Ruzbeh Bacha
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What the Film ‘The Big Short’ Teaches Us about Value Investing

It’s reasonable to wonder what a movie about the housing crisis and ensuing financial meltdown could teach regular people in the market about investing. But within The Big Short there are nuggets of wisdom that pertain to value investing. There’s also Margot Robbie in a bathtub, so something for everyone.

The movie is set in the 2000s and follows the events and characters involved in the housing market bubble (Spoiler Alert: that bubble burst). The characters were all prescient, and saw that the housing market was decidedly overvalued, and they realised that they stood to gain by shorting it. Most of the characters in the film, and their real life counterparts, profited immensely from those trades.

While the movie focuses on hedge fund managers, big time stock traders, and bond salesmen – not your typical lot to learn from for personal investing – there are truths in the movie that extend to all levels of value investors. If you’re in London, join us at London Value Investing Club where we as a group of value investor discuss various value investment opportunities.

The market doesn’t always make sense

“Markets can remain irrational for longer than you can remain solvent”

John Maynard Keynes
The quote from Keynes illustrates a truth from the movie, though it’s not directly evident without thinking about it a little. Part of the problem with following the type of people in the film is that they were all in situations where they had millions of dollars at their disposal. At a few points in the movie, characters were down nearly 40%, and considering whether or not to cut their positions. But they were all certain about the impending burst, so they held on for the massive pay day in the end. But what if the bubble took longer to burst? How long would they have held on, and what level of losses were they willing to tolerate?

If you’re investing for your own financial well being and don’t have millions of dollars in reserve, no matter how sure you are of a commodity gaining value, it may not do so within your time table.

The quote from Keynes illustrates this well. You may be entirely right about something, but the market won’t work on your watch. If you don’t give yourself enough time and leverage, it could be disastrous for you financially.

Read full article on Master Investor