Wall Street Financial Truth

Chapter 19 How do rich people make money (2)
Because of this mathematical principle, investing successfully requires a little intuition: reduce expert fees, minimize expenses, maximize your share of returns from the market, and give you the possibility of obtaining returns above the market average sexual increase.

In a nutshell, willful ignorance trumps investment expertise.

3. Derivatives - a game played by the rich
There is a saying on Wall Street that the rich buy fixed-income products, and the poor buy stocks, because stocks are high-risk things. The rich already have enough money, and the rich want to preserve their value.

actually not.

The hedge funds that you often hear are invested by the rich, but they are all operated by professionals.This is a special situation in the United States. Unlike ordinary funds, hedge funds required at least $100 million to open an account in the earliest days.

Those who play hedge funds are basically financial giants, such as Soros' Tiger Fund and Quantum Fund, these are all hedge funds.Financial predators have a great chance of winning, because they are at the top of the pyramid, and they always enter the market first. If they want to buy something, they will hype it through the news media, and first sing it down, so as to enter at a low price.

For example, in 2005, foreign hedge funds had already taken a fancy to China's real estate market. After analyzing them, they felt that there was a wave of rising trends, and the media at home and abroad began to speak ill of China's real estate market.

A large number of hedge funds came in at this time, including three or four hedge funds at Morgan Stanley at the same time, with 500 billion US dollars in money; Goldman Sachs also has several hedge funds, which are also about 300 billion US dollars, in the Chinese circle Land, buy a house.

When China's real estate is at a high level, they will withdraw at a high level.As far as I know, the two hedge funds of Morgan Stanley have made more than 1300 billion U.S. dollars, and they have absorbed more than 1300 billion U.S. dollars of the wealth of the Chinese people.

Since the 20s, the U.S. government has gradually relaxed financial regulation, which not only relaxed the restrictions on hedge fund participants, but also continuously lowered the entry threshold for hedge funds, which completely liberated hedge funds.It can be said that hedge funds are a game played by the rich and are not regulated in the United States.

The essence of hedge funds is a niche financial product that is privately raised by financial experts only for wealthy people and professional institutions. In order to achieve the goal of continuous absolute return, its trading methods and asset allocation are all-inclusive.

The rich invest in these hedge funds, one million goes in, and two or three million come out.Hedge funds are the scariest thing on Wall Street, making waves everywhere.

The more complicated the financial products promoted by Wall Street, the more grotesque it sounds to you, but in fact, the less you should play with it at this time.Especially those derivative securities, options and futures, the farther away they are from their original products, the less they should play, because the farther they are, the greater the leverage, the greater the leverage, and the greater the risk, which is far beyond the reach of the poor. of.

There is a famous Wall Street saying: "My grandma or my grandma, if I can pack her into a beautiful 18-year-old girl, I can also sell her." This is called financial innovation-as long as there is money to be made, No matter whether she is an old woman or a whore, she can make it beautiful and sell it.

The investment in "Avatar" was 25-5 million U.S. dollars, and the box office exceeded [-] billion U.S. dollars worldwide, earning more than [-] times.Just because this matter is related to investment, it is a very good profit-making derivative product.From the very beginning, Wall Street saw that the box office of movies was a good investment product, and began financial innovation, so there were futures on the box office of movies.The U.S. Commodity Futures Trading Commission (CFTC) approved the listing, but its owner, Cantor Futures Exchange, voluntarily gave up.Mainly due to the pressure exerted on Congress by the main opponent, the Motion Picture Association of America (MPAA).

What is the purpose of financial innovation?Inside Wall Street, every financial innovation will get the maximum profit. Financial innovation is now more and more derivatized. Once derivatized, there is leverage. Once there is leverage, the bubble can be blown up. After blowing up, it can "shear the sheep." ", making a lot of money.

Of course, financial innovation also has advantages. Others have mentioned it. I will talk about the disadvantages separately. The subprime mortgage crisis is a disaster caused by financial innovation.

Some people say that the poor speculate in stocks, the more they speculate, the poorer they become, and the rich play derivatives, and the more they play, the richer they become.For example, Buffett is firmly opposed to derivatives on the surface, and has repeatedly warned everyone to stay away.His classic saying: 'Derivatives are instruments of financial mass destruction. (Derivatives are weapons of mass financial destruction)' Ironically, his Berkshire Hathaway is one of the biggest players in derivative products , the company's astronomical amount of money is all betting on derivative securities, and Buffett still holds $620 billion in derivative product contracts!

4. Leverage – the foundation of financial magic
In recent years, Wall Street's financial politicians have gone to China to continue lobbying, seeking to further open China's financial market, with a view to moving Wall Street's capital games to China.

