Don't Ignore These Cautionary Lessons From 'The Big Short'


“The Big Short” has done something a lot of personal finance writers haven’t been able to do for years: Make the economic collapse entertaining! Heck, it even makes subprime loans sexy by having actress Margot Robbie explain them while taking a bubble bath. The movie fully deserves its Best Picture Oscar nomination.

You’ll laugh until you cry while watching the film, but you don’t want to miss the sober money lessons it offers. Here are seven important takeaways.

1. Be very careful about who you trust with your money.

People who take charge of their lives in so many other ways often cede control to others when it comes to money. That’s not necessary and can be a disaster (ahem, Madoff). Even if you hire an advisor, stay involved in the decision making and on top of the numbers.

The financial disasters chronicled in “The Big Short” are hardly isolated incidents. Many times in history, so-called experts have gotten regular people in a lot of trouble. They probably will again. So be very stingy with your trust. Nobody cares more about your money than you do.

2. Ask what’s in it for your advisor.

Car salesmen may offer advice on different models, but, ultimately, they’re trying to sell a car. Financial advice can often work the same way. Someone who gets paid when you buy specific funds or complicated financial products is, ultimately, a salesperson.

In a telling scene, Ryan Gosling’s character demands to know “How are you f***ing us?” before his firm will agree to an investment. It’s a great question consumers should ask before they give their money to someone. (“What do you get out of this?” is a more elegant way to ask it.) If advisors make commissions from certain funds they invest in or products they sell, that doesn’t necessarily mean they’re the wrong choices for your portfolio. But they may not be the best. So it’s worth asking.

3. If you don’t understand it, it’s not for you.

Who cares if you don’t know what a credit default swap is? It’s just insurance, but that’s not the point. Complicated terms may be created—or thrown into conversations—by financial folks in part to make you feel inadequate so you stop asking questions and think only they can take care of your money.

Don’t make that mistake. Instead, ask for an explanation in plain, simple English. The minute someone starts layering on the lingo, hit the eject button. Whatever someone else is doing with your money should be easily explained in a few sentences.

4. If you’re confused, look for metaphors.

Speaking of lingo, the best scene of the movie involves Selena Gomez and Richard Thaler explaining synthetic collateralized debt obligations at a blackjack table. The real reason for the size of the housing bubble calamity wasn’t people missing mortgage payments. It was all the side bets that magnified the impact of those defaults exponentially.

It was like the people watching Gomez play her blackjack hