Tuesday, December 23, 2014

Book Review #20: The Wealthy Barber: Author: David Chilton

There are few singular aspects about the book 'The Wealthy Barber: Everyone's commonsense guide to becoming financially independent'. First is that the author of the book, which discusses tools available for an american investor, is a Canadian. The second is that the protagonist of the book is Dave and his wife is Sue. The author of this book is David Chilton ('Dave') and his wife is Susan ('Sue'). Coincidence? I don't think so.

The third, and I think infuriating, aspect of the book is that in various pages in the book, the characters ask questions which remain unanswered. If there is no intention of answering the question, then why ask?

In a small, crisp volume of about 10 Chapters (of which first three are irrelevant to the main theme of theme of the book) condensed in about 200 pages, the books explains the key aspects of Financial Planning. The target audience is the Layman who do not have much knowledge of financial planning. The book covers financial planning, retirement planning, insurance, home purchase and budgeting. In each of the above areas, there are some innovative ideas that even an experienced person will find educative.

In the first three chapters, the book introduces the characters of his book. There is Dave, a school teacher, whose wife Sue is expecting. Dave has a plan to buy a new house but is worried that his financials are not in order and approaches his father for financial advice. Father directs him to Roy Miller, the town barber, who also doubles up as a financial consultant. Despite being a barber, Roy is very wealthy with a House on the lake and running his own successful business.

From chapter 4 through chapter 10, Roy covers various areas of Financial Planning. Chapter 4 covers long-term investment. Chapter 5 discusses Wills and Life Insurance while Chapter 6 touches upon Retirement Planning. The remaining chapters cover Real Estate Investment, Saving and Investment and Income tax. The books rounds off by summarizing the concepts discussed in the book.

To become wealthy, one has to become 'An Owner, not a loaner'. One must remember to own assets rather than keeping money in savings (checking) account. Financial planning is planning for major life goals like buying a home, buying vehicle, children's education etc. To meet the goals, Roy suggests to invest 10% of the income every month in carefully selected mutual funds. This provides three advantages. One is compounding of returns, two is diversification and three is dollar cost averaging. Roy recommends to do a thorough review of the fund manager before investing in any fund. The expense ratio and entry load are two other factors that the investor has to consider before selecting the fund. A better approach will be to invest in Index Funds which has low expense ratio.

Roy advises against market timing and sector switching as a strategy since both tend to increase one's loss. Also one should avoid funds following complex investment strategies.

People tend to confuse financial planning with retirement planning. The difference between the two is that while financial planning is for specific goals, retirement planning is for handling the uncertainties of retirement including duration (longevity) and loss of purchase power due to inflation. Tax is an important part in retirement planning. Roy recommends to keep Government as a partner when it comes to retirement planning. Government has provided many tax deductible and tax deferred options to help investors plan for their retirements. The book details a number of such options from the legal perspective of USA. Readers from other countries could skip this section. One option that Roy do not recommend is investing in private annuity plans.

There are some reasons why one should plan for retirement. First of all, with improvement in medical facilities, the average lifespan is increasing over the years. Second, it is incorrect to say that your needs will come down after retirement. Needs will change, but may not come down. Third, while it is true that children will become self-dependent, you may have to consider the possibility of having dependent parents living with you.

Roy recommends that each individual prepare his / her Will and regularly update the same. Prior to preparing the will, it is better to discuss the same with a lawyer and identify a group of people as the executors of the will. There is a detailed discussion of the legal provision if an individual dies intestate. When it comes to buying insurance, the recommendation is to have three type of insurance. One, life insurance, purchased through a term plan, two, medical (health) insurance and three, disability insurance. To stress the importance of disability insurance, Roy ominously mentions that there is a high probability that a 30 year old individual will spend at least one year with disability before they touch 60 !.

