Liar’s Poker by Michael Lewis August 09 2007
A splendid, revealing book that captures your attention from the minutes you pick up the book, with a blend of entertaining factor found in Ugly American combining the comparative learning experience in Intelligent Investor.
At age of 24, Michael Lewis already landed a rare opportunity to work for the prestige, at the time, Salomon Brothers. Unlike the traditional interview process, his fortunate one-time acquaintance with the CEO’s wife was his ticket to a seat in the training class. From a trainee, to a geek, then on his way to becoming a Big Swing Dick, this is his story. A story of 1980’s, about a once reputable Salomon Brothers on a rollercoaster ride that started what was the envy of the Wall Streets, to its dominated positions in many key investment areas, then crushing down to its feet, a look behind the scene of how its people and the culture of the firm had help it to erect and distinguish itself among the elites, and only two years later finding themselves abandoning ship, and of course how our young author had managed to steered though the waves.
Liar’s poker is played between 2 people, each taking turns to guess number of digits in the serials numbers of two dollars bills. Each person knows only the serials of his own bill and guessing each time either equal of higher number of combining digits of what the other person previously guessed. The game ends when one person calls other’s bluff.
This book talked a lot about the people, the trader, the salesman, the investors, the managements, and the economic aspects of different markets, such as the municipal market, the bond market, the equity market, the mortgage market. Here I will just list what seemed to be good things to remember, of course over 50% of which overlapped with many others books.
A rare ability among people and treasured by traders is to hide ability of mind.
Two common emotions that destroy traders are FEAR and GREED.
Some firms (people) only give hints, they don’t want to stoop low to request your service or you, and instead you have to take the hint, be proactive and fetch the request.
The way of business school in 1982: Major in economics, use that degree to get an analyst job on Wall Street, then use the job to get into Harvard or Stanford, worry rest later.
Act of Glass-Steagall in 1934, separated investment banking, which now underwrites securities, off from commercial banking, which took deposits and make loans.
The stress interview: test under pressure, the silent treatment interview tests the ability to take control.
In interviews with investments banking, people are discouraged from too interested in money. Current answer: the challenge, the people, the trill of deals.
Most traders are like toll takers as quoted by Kurt Vonnegut, a lawyer, for his profession: There is a magic moment, during which a man has surrendered a treasure, and during which the man who is about to receive it has not yet done so. An alert lawyer will make the moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on.
Quoted yet again from Buffett: any player unaware of the fool in the market probably is the fool in the market.
Oct 6, 1979, Paul Volcker, chairman of the Fed, announced the money supply would be fixed, and interest rate would float.
Manager directors grew interested only if you are widely desired. So let other people know you are pursued.
American Bond Market lurches on important economic data release by department of commerce, the market decide what are important and the traders know what the number is the flavor.
Mayday of stockbrokers is May 1, 1975, when the fixed stock brokerage commissions come to an end. Now investors shop for brokerage with lowest commissions.
Lewis"a good rule for survival on wall street: never agree to anything proposed on someone else’s boat, or you’ll regret it in the morning."
U.S treasuries were the benchmark for all bonds.
Mortgage bonds: pool all the mortgage loans, and sell them as bonds (CMO, collateralized mortgage obligation), later IOPO stand for either interest only or principle only, can be sold separately. Once corresponding to bond price, other bond yield. IO PO moving opposite, remember, homeowner prefer to prepay mortgages when interest rate fall. Also, can separate CMO based on maturity dates, so investor has degree of certainty about the length of loans. Note: Don’t buy PO. Not worth it.
The flow #1: Interest lowered -> people refinance -> bond holder gained cash from bond buy backs and people reinvest in lower rates; so bond become cash, bond price go up -> bond yield go down -> investors move to stock, so stock go up.
The flow #2: when interest rate skyrock -> lender have to accept lower long term 30yrs, rate from say mortgage applicant at, say 10 percent, but paying high short-term interest of say 12 percent, due to short term increase -> so lender stop make loans -> less supply of money -> slow economic growth.
The flow #3: stock prices lower -> people less wealthy -> people consume less -> economy slow down -> inflation would fall -> interest rate would fall -> bond prices would raise ->
So mortgage bonds get longer maturity when rates go up, shorter when rates go down.
When government in deficit, it sell assets, such as loans that made below market rates and worth far less than par. The trick: determine beforehand which of government project loans was likely to prepay, then buy those loans at say, 60cents on dollar, then when prepay actually happens, you earn 40 cents profit. Two kind of lenders would get money back prematurely: 1. financially distressed. 2. cushy upmarket property which is: to convert a housing project: the occupants bought out the owner-developer, who would, in turn, repay the loan to the government. And then government repaid the financials 100 percent on a dollar for which they just brought at sixty. (because market was inefficient) Trick is to buy them below face value just before homeowner repaid their loans.
Increase number of product -> increase number of customers.
Say you pay monthly mortgage payment for a loan from Citibank, but the money actually pass to, say Salomon Brother clients, who had purchased Citibank bonds.
Quote: the greatness of the firm was its culture.
Lay-up: a jargon for a gamble that was sure to succeed.
Lewis: The attraction of options and futures, our specialty item, was that they offered both liquidity and fantastic leverage. They were a mechanism for gambling in the bond market. Note, they make money investor loss money.
One good reason to use chart, technical analysis, is everyone else did, so place your bet and get in front of waves.
Lewis, from trader perspective: It was my job to encourage him [investor] in this [his] view, since the smarter he felt, the more he traded, and the more he traded, the more business he could give me.
Buy a company bond and short US treasure same time -> betting that company bond will outperform US treasure.
Lewis: Whenever a trader screwed a customer and the salesman became upset, the trade would ask the salesman “who do you work for anyway??The guiding principle is customers have very short memories. Screw them, they will eventually forget about it.
What small investor don’t know is, when they consult, they consult with geek, not big swing dicks, and assume anything they were told was good advice.
Again: you don’t need to know a lot, just enough and more than guy next to you. Or let them think you know more.
No one is master of the markets, learn to ride the gains, and cut his loss to succeed.
Good advice: 1. Approach of Contrarian is when all investor were doing same thing, do the opposite. 2. in events of major dislocation, look away from initial focus of investor interest and seek second and tertiary effect. Etc: nuclear leakage, buy potatoes. Assume, radiation destroy large crops.
Again: Play What If game.
Market in long run are driven by economic fundamental laws ?if U.S run persistent trade deficit, the dollar will plummet.
Lewis: Rarely do all parties wins. The nature of the game is zero sum.
If he was making promises, but thinking profits, don’t trust him.
Lewis: about fraud: What would a painter do if a rival stole his work and put his name on it? He’d paint a replica and issue a challenge for the rival to do the same.
Lewis: It was clear how to do maximum damage: to say as little as possible and give him the chance to say something he shouldn’t.
me: We are inferior to investment bankers for they can find sucker in their customers to eat their mistakes, but we have can only eat our own mistakes.
Supervisors give talk before give you money to make you feel valued and compensation or bonus was less important.
Be confident and built a team of devotees. Have raw skills and patient with ideas.
A better method of rating companies, rather than based on numbers and past performance, is to make judgments on its management and fate of industry.
MBO or LBO: managements begin to buy company from shareholders.
Lewis on selling bonds: if it was a good deal, the bankers kept it for themselves; if it was a bad deal, they’d try to sell it to their customers.
Pg 225, management raises money to avoid take over is bad for shareholders.
Ronald Perelman, amassed from nothing to 500 millions from raiding companies with burrowed money and firing bad managers.
Lewis: An aspect of genius of Gutfreund was his ability to cloak his own self-interest in the guise of high principle. ?when an investment banker starts talking about principles, he is usually also defending his intest and that he rarely stakes out the moer high ground unless he believe there is gold under his campsite.
Lewis: if the bonds were dog meat, no one would have said it.
Lewis: in the markets you don’t take risk without being paid hard cash at the same time.