What do they want to do in China?To put it bluntly, it is to make money, this is the essence of Wall Street.What weapons are they holding?It's securities derivatives.Securities derivatives can be described as the original "money-absorbing method" created by Wall Street.Wolves always follow the fat sheep. Currently, the world's fattest "sheep" is China in the eyes of "wolves".The result of securities derivatives is that wealth is transferred to Wall Street without anyone noticing.Before we play with Wall Street, we must be highly vigilant and be prepared to dance with wolves.

Before uncovering the mystery of Wall Street, it is necessary for us to review the famous saying of Archimedes: "Just give me a fulcrum, and I will pry up the whole earth." And all financial derivatives on Wall Street are derived from Archimedes Developed from the principle of leverage.

In fact, in our daily life, the principle of leverage is widely used.For example, the bottle opener that opens the bottle cap uses the principle of leverage to save labor; for example, the steering wheels on trains, ships and automobiles are also produced using the principle of leverage.Maybe you don’t pay attention to it. In fact, the current payment method for home purchases used by Chinese people-house mortgage loans also use the principle of leverage, but the word "financial" needs to be added in front, which is what Wall Street people often say "Leverage". '("financial leverage" or "capital leverage").

It is said that a few years ago, I went back to China to visit relatives. In order to experience China's hot housing market, I walked into a new real estate.The sales lady introduced enthusiastically: "Sir, if you want to buy a house in this real estate, you only need to pay 20% of the down payment, and we can help you apply for a bank loan for the rest. You can live in first, and the money will be spent later. return."

"Wow, sounds good!" I responded casually, and then asked, "What if I can't pay the loan in the future?"

"What does that matter?! This house is very easy to sell, and the market is going up. If you can't pay the loan, just sell it. It must be a deal that only makes money. You have to make a quick decision. After passing this village , but there is no such store.”

What the sales lady said may be true.Because in the past few years, China's housing prices seemed to only rise but not fall. Even if the houses were sky-high prices, there were still people snapping them up.But as we all know, the vast majority of people who buy a house do not pay in one lump sum.A smart investor (accurately, it should be called a real estate speculator), even if he has 100 million in his pocket (if a house is 100 million), he will be very smart to buy five houses, pay a 20% down payment for each house, and use it naturally Understand the principle of financial leverage, and then wait for the house to rise.

If the down payment is 20%, he uses 5 times the financial leverage. If the house price increases by 10%, his return on investment is 50%; if the down payment is 10%, then the financial leverage becomes 10 times.If the house price increases by 10%, his return on investment is 100%, which is doubled!

Now it's time to rejoice!Slow down, don't be too happy too soon.

Everything has advantages and disadvantages. As the saying goes, "a sugar cane is not as sweet as its two ends", and financial leverage is no exception.Financial leverage can magnify returns, but it can also magnify losses.Take the 100 million house as an example. If the house price falls by 10%, then with 5 times the financial leverage, the loss is 50%. With 10 times the financial leverage, it means that the capital is lost and the whole army is wiped out...Since the financial crisis In fact, 1200 million houses in the United States were forcibly auctioned off. The main reason is that the financial leverage multiples used in the past were greatly enlarged.At the end of 2011, domestic real estate also showed a continuous downward trend. It seems that bad luck is also inevitable.

Reducing financial leverage is like recovering from a drug addiction. It is extremely painful.House prices fall, home equity (Home Equity) disappears, and once auction houses are listed, house prices fall even more; house prices fall, more auction houses, a vicious circle... Therefore, it is not alarmist to say that the United States is now facing the worst economic crisis since the 20s .

Indeed, in the boom years of the housing market, we have heard stories of countless lucky people whose house prices doubled.But housing prices will not rise forever, as evidenced by the United States, Canada, Japan, Hong Kong, Ireland and other countries and regions.The higher the housing prices that are skyrocketing, the higher the loan amount from the bank for ordinary people who really want to buy a house and live in it, and the more interest they pay.And once the buyer cannot repay the mortgage, the bank will simply take back the property.They are justifiably collected, who told you not to pay back the money you owe?
Now, many households and banks in the United States are in the pain of reducing financial leverage, so they have to turn to government bailouts.From the perspective of national economic development, the government has no choice but to provide assistance.The U.S. government rescued Bear Stearns, Fanfang, AIG, and then the Federal Deposit Insurance Corporation (FDIC), student loan deposits...

If in the past it was individuals who used a lot of financial leverage, then now it is the government that uses a lot of financial leverage.The result of the government's use of financial leverage will be inflation and the depreciation of the dollar.To put that in perspective, the long-term U.S. government bond return (3.75%) returns next to nothing after taxes and inflation are deducted.

This process of "de-leveraging" in the United States and the world will be a very long and painful process.Therefore, when China opens its financial market, it must first build a protective fence to protect national property from falling into the pockets of the financial hegemony—Wall Street.

