financial system

Our Book Report: “The Big Short”


Back in the Mesozoic Era when we attended elementary school, it was common practice to assign book reports as homework. On the appointed day, students were called to the front of the class to read their report aloud.

This may surprise you, but fourth graders often seized on one small part of the book, a particular event or character. The rest of the story, perhaps even the central theme, might be neglected. We are trying to tell you that this book report is fourth-grade style.

The Michael Lewis epic about the last financial crisis illuminates how nearly the entire financial world can get it wrong, while a tiny group of free thinkers or eclectic contrarians digs into the facts and gets it right. The people who figure the deal out in real time usually get castigated and abused—and rich.

The contrarians are usually as noisy as they can be. But they might as well be speaking Etruscan to the coffee klatch at B’s Diner in beautiful downtown Louisville. It is as if nobody can understand them.

The moral of the story is that being part of a broad consensus may provide a sense of security. We humans are social creatures, and we crave acceptance and a certain level of conformity to group norms. But the crowd might be terribly wrong, to its eventual detriment.

Meredith Whitney, a previously obscure analyst, was the voice in the wilderness on the sub-prime rot in the financial system in 2008. She had been trained by Steve Eisman. These two had a history of looking at reality, and finding the gap between it and the prevailing perception.

Clients, you already know these people are heroes to us. They were selling when the stampede was buying. They did their own thinking. The consensus meant nothing to them. These are the things to which we aspire.

Of course, the renegades turned out to be correct, the conventional wisdom was actually ‘wisdumb,’ and a few people did well while many suffered losses. Again. “The Big Short” by Michael Lewis is a wonderful telling of this tale.

We have written enough already about our differences with the current consensus views. Clients, if you would like to discuss this or anything else on your agenda, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Any named entity, Leibman Financial Services, Inc. and LPL Financial are not affiliated.