The Big Short by Michael Lewis

The Big Short: Inside the Doomsday Machine by Michael Lewis was a book that had been on my “to read” list for a very long time. I finally had a chance to finish reading it when I was travelling recently.

Michael Lewis tells the story of the subprime crisis and its subsequent implosion by following a few central characters. Not famous people like Ben Bernanke, Timothy Geithner or Dick Fuld, but less well known people like Steve Eisman, Michael Burry, Greg Lippmann, Jamie Mai and Charlie Ledley.

Most of these people understood the subprime problem well before it erupted into a full blown crisis. They managed to put the pieces together and subsequently profited immensely from the crisis.

The background stories of these central characters are intriguing by themselves and combined with the inside story of the financial markets, makes the book a very compelling read.

The story of Michael Burry would serve as an inspiration to fund managers wannabes. Michael was a doctor but had a passion for the inner workings of the stock market. In his free time, he would do research on stocks and publish his findings on a personal blog. His work was so good that both ordinary investors and people from Wall Street started following his trades.

When Michael Burry decided to quit his medical career and focus on managing his own money, he had just $40,000 in assets and owed $145,000 student loans. But when he announced his decision to go into full-time portfolio management, he was immediately approached by a couple of fund managers who had been following his blog. One gave him $1 million to acquaire a 25% stake in his firm. Another gave him $600,000 for a smaller stake in the company, but invested $10 million into his fund.

Michael did not disappoint and outperformed the market significantly. Within three years, he was managing a portfolio in excess of $600 million and turning investors away.

The story of Jamie Mai and Charlie Ledley was even more astonishing. They were a bunch of 30 year-olds managing a sum of $110,000 out of their garage. By exploiting inefficiencies in options pricing and taking calculated bets, they were able to grow their portfolio in ways we can never imagine.

Their first trade of $26,000 on a call option grew into $526,000.

Their second trade of $500,000 turned into a $5 million profit.

Their third trade of $200,000 quickly turned into $3 million.

Two years after they opened for business, Jamie and Charlie were running a portfolio of $12 million of their own money. Later on, they were to hold $205 million worth of credit default swaps on subprime mortgage bonds.

The Big Short: Inside the Doomsday Machine was a book that I found hard to put down after I got started. I will certainly want to read other books written by Michael Lewis. I understand that they have also received very positive reviews.