Buy versus rent is the question that Roy addresses in the next section. The advantage of buying a home by taking a mortgage loan is that it provides 'Leveragibility', Tax Incentives and Forced Savings. By 'leveragibility' Roy means that while one has to pay the lender on home equity, the same can be retrieved from the rentee, leaving nothing to be paid by the owner. Renting is suitable if rent is much lower than mortgage payments (a point which I cover in THIS POST). Renting is also recommended if you are relocating every two years. A house should not only meet the needs and wants of the owner, it should also be a sound investment. Roy advises against stretching oneself to the financial limit to buy a house. In the final part of this section, Roy suggests some innovative ways in which one can raise the down payment to buy the house.

'A dollar saved is two dollars earned' is the key lesson in the next section. If you regularly invest 10 percent of your income in mutual funds, have sufficient insurance and have an ongoing retirement plan, you may not need to do budgeting. However, Roy recommends budgeting as a best practice. One counter intuitive point being made is that one should spend to make oneself happy.

When it comes to income tax, Roy recommends each of us to fill our long-form income tax forms. This will give us an idea of potential tax saving opportunities available for us. One way to do tax planning is to replace your non-deductible consumer loans with tax deductible equity top up loans where applicable. Roy advises  Tax Avoidance but forbids Tax evasion, since latter is a crime.

The book is an easy read and packs a lot of information. However, some of the points made may have been superseded by changes to applicable tax laws. After reading this book the reader while appreciating the points made should also take steps to collect the latest investment options available. If the objective of the book is to put the reader on a path to financial planning, I think it has met the same.

One final point. There is an urgent need for such books in the Indian context. Here in India, most of the investment advice is given by tax experts who has a singular inability to connect with the readers. A simple yet informative book of this type is the need of the hour here.

PS: There at least one avoidable mistake in this book. Somewhere it says that DJIA 'invests' in 30 stocks. This is not correct. DJIA is an index with 30 stocks as its  components. 

Monday, December 22, 2014

Book Review #19: Richest Man in Babylon: Author: George Samuel Clason

The book 'The richest man in Babylon' written by George Samuel Clason is the original book on Financial Planning that inspired a number of books in that genre. This was the first book to come out with a set of timeless concepts including the idea of paying yourself first out of your income and the benefits of compound interest. These concepts have since been used in many books including 'The Wealthy Barber'.

Babylon was the richest city of the ancient world. The industrious people of Babylon completed some magnificent feats of engineering including 'Hanging Gardens' and a network of dams and canals that brought the waters of Euphrates to irrigate the city land. Another feat of engineering was the massive wall that protected the city from the armies of marauding invaders who coveted its wealth and splendor. From the clay tablets unearthed from the ruins of the city, we know that the people of the city knew how to earn, save and grow wealth. These principles of financial planning, identified about 8000 years ago, have stood the test of time and are relevant to this day. 

As was wont in ancient times, many of the concepts were explained in the form of parables. We have come to know of these stories from analysing the clay tablets discovered in the Babylonian ruins.  

This small book covering 72 pages packs the financial wisdom of ancient Babylon. Almost each sentence in this book is filled with pearls of personal and financial wisdom. The book covers financial concepts in eight parables, each parable explaining some aspect of financial planning. 

The first Parable, 'Richest Man in Babylon', tells the story of Arkad, considered to be the richest man in Babylon. Two of his friends, Bansir the chariot maker and Kobbi the musician, who live from hand to mouth are wondering how to become rich. To understand the process of wealth creation, they approach Arkad. Arkad advises them to save tenth of their income and spend only the remaining. He suggests that they should live within one's means. They should learn to invest the portion that they save, thereby making money work for them. On investment, he suggest that they take advice from experts who have experience in the area of investing. Another suggestion is to live upon less than you earn. To take care of contingencies, he suggest to insure their wealth. Finally they should plan now so that they can live comfortably in the old age when their earnings will come down significantly.

The second parable is titled 'Seven Cures to a Lean Purse'. This starts when King Sargon, upon returning to the city after a long fought war, finds that many people are suffering without money and resources. The chancellor explains that all the ongoing infrastructure projects are completed and that many people are without work (bit of Kaynes here...). The wealth has flown to a few who know how to make and keep it. King enlists the help of Arkad to educate the people of the city the secrets of earning and keeping wealth. This parable details the seven habits that can make a lean purse fat (fill the purse with money). The seven habits are;

1. Start thy purse to fattening: To ensure that the purse is never empty, make it a habit to save a tenth of your income. This will get you into the habit of saving. 
2. Control thy expenditures: Prioritize your expenses and spend only on what is necessary. You cannot fulfill all your wants and needs. You have to identify what can be fulfilled and what cannot be. If we do not prioritize and diligently stick to our prioritized expenditure, our 'necessary expenses' will always grow to equal our incomes. (A play on Parkinson's law: Expenditure expands to fill the income available). Always demand one hundred percent of appreciated value for each coin spent.
3. Make thy gold multiply: Invest the surplus and let the power of compound interest help you to become wealthy
4. Guard thy treasures from loss: Insure your wealth. Be loss averse. Secure the principal. Enter into investments which provide reasonable returns (Don't be greedy). Consult with people who are experts in handling money.
5. Make of thy dwelling a profitable investment (Own your home): Buy a home by taking home loan. EMI payments will ensure that your debt comes down with each installment. This will also provide 'Leveragibility' where your rentals will pay for your EMIs.  
6. Insure a future income: The focus is on retirement planning. Everyone should ensure that they are well taken care of during their retirement. Save small sums regularly. (Author is referring to SIP here).
7. Increase thy ability to earn: Cultivate your abilities, learn new skills, study and become wiser so that you can respect yourself. Set tangible goals and back it up with strong will. Desires (Goals) must be simple and definite. They defeat their own purpose should they be too many, too confusing, or beyond a man's training to accomplish. Some of the things that provide man with experience include paying back his debt, taking care of his family, preparing a will, helping people in need and doing acts of thoughtfulness to those dear to him. 

Third parable, titled 'Goddess of Good Luck' presents a lively discussion between Arkad and his audience on the question of luck. The  group addresses the question as to whether some people are plain lucky and whether there is a way to attract good luck. 'Luck' can be loosely defined as the probability of a positive outcome. Arkad points out that if one puts in honest work, the chances of a positive outcome are always on their side. However, in case of gambling, the chances of positive outcome are always on the side of the game keeper. This means that success that is the outcome of putting in honest output can be called 'Luck'. Another reason that winning from gambling is not an example of luck is that these winnings are transient and do not stick to the winner. The wealth won through gambling will always flow out of the winner's hand much like water flowing out of a sieve. Most of the time, we do not attribute 'Luck' to the success that we earn. Arkad points out that it is not a correct approach. Many a time, we do not make use of the opportunities that appear before us and call ourselves unlucky. If not benefiting from opportunities is 'Unlucky', shouldn't the reverse, of identifying from and benefiting from opportunities that come our way be called 'Lucky'. The paradox is that we attribute our successes to our hard work and our failures to us being unlucky. (This is the same concept of 'Internal' v/s 'External' Locus of Control). The parable concludes by pointing out that 'Luck' always favor those taking action.

Fourth parable, titled 'Five Laws of Gold', addresses the question, which is more valuable, a bag of gold or a clay tablet carved with words of wisdom? This question is addressed by Kalabad, who tells the story of Nomasir. Nomasir is the son of Arkad. When Nomasir came of age, Arkad gave him a bag of gold and a clay tablet written with five laws of gold and asked him to come back after ten years. If at the end of ten years, Nomasir proves himself to be worthy of handling gold, Arkad will make him heir to his estate. 

Initially Nomasir spends all the gold without ever caring to read the wisdom in the tablets. When he finds himself in penury, he opens the clay tablets and reads the words of wisdom. Following these words, Nomasir recoups all his losses and more and finally at the end of 10 years, comes back to Arkad with three bags of gold, one bag which Arkad had originally given to him and two bags as a compensation for the words of wisdom written in the Clay Tablets. Nomasir thus proves that wise words are more valuable than a bag of gold. 

The five laws of gold are: 
I. Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
II. Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
III. Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
IV. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep. 
V. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.

Fifth parable, titled 'Gold Lender of Babylon' tells the story of Rodan, the spear-maker to the King. This parable explains the process and the principles of lending money. The king bestows on Rodan 50 pieces of gold as a token of appreciation for a good job done. Once they come to know of this, many people, including his sister, approach him to lend them money. While he is able to say no to others, he doesn't know how to handle the request from his sister. He approaches Mathon for advice on how to handle this situation. Through the story of Ass and the Ox, Mathon advises Rodan that while it is appreciable to want to help his friends, he should do so in a way that will not bring his friend's burdens upon himself. Mathon teaches him that loans can be secured by three ways. One is to secure loan by property. The value of the property should be more than the loan amount. Second security for a loan is the capacity of the borrower to earn. Loans secured with these two securities will be repaid. A loan made to a person with no security or earnings capacity will end up in default. 

The sixth parable titled 'The walls of Babylon' discusses Wealth Protection. The ancient city of Babylon was surrounded by tall impenetrable walls. Many an enemy tried to attack Babylon and was unable to do so since the walls remained strong and enduring. Just as walls protected Babylon from enemy attacks, we have to protect our wealth by insurance and other means.

Seventh parable, titled 'The camel trader of Babylon' focuses on Debt repayment. It is very important not to take any debts and if debt is taken, to repay the same on priority. It tells the story of Dabasir who took too much debt upon himself. Unable to pay off the creditors, he ran away from Babylon and got into bad ways. He was caught and sold as a slave. With the help of his owner's wife, he managed to escape and come back to Babylon. Once there, by dint of hard work paid off all his debtors. The 5 tablets of Dabasir explain the process he followed. 

Out of the money that he earned, tenth was kept for himself. He kept two tenths to pay off his debtors and the remaining seven tenths was used for his personal needs. He paid off his creditors regularly every month with the two tenths of his income. He also negotiated with his lenders to restructure his debts. Over time he paid off all his debtors.. 

Eighth Parable, titled 'Luckiest man in Babylon' tells the story of Sharu Nada who went through extreme adversity and overcame them through the dint of sheer hard work. The story explains the importance of hard work and how one should use hard work to distinguish themselves from others. Through his hard work Sharu Nada turned himself from a Slave to a very rich merchant. The key point is that hard work does good to the man who does it. Work make him a better man.  

The book is sprinkled with Pearls of wisdom in its pages. Each of them is a gem. Sample a few.
  1. "Learning is of two kinds: the one kind being the things we learned and knew, and the other being the training that taught us how to find out what we did not know."
  2. "He who takes advice about his savings from one who is inexperienced in such matters, shall pay with his savings for proving the falsity of their opinions. if you would have advice about jewels, go to the jewel merchant."
  3. "You first learned to live upon less than you could earn. Next you learned to seek advice from those who were competent through their own experiences to give it. And, lastly, you have learned to make gold work for you.You have taught yourself how to acquire money, how to keep it, and how to use it."
  4. "With all men, that first step (of investing their earnings), which changes them from men who earn from their own labour to men who draw dividends from the earnings of their gold, is important"
  5. "When bargain is good, then dost thou need protection against thy own weakness (of procrastination) as much as any other men"
  6. "Men of action are favoured by goddess of good luck"
  7. "There is no chain of disasters that will not come to an end"
  8. "Wealth that comes quickly goeth the same way."
  9. "Wealth that stayeth to give enjoyment and satisfaction to its owner comes gradually, because it is a child born of knowledge and persistent purpose."
  10. "To earn wealth is but a slight burden upon the thoughtful man. Bearing the burden consistently from year to year accomplishes the final purpose."
  11. "To the man who hath gold, yet is not skilled in its handling, many uses for it appear most profitable. Too often these are fraught with danger of loss, and if properly analyzed by wise men, show small possibility of profit."
  12. 'I have traveled much and learned much and labored much and earned much, yet alas, of gold I have little.", This is the story of my life as I have described in this blog post.
  13. "Many men come to me for gold to pay for their follies, but as for advice, they want it not. Yet who is more able to advise than the lender of gold to whom many men come in trouble?" Mathon the money lender
  14. "Being young and without experience I did not know that he who spends more than he earns is sowing the winds of needless self-indulgence from which he is sure to reap the whirlwinds of trouble and humiliation."
  15. "Ill fortune pursues every man who thinks more of borrowing than of repaying."
  16. "If a man has in himself the soul of a slave will he not become one no matter what his birth, even as water seeks its level? If a man has within him the soul of a free man, will he not become respected and honored in his own city in spite of his misfortune?"
  17. "Thy debts are thy enemies."
  18. "The soul of a free man looks at life as a series of problems to be solved and solves them, while the soul of a slave whines, 'What can I do who am but a slave?' "
  19. "Usurious rates of return are deceitful sirens that sing but to lure the unwary upon the rocks of loss and remorse."
  20. "Life is good and life is rich with things worthwhile and things to enjoy."
  21. About  hard work: "Some men hate it. They make it their enemy. Better to treat it like a friend, make thyself like it. Don't mind because it is hard. If thou thinkest about what a good house thou build, then who cares if the beams are heavy and it is far from the well to carry the water for the plaster."
This is a great book, highly recommended for young and old alike who want to learn about Financial Planning and about life in general. 

My rating? 5 Stars

Wednesday, December 17, 2014

Two stocks that I have purchased...

Generally I do not do stock recommendations, but after reading the book 'The Intelligent Investor', (Reviewed Here), I scanned the market for some stocks that meet the investment criteria of a value investor. I have identified two of them

If you remember, Graham recommends that one can find value in beaten down stocks and sectors. One of  the signals that the stock is available at significant value is that the market value of the company is less than the net assets of the company after considering all the long-term obligations.

Our beaten down sector is Real Estate and Infrastructure. Both the sectors are trading at significant lows and that provides us with opportunities to find value.

One such stock is Anantraj Industries. The total market value of the company is 1301 Crores. As per the financials obtained in Moneycontrol.com, this company has a net worth of 3920 Crores and a long-term debt of 873 Crores.

The net assets of the company is 2421 Crores. If you subtract the loan of 873 Crores, we are left with 1548 Crores more than the market value of the company. This means that if you buy this stock, you are getting the entire fixed assets for free with about 17 Crores of cash thrown in.

Price to book value is 0.35 offering significant margin of safety. PE is about 8 which gives a yield of 12%. Dividend yield is 0.54%. Annual sales is about 438 Crores, which is a cause of concern (Low as per Graham's standards).

This is a consistently dividend paying company. However the dividend percentage has wildly fluctuated over the last 10 years. Face value is Rs.2

The risk is that the company has a contingent liability of about 468 Crores. This is related to pending cases on Sales Tax Exemption and Income Tax Assessment. I don't know the details. Even if you reduce this, the market value is very close to the net current asset making this company a bargain.

Today I purchased 1000 shares at 45. Do your due diligence before you buy.

Another company where I did similar evaluation is BL Kashyap and sons.

Here the numbers are as follows.

Market value of the company: 274.26
Networth: 484
Long-term loans: 459
Net current assets: 796
NCA - Loans: 337
Annual sales: 1282
Annual Sales is almost 5 times the market valuation.
Contingent liability: 511
Interest coverage: Negative (highly risky)
Mutual Funds interest: Yes?
Current market price: 14

I just brought about 4000 shares: Do your due diligence before you buy. This is riskier since it made losses last year. 