5. "Ma Jin" - cramping at the end of play
How much movement can financial leverage play?If you don't believe it, let me tell you two true stories.

As we all know, the economic crisis that evolved from the financial tsunami in the United States has spread across the world like cancer cells, and its instigator is the harmful subprime credit.However, many people are worried but some people are overjoyed.There is a hedge fund manager in the United States with the same surname as the former US Treasury Secretary, John Paulson.When the companies on Wall Street were gloomy and everyone was worried about losing their jobs, the fund he managed made a lot of money, turning $1.5 million into $280 billion!For this, he "won" a big red envelope of 35 billion US dollars!This may be the greatest personal income in the history of Wall Street.

How did this Mr. Paulson do it?The model is very simple: just go short.

At the beginning of 2006, Paulson, who grew up in Queens, New York, keenly smelled the smell of the housing market bubble, so he began to bet on shorting the housing market.He set up a "Credit Opportunities" hedge fund, raised $1.5 million, bought credit-default swaps, and shorted mortgage debt.What he did at the time was against more than 95% of the investors in the market.But Paulson thinks that no commodity will only rise but not fall. Since houses are also commodities, it is no exception. The housing market will not be a bull market forever.

While the housing market won't go up forever, it's hard to tell when it's going to go down.In the first few months after Paulson set up the fund, the U.S. housing market was still optimistic, and housing prices rose all the way, so his fund lost money.On Wall Street, general investments have a stop loss point. Once the stop loss point is reached, the fund manager will choose to retreat in order to reduce losses.The loss didn't deter Paulson. He was determined to stand up to the crowd. At that time, the pressure on him was enormous.To reduce stress, he runs 5 miles a day in Manhattan's Central Park and tells his wife every night that it is "the dark before the dawn" and that success is on the horizon.

Paulson's "gamble" was right. "Truth" seems to be only in the hands of a few people.It didn’t take long before the housing prices in the United States suddenly fell from their highs. With the decline in housing prices, the mortgage debt in his fund fell like an avalanche due to the high leverage effect, which made the funds under his management rebound and reverse upwards.” Skyrocketing" more than that.By 2007, his hedge fund had raked in $150 billion; during the financial turmoil, he had raked in another $130 billion.

It's just amazing!In just a few months, a fund changed from 1.5 million to 280 billion U.S. dollars. As long as you look at it correctly, it seems that it is not difficult to make money.But reality is often cruel!Why did the vast majority of people lose so badly, and even more people dare not place bets, but Paulson dared to gamble freely?The key point is that his gambling money is not taken out of his pocket, it is the money of the majority of investors. If he wins the bet, he makes money. If he loses the bet, he will close the business at worst.

However, then again, when it comes to market trends, some people are bullish, while others are bearish.Having a certain number of short sellers also has certain benefits for balancing the market.If the dot-com bubble of the late 20th century, or the housing bubble of previous years, had more short sellers, it might have added some stability and sanity to the market, keeping the bubble from getting blown so big, perhaps The bubble was burst earlier.Especially for institutional investors, the proper use of short selling can play a role in anti-flight hedging, reduce investment risks, and achieve the role of hedging.

However, there are very few "lucky people" like Paulson, and it is very difficult to control the timing of betting on falling prices.If the US housing market falls three months later, Paulson may not be able to survive.Even a capital crocodile like him may capsize, and for retail investors, losing money is even more common.

My friend Lily's husband is a failure example.

Wall Street has invented various financial products, all of which are based on high financial leverage.For example, the most typical Margin account (margin account, pronounced the same as "Majin").Lily's husband stumbled on this.

I remember that in the first few months when I first entered Wall Street, after I learned the basics of options and futures, I was like "studying the art for three days, going up the mountain to fight tigers", and I was a little smug.Everyone who meets will brag about "making a big fortune with a small amount", "leverage effect", and "only earning but not losing".Once I met my wife’s friend Lily, I boasted again and added a lot of English terminology.Seeing that Lily was stunned for a while, I felt very refreshed.Unexpectedly, the speaker has no intention, but the listener has intention.When I saw Lili again after three months, she stared fiercely and complained, "It's all because of you that I fell for you, and my husband lost 10,000+ dollars!"
"What! Lost 10,000+ dollars! Can't you?" Although Lily's husband is rich, 10,000+ dollars is not "little money" after all!Then he hurriedly asked Lili, "Can you tell me how your husband lost money?"

Lily said: "I don't know either. I told him that there is a way to speculate in stocks without spending a lot of money. If you do it well, you can make a lot of money. My husband asked me what method, and I will learn what you said, what' Options', 'Call' (both options futures terms), stuff like that."

I said, "Yeah, that's right."

(End of this chapter)