The Big Short Is Coming
Or, Is The Big Short Coming?
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Today’s edition is part of My Stories where I share vulnerable thoughts around my opinions in Finance.
Charts & Chit Chat will be our next edition coming out within a few days where I share Financial Data/Charts alongside quick takeaways that get right to the point.
For now, let’s get vulnerable.
A childhood crush of mine who later turned into “the one that got away” from my late teenage years was named Margeaux, pronounced the same way Margot Robbie pronounces her name and just as eye-stunning to me.
Michael Burry made $100 million dollars with his bet against the housing market that paid out in 2008.
Steve Eisman (Mark Baum in The Big Short) and his Hedge Fund FrontPoint was estimated to make hundreds of millions off the same bet.
Lehman Brothers was the only bank to go bankrupt and fully disappear at the time. The other banks were all acquired by bigger banks, and the bigger banks received a bailout from the government.
It sure would be nice if the government gave me money to buy the cocktail lounge around the corner from me. That might give me a second chance with Margeaux.
Besides Lehman, the biggest losers of this bet were the American people. The bailouts for institutions like Citigroup, Bank of America, and AIG were funded by American taxpayers.
We gave the banks money to buy the cocktail lounge around the corner, and people like Burry and Eisman saw this coming from a mile away and made a killing betting on it all unfolding.
As quoted in the movie, these folks were able to spot this inefficiency in the market by doing something nobody else did. “They looked!”
There’s something so cool about being able to profit even when the market is moving lower. It is undoubtedly more fun for me to profit from my option trades when the S&P’s are moving sideways to down rather than up.
You feel like a boss profiting when the market isn’t moving higher. You feel like the owner of a cocktail lounge where 8 beautiful women come to sit at the bar every night and drink espresso martinis just to get a glimpse of you.
Margeaux who?
Making money in a bull market is easy and doesn’t feel as powerful. It’s just honest work.
Everyone in markets is searching for a way to create the best risk adjusted returns. How can we take the least amount of risk while making the most amount of money?
It’s easy to make money in markets. Keeping it is the hard part and what we are all most worried about. This is why when the S&P’s are down -20% on the year we think they are going to fall down to -50%, and when the S&P’s are making new highs on the year we find even more reasons for why a market correction is right around the corner.
We’re scared of the drawdowns and giving back our hard earned money, and don’t forget about how cool it is to make money when the market is moving lower. Movies are made and books are written about people who make a lot of money in market crashes.
It’s amazing to hear about how Michael Burry was betting against the housing market collapse since 2005 and it didn’t unfold until 2008. Losing money for 3 years straight while staying committed but looking like a fool in your industry is no easy task.
George Soros made $1 BILLION dollars with a B shorting the British Pound in 1992. That’s a lot of money today, nevermind 32 years ago.
Soros didn’t wake up one day and decide to put on his short position. Him and his team were monitoring the situation for a long time.
They have to monitor economic conditions, political developments, market sentiment, macroeconomic indicators, central bank policies, political statements from officials, and dozens of other relevant factors for several months if not years before making a bet to return that type of money and become the legendary investors we idealize today.
So between it feeling cool to make money in the downtrend, investors always monitoring risks in the economy, and idealizing the legends that have made tons of money in a market crash — it makes a lot of sense that we’re always looking for reasons the market should go lower!
Is that a good idea though? Should we always be looking for The Big Short?
I started getting heavily active and interested in markets in 2013. At that time I always thought the market was going to crash. I think when you first get more engaged researching markets and news it’s easy to fall in love with the bearish arguments.
It really took me about 5 years to ditch the permabear mentality, which was after I got burned betting against the up move in the S&P’s during the last few months of 2017.
The bearish arguments always sound really good on paper. The problem is that many of the bearish arguments I was really scared of in 2013 are identical or not all that different from the bearish arguments in 2017, or today, or before 2013 when I was still pooping yellow in my diaper.
People have been saying the US Dollar is going to lose its status as the Global Reserve Currency for over 40 years now for example, longer than my lifetime.
I was a member of Sky View Trading in 2013 while the business was in its infancy and nothing like it is today. I didn’t start working there part time until 2016, and full time in 2018. I can remember reaching out to Adam (co-owner) one day as a member about some bearish arguments I heard from Tom on TastyLive.
I love Tom and I love TastyLive. I still listen to them daily. But Tom is a well known contrarian in the market, meaning he tends to share thoughts about how the market could or is going to reverse.
The market goes up over time though, and most of the time. So that kind of means that Tom is going to be sharing bearish thoughts most of the time.