Please note that I have used only one criteria. Market value is less than the net current assets less of all long-term obligations. If you consider other criteria like continuing earnings growth, continuous dividend payments, these stocks may not make the cut.

Caveat Emptor !!!

Monday, December 15, 2014

Book Review #17: The Big Short: Author: Michael Lewis

If you analyse any disaster that has happened ever, you will find four components. One is a set of intelligent people that created the situation which led to the disaster. Two is the lack of involvement, motivated or due to lack of knowledge, of those who were responsible for providing the necessary oversight to prevent the disaster. The third factor is the presence of strong personalities who effectively blocked the free flow of information and the concomitant transparency. Fourth, a group of people who benefited from the disaster.

Considered in that perspective, the book 'Big Short' makes all sense and a wonderful, edge of the seat read.

The theme of the book is the US Sub prime mortgage loan crisis that brought down the global financial markets and led to a prolonged global slow down beginning 2007. The book explains the crisis in ways which a layman (well, almost a layman !) can understand. After reading this book it is difficult to understand how the potential crisis went undetected for so long by so many.
The crisis started with Banks providing almost 100% mortgage loans to the American Public to buy homes. Immediately afterwards, the banks packaged these loans and sold the same to investors who have surplus money to invest. Since this 'Loan Package' was giving a better return on their investments than traditional investment options, there was a good market for these.

What is the status of the loan now? The loan has gone out of banks hands to the investors hands. In return banks have got cash which they used to provide more loans !!

So far, as they say, so good.

What do the investors do? They have significant exposure to mortgage loans. They approach insurance company to insure these loans. In return for insuring these loans, the investors paid a regular premium to the insurance company.

What is the end result? Average public has got almost 100% loan from banks and other lenders to buy houses. So they do not have any of their own money invested in these houses and hence no personal stake in these houses. They will keep these houses till they are able to repay the loan. The moment they are not able to pay back on these loans, they will just walk away.

By transferring the loan from their books to the investors' books, Banks effectively transferred the risk of loan default. Since Banks did not have any risk in their books,  they went on providing loans to the public with minimal due diligence. As the housing prices were going up, banks were giving people new loans on their houses (purchased with the previous loans) and selling these loans to investors. The book cites the case of a Mexican gardener whose annual income was 14000 dollars and who was given a loan of about 700000 (Yeah, you read it right !!) to buy a home. Another case is of a lady who was working in the house of one of the protagonists of the book, who, at one point of time possessed 5 homes !!

Such recklessness....

So, neither the average public has a skin in the game, nor the banks. What about the investors who purchased these loan packages? They also did not have a skin in the game since their loans were insured by the insurance companies (well, mainly one company, AIG).

What about the insurance companies themselves? By a queer arrangements, the insurance companies themselves were able to convert the regular premium payments into a kind of 'bond' and sell the same to investors.

So far we have not spoken about the investment banks. As we all know, they were the main players in this game. What was their role, you may ask.

Well they had dual roles. Initially they played the part of intermediaries between the Loan Originators, banks in many cases, and the end investors. By facilitating these deals, they got their commission from both the parties. Over a period of time, their role changed and they became active players in this game. They purchased these loans from the Originators and repackaged these loans to esoteric products like CDO (Collateralized Debt Obligations), ABS (Asset Backed Securities) and others (All these instruments and the complex math behind them were a PITA for those who were pursuing MBA during those times, like the author of this review. Countless are the hours that he has spent in understanding the difference between CDO, ABS and CDS. What for, pray, what for? ). Once these were created, they got rating agencies to rate these products as Triple A (Highest Safety of Principal and Interest) and sold them to these investors.

To encourage the people to take more loans, Banks offered  'Teaser' rates, artificially kept low , fixed rates valid for about two years. On completion of two years, the loans would become floating rate and would be linked to the prevailing interest rates.  The first of these 'Teaser' rates started in 2005 and were expected to move to floating rates from 2007.

