The Big Short - by Michael Lewis

I am half way through Michael Lewis "The Big Short" after finishing "Liar's Poker",  a hilarious account of the time he was in Salomon Brother.

The book gives details about the time before the big housing crash and credit bubble in 2008. It is like reliving that period in a trading environment. Very interesting and a lot of lessons can be related to  the current situation. There are a lot of parallels to be drawn.  For me, the situation mirrors the situation now where the bond market has gone stratospheric with central bankers trying to evade the financial crisis - lots of manipulation to blindside the real direction. It is a great read.

There are few lessons to be learned.

o Fundamentals are key to the market long term.  Often it is not seen until it is a little late. This is the big money maker. I can make money from trading volatility, side way directions but the big bucks is from getting the long term trend right. The best way is to bet on the long term trend. But the market can always go against you short term creating apprehension and fear. Just before the crash housing price continued to go up despite extremely poor fundamentals. Thus, the ability to hedge and following trends are very important skills.

o Market will always go to extremes.Manias engulfes greedy investor and fear cripples the weak. This is where money is made by betting on the right directions.

o There is a problem of personal direction bias - unable to see the true direction of the market because of personal conviction. There are blind spots. Wonder how many smart people failed to see the dot.com bubble or the housing collapse? How could regulators failed to see failing lending standards and rapidly deteriorating fundamentals ? Similar situation to bond market, gold and silver valuations? Can the world continue to thrive with unsound finance, ,massive currency printing and intensified currency wars? To solve the problem, always reexamine your bias in the light of new evidence and at the same time hedge your positions until you get the direction right. The fundamentals can lag the price actions by a few years!

o It depicts rampant greed, manipulation and corruption in the political system and financial world -  companies like JPM, Citibank, Goldman Sach and our previously, Morgan Stanley, Salomon Brother, Lehman Brother etc. Never trust these guys!

Interestingly, I read a bad review on Niall Ferguson "The Ascent of Money".  But I like the book. It gives a wonderful historic account. I am not scholarly enough to debate the good Harvard professor on his account of the history of money. But I am seeing that history is showing much rhyme in current events now. For those who do not read, you can view a 4 hours BBC documentary on the book at  http://www.youtube.com/watch?v=4Xx_5PuLIzc.