Success is the cumulative result of many wins over the market. But the trade that people remember forever will be a big bet that will bring in huge profits.

Currently running a hotel chain in his hometown of Ghana, but in the 1990s Tony Yeboah was a world-famous striker, one of the top goalscorers in the Bundesliga and also played two seasons in the Bundesliga. Leeds United. In the UK, his name is associated with a stunning goal against the Wimbledon team that can still be watched on YouTube. Masterfully catching the ball with his chest, he continued to slick the ball past the defenders before kicking the ball into the right corner of the goal and scoring.


Beautiful goals will stay in the audience's mind much longer than the game, even if it is a final. The same goes for investing. Success is the cumulative result of many wins over the market. But the trade that people remember forever will be a big bet that will bring in huge profits. One of them was "The Big Short," the big bet against subprime mortgages on the eve of the 2008 crisis that was reported in Michael Lewis's book of the same name.

At the moment, the market is experiencing a similar situation. The stock price skyrocketed along with the wave of aggressive F0 investors that made the word "bubble" standing on the lips of many investors. Recently Aaron Brown (New York University) and Richard Dewey (Royal Bridge Capital hedge fund) did an in-depth study of "The Big Short" and drew a remarkable conclusion. According to them, the bet against subprime debt carries a much higher level of risk than has been reported. They also conclude that the interpretation of a trading idea is just as important as the nature of the idea.

First, let's talk a little bit about the subprime crisis. During the mid-2000s, house prices in many developed countries increased rapidly. In the United States, mortgage loans also increased sharply, mainly loans disbursed to "subprime" lenders with low credit ratings. The risk increases when these liabilities are pooled and "packaged" into securities that are rated AAA.

The housing boom in the US at the time had all the signs of a bubble: cheap money, accumulated debt and the belief that there was no risk at all. If you were aware it was a bubble, how would you bet? Many smart people know that subprime bonds have a higher probability of default than their price or credit rating. So they bet against the riskiest part of the worst group. They enter into credit swaps (CDSs) with banks that protect them if the bonds default. In 2007 and 2008, default rates increased and CDS contracts were activated. The reward for them is as impressive as Tony Yeboah's goal.

But why aren't more people betting this way? According to Brown and Dewey, the premiums of CDS insurance policies are quite high, in addition, CDS is a illiquid instrument.

Investors have found other ways to bet against bubbles. One of them is to avoid the cost problem by buying less risky (but still double-digit) subprime securities, while at the same time buying CDSs on existing AAA bonds. lower fees. When the bubble burst, all assets are affected but in the meantime you can still benefit. Perhaps the best way to profit from the bubble in this case is to buy mortgage bonds at super cheap rates after the bubble has burst.

Research concludes that certainty can be your enemy. Even though you know for sure that something is wrong, that alone is not enough to make you money. The precariousness is an important part of the legend of The Big Short. The story could have turned out quite differently. If Yeboah's shot had been just over an inch, he wouldn't have scored. But Yeboah isn't just luck, it's skill. A month later, he had a similar beautiful goal against Liverpool.