How could this 'Ponzi' scheme crash? What can go wrong? Well, many things...

The entire scheme was based on the expectation that American Public will repay their loans on a regular basis. And that would happen as long as housing prices were going up. That was the main assumption behind this entire scheme. US Housing prices will continue to rise.

Any analyst worth his financial statement will tell you that home mortgage is an asset and like any asset, it is impossible for the prices to continue going up. Sooner or later the prices will stop increasing and then it will start falling.

Other than housing prices slowing down (or falling), there were other triggers for this scheme to fail. One was if the insuring companies stopped insuring the loans. Other was if the rating agencies started rating these products at their real worth.

Author is at his acerbic best when he discusses the role of rating agencies. Since the customers of the rating agencies were the investment banks, the rating agencies were reluctant to take tough stance against these banks. The rating agencies abdicated their responsibility for oversight and just played along with the investment banks to provide high credit rating to what were essentially junk bonds. Another area where the rating agencies failed was in not updating their credit valuation models. The smart guys in the investment banks quickly figured out ways of beating the Credit Rating agencies at their own game. Rating agencies went through a moral hazard of having to evaluate the same customers who gave them business and they failed in their job.

It was not that everyone were gung-ho on this new money making scheme. There were skeptics aplenty. The book tells the story of few such individuals. They identified the impending disaster in the US Sub prime market and shorted (hence the name 'The Big Short') the US Sub prime bonds. While everyone around them was convinced about the stability of the Sub prime market, these guys recognized quiet early that the whole sub prime bond market was perched on very weak foundation. They anticipated the fall, and starting from 2005,  took the necessary investment actions and waited for their forecasts to come true.

There was Dr.Mike Burry, a certified Neurosurgeon, who read books on Value investing and made a fortune as a self taught Value Investor before investing his entire portfolio on buying Credit Default Swaps (CDS) on the US Sub prime market. There is Steve Eisman, a Wall Street Professional, who saw the madness evolve right in front of him and anticipated how it was all going to end and shorted the Subprime Market and stock of  the companies invested in the market. Then there were Charlie Ledley and Jamie Mai, two small time investors whose only claim to fame till then was making money by going against the conventional wisdom of the markets. 

The wait was not easy. Each of them had to wait patiently for their predictions to come true. At least in the case of Dr.Burry, he also lost the confidence of his investors in his ability to make money. These were the same investors for whom he had made about 250% return when market as a whole had give about 7% !. Due to the complex nature of the sub prime market, coupled with the complexity of the instruments themselves, many investors did not understand the significance of what Dr.Burry was doing and hence went aggressive on him.

Finally in the mid of 2008, the much anticipated and dreaded collapse came. The collapse took along with it Lehman Brothers and Bear Sterns. It crashed the US Banking system and this had a domino effect on banks across the globe. The markets crashed, US went into recession, Other countries went into recession. Stock markets entered into bear phase.

The 'Big Shorts' who anticipated this crisis made tons of money. Their only fear at one point was that their creditors will declare bankruptcy or that the US Government would intervene. That happened, but, fortunately, after our protagonists had made money.

Who were the villains in this peace? First were the investment banks who created these esoteric instruments. It is hard to tell if they were villains, since their creations turned out to be Frankenstein monsters that ended up bringing them down. Credit agencies were definitely at fault for abdicating their oversight roles. Some strong personalities in AIG and Credit Rating Agencies who, through the force of their personality, prevented intelligent analysis of these products were also villains. The US Media, which ignored the potential crisis though presented with facts is another culprit. US Government who looked the other way when the excesses were going on cannot escape blame either.

Once the dust settled, the US Congress passed TARP (Troubled Assets Relief Program) which bailed out most of the investment banks. Citi Group got about 300 Billion USD and AIG got another 300 Billions.

And, finally, the key villains of the story, who knew what was happening and took advantage of it to fleece the american tax payer, ended up rich.

Discredited? may be, but rich, nonetheless.