I remember one day Adam telling me that he really likes Tom and TastyLive too, but he had to stop listening to his thoughts on there. He said, “Tom always scares me into thinking the market is going to crash so I had to stop watching the show.”
Again, this is not to pick on Tom or TastyLive because I love them both! This is just to give an example of how easy it is to get caught in the allure of The Big Short arguments, especially if they are coming from people you look up to.
In many cases, people spouting The Big Short arguments don’t actually have bearish bets on either. They have financial advisors putting them in products that track SPY as they are touting their bearish arguments on TV or YouTube. Or, they made 10’s of millions in the markets/business already (being a bull somewhere) and decided to take their chips off the table and live their lives in peace now while they scare the public.
We’ve had 3 “market crashes” (over -20% drawdowns) since 2013 and the market is still up 290% in that time.
SPY has gone from $140/share in 2013 to $546/share today in 2024, despite three different 20% drawdowns in 2018, 2020, and 2022.
The story is similar no matter what 10 year period you look at. In fact, there’s a very high probability that you will be profitable as a bull regardless of what timeframe you look at.
After 1 month = 62% chance.
After 1 year = 74% chance.
After 3 years = 84% chance.
After 5 years = 90% chance.
After 8 years - 97% chance.
Who looks at those odds and says, “I’ll take the bear side?”
The small chance that you aren’t profitable shouldn’t really scare you that a big crash is coming to take all your money away. Instead, it should excite you that a market correction is coming allowing you to add to your passive positions at better prices, increasing your odds of success even more than what is shown above, and giving you a chance to compound larger sums of money.
It’s just so much easier to play the long side of asset prices, especially longer term.
I know we all want to be Burry, Eisman, and Soros. Stories like that are probably what got us interested in Financial Markets in the first place!
But let’s bring it back to reality. How many people are Burry, Eisman, and Soros? Less than 0.10%. That’s not an exaggeration either, that’s the actual statistic!
Joe Shmo’s like you and me aren’t going to create wealth through The Big Short. We’re going to create wealth by focusing on the long side of asset prices and optimism in the American economy while we sell the fear of doomers.
That’s the whole premise of selling option premium like we do at Sky View Trading too. We’re selling the fear of doomers and creating high probability bets while we manage that risk the 1 time the doomers are half-right for a month or a year.
Selling option premium like we do tends to outperform average index returns over time, just like aggressive accumulation in bear markets gives us a chance to compound larger returns over time.
People will call me a permabull millennial and that’s fine. I am millennial by definition and I’m a permabull by choice.
I think it..
pays to be a permabull.
pays to bet AGAINST The Big Short.
pays to be optimistic about the American economy.
The bears look cooler, sound cooler, and have way more fun when they are right. I’ll give them that.
I will also be wrong one day and they will get their time in the sun.
One of these weeks is going to mark a top in the market and be the start of a longer term correction down -20% or more in the S&P’s. On that day or that week you’ll be able to find a newsletter where I’m touting the bull case and I’m going to look like an idiot!
On that same day or week there will be an eloquent argument presented by a bear that turns out to be spot on accurate as the months progress.
The problem is that same bear has been touting that argument for the last 18 months and 100 percentage points in the Nasdaq (and counting).
That bear has already done a lot more harm than good for many that were listening to their growl.
So the reason I am a permabull these days is simply because I genuinely feel and know that being a permabull is going to keep most people out of trouble. Being a permabull does more good than harm. Being a permabull is how Joe Shmos like you and me create wealth over time.
Permabears, or sensationalized bearish arguments generally do more harm than good.
They scare people away from investing.
They scare people away from trading strategies like “naked premium” because of the “undefined-risk” they carry.
They scare people away from understanding that this is simply a game of trading cash for assets and strategies over a long period of time to protect our purchasing power from the government debasing our currency.
So, is The Big Short coming?
Maybe. Probably not though. And if it does, we’re probably higher in 1, 3, 5 years time anyways.
Don’t let the fear of short term drawdowns keep you from accumulating gains over the medium to long term. Don’t bet against America. Don’t be a bear.
Bears are the type to own a cocktail lounge though so I am envious of them, but I’m just out here trying to put in an honest day’s work and make money the old fashion way.
Some millennial I am.
I really hope this isn’t the newsletter that marks the top in the S&P’s.
Margeaux, please come back!
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Disclaimer: These are not recommendations and I am not a financial advisor. These are just my two cents, or two satoshis as the kids say. Remember to do your own homework before making any financial decisions. Also, keep in mind I usually have some personal investments in the things I discuss.
Good picture. I love that scene of Margot Robbie.
Gotta love Dr. Burry!