the housing crash, or great acting.

Yes, actually great acting, led by Steve Carrell, Ryan Gosling and Christian Bale, and supported by Brad Pitt and too many other actors to name.

We’re served the crash in two parts:

Part one: Too many people with too many mortgages who didn’t have the ability to pay those mortgages once their rates adjusted upward.

Part two: Too many salespeople sold bonds falsely rated as AAA, or close to it—bonds filled with those lousy mortgages, which, in turn, became the basis of securities, which then in turn became the basis of other securities and so on.

By the time Wall Street was through selling one security after another, 10 million in lousy mortgages could be the basis of billions in securities. No kidding.

The Big Short uses a clever convention to explain the complexity of these securities: feature actors, their sidekicks, and extras address the screen and do the explaining by analogy.

We have a beautiful blonde in a bubble bath explaining an MBS or mortgage backed security, as well as Selena Gomez and one of the world’s leading economists sitting at a blackjack table explaining a CDO—excuse me, a collateralized debt obligation.

There’s more…

[youtube http://www.youtube.com/watch?v=vgqG3ITMv1Q?feature=oembed&w=1080&h=608]


Morality is never far from the storyline or lack thereof. A reminder the pace of events we lived through obscured the radically unethical and illegal behavior of too many to count on and around Wall Street.

I loved that pace. I was in the middle of the crash and crisis, running a short side advisory service and writing a book, Sell Short, recommending people buy puts on home builders and regional banks in February of 2007, then on to the big banks a few months later.

Watching the movie brought back memories. I was on the set of Fox Business, using a Blackberry to type an alert for my subscribers about our short position in Bear Stearns as the stock collapsed—a day that is the focus of one of the last scenes in the movie.

Five days later, the company and stock disappeared into JPMorgan Chase.

Bottom line: This might be the movie of the year… and I’m a hardcore Star Wars nerd.

Now, let’s talk about you, the investor…

One scene is worth the price of the movie, and for $10 or $15 bucks, you can save yourself a lot of time and money you might spend on learning how to find supposedly great opportunities.

As the potential short sellers—the folks shorting those mortgage bonds—work to abandon their skepticism, they visit near-empty housing developments, chat with brain-dead and hopelessly corrupt mortgage brokers, and drive around with real estate agents looking at house after house for sale.

I did the same in 2007-2009 and beyond. You can do the same.

How to do this today?

If not a housing development, go to a mall. Check out hotel and airline prices on Expedia or some other web site. Ask the nurse practitioner at the dermatologist “How’s business?”

You’ll be shocked by how quickly you learn what Wall Street is missing.

Retail sales are soft. That must mean all retailers, right? Nope. Check out Williams-Sonoma (WSM).

Consumers aren’t spending in retail, so they must be pulling back, right? Nope. They are traveling, think Expedia (EXPE).

Where else is there money going? Health care, particularly lower end stuff. Think CVS Health (CVS).

Prove it to yourself. Go look at the copper pots, visit a CVS mini-clinic and check out airline prices compared to last year. Let me know what happens.

For those who want to know about housing, go the beach where homes start at half a million or more. There are more “for sale” signs than seagulls.

Great movie, great lessons. The Big Short is a must-see movie for traders, investors, and cinema buffs everywhere.

This post originally appeared on mainstreetinvestor.com.

More From InvestorPlace:

Article printed from InvestorPlace Media, https://investorplace.com/2015/12/powerful-investing-lesson-big-short/.

©2022 InvestorPlace Media, LLC