Objects related to the cinema on reflective surface.

Content provided by Rusty Vanneman, CFA, Chief Investment Officer

Recently, the CLS Investment Team went to the movies (after the markets closed, of course!). It’s a great time of year for high-quality movies, and our choice was the critically acclaimed, The Big Short. The movie is about the financial crisis that stemmed from the real estate bubble nearly 10 years ago, and is based on a book by one of our favorite authors, Michael Lewis. The movie has an outstanding cast and was an absolute must-see. It was also a great excuse for the team to get together.

In short, the movie delivered – it was fantastic in many ways. But it was also flawed.

First, the fantastic. The film took complicated and arguably dry subject material and made it entertaining and understandable. That’s big. The acting was also brilliant, especially by Christian Bale, perhaps one of the greatest actors today (although he surely exaggerated his character). It was quirky in a good, artsy sort of way with interesting camera work supplemented by a great soundtrack. It was opinionated, thought-provoking, and funny. There were quotes that will surely pop up in investment team meetings in the year(s) ahead: “What’s that smell? Opportunity!” and “Truth is like poetry and most people – hate poetry.”  All in all, The Big Short is totally deserving of the praise it’s received. I could watch it again, and I no doubt will many times.

But it also delivered many wrong messages, some of which could be powerfully disruptive to investors.

  • It was disappointing because the film gave the appearance that the market meltdown was so predictable and preventable – that only fraud and stupidity stood in the way of innocent people getting hurt. It wasn’t that Markets move up and down due to many variables. It’s just not as simple as the movie suggests. As a money manager during that time, I too was concerned (as many others were) about the economic/market conditions then and had sold real estate, financials, and overall market exposure. But I didn’t decisively know when and how much the market would falter. Nobody really knows. Nobody. A message that the economy/markets are predictable is always dangerous and ultimately hurts investors. If investors truly think a forecast is certain, they’ll overly concentrate their portfolios and take unnecessary risks. Sure, concentrating a portfolio can create big upsides, but it can also create permanent damage. That’s why I always encourage balanced portfolios. They’re humble enough to admit I don’t know what will outperform, and they help keep investors in the game. Staying invested is arguably the most important variable for investors to reach success.
  • The oft-mentioned point that just about everybody in the industry is fraudulent, stupid, or both is nothing short of ludicrous and insulting. Ugh. There are bad eggs in every industry. And the cause behind the economic crisis was a stew of factors, both private and public.
  • Many viewers will probably want to be in hedge funds after watching the movie. But (assuming they have the opportunity to invest in them anyway) they have to understand a hedge fund’s incentives. Hedge funds are not long-term investments. They are wired for short-term kills. They need to make money fast so portfolio managers can make money fast. It’s the way their incentives work. If they don’t make their profit targets, the funds close down and re-open so they can pass Go, collect their $200 and start fresh. In short, while some of the best investment talent in the industry is indeed managing hedge funds, hedge funds are usually not right for most investors – they are often too expensive and too risky.
  • This next point is a pet peeve of mine. Have you ever noticed that when the market corrects, stats get thrown around stating something like “X trillions of dollar was lost”? But we never see “X trillions of dollars was created” beforehand and “X trillions of dollars was created after the market recovered.” Scare tactics don’t help anybody – except those that benefit from scared investors.

It’s probably best to remember The Big Short is first and foremost about entertainment. It’s not a documentary. Nonetheless, it’s a great movie – and I bet it wins some major awards.


The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. This information is prepared for general information only. All opinions expressed herein are subject to change without notice.