You may be surprised to hear that Moneyball by Michael Lewis is my #1 investment book, given that it’s about baseball, not Wall Street or the stock market.
Moneyball is a story about how one of the poorest teams in baseball, the Oakland A’s, and their GM, Billy Beane, built a roster chock full of talent and won 103 games. Beane did it by discovering hidden value through faith in his convictions and obscure stats, like a hitter’s pitches per plate appearance—helpful in tiring out a pitcher and getting on base. He drafted baseball players who were overlooked by other GMs blinded by their herd-like analysis.
You’ll learn from the book that as an investor, hard work and tireless research can help you discover value where others don’t see it. Plus, it’s a better read than your typical investment book.
Michael Lewis also wrote The Blind Side, now a motion picture, which is another story about value. Again, it has nothing to do with stocks or bonds. It’s about football and the rise in value of the second most important player on the field, the left tackle, who protects the highest-paid player, the quarterback, and his blind side. You’ll love the story about Michael Oher, who embodies what it takes to be a good left tackle.
The stories Michael Lewis tells through his books are the closest most readers will ever come to Wall Street, and thankfully so. In the cult classic Liar’s Poker, Lewis, fresh out of Princeton, is employed in the highly sought-after Solomon Brothers training program. When the mortgage-backed security bond is created, he’s there. Led by John Gutfreund, the bond traders rig the odds in their favor like a casino. At a moral crossroads, Lewis leaves the well-paying job and literally writes the book that defines an era of greed.
Ironically, his new book, The Big Short, comes full circle. It is about the demise of the subprime mortgage-backed security bond market Solomon helped to create years ago. The characters alone make it worth reading. What you’ll learn, in addition to the workings of synthetic collateralized debt obligations (CDOs) and credit default swaps (CDSs), is that the market implosion was simply a matter of time.
Of course, now Goldman Sachs is facing civil fraud allegations from the government. Three years too late, I might add.
As Lewis explains in his book, Goldman Sachs was a big player in the CDO market and was eventually a big loser, too, since CDOs lose when subprime mortgages default. According to Lewis, Goldman held $16 billion in CDOs when subprime loans began defaulting and eventually incurred billions in losses, some of which it reduced with shady maneuvering. Hedge fund king John Paulson, among others, profited with CDS positions, which, on the other side of the bet, benefit from a default.
To blame just Goldman Sachs and Wall Street would be wrong. Government led by Republicans and Democrats pushing home ownership for all, easy-money mortgage lenders selling no-documentation loans, and speculative unemployed borrowers all share responsibility for the mess. Unfortunately, risks to investors will remain if toothless reform—and it is toothless—still supports a safety net for Wall Street and business as usual for the bloated Fannie Mae and Freddie Mac.
Until we see real reform, you’ll be wise to follow the lessons learned in Michael Lewis’s books and focus on value.
E.J. Smith is Managing Director of Richard C. Young & Co., Ltd. an investment advisory firm managing portfolios for investors with over $1,000,000 in investable assets.
E.J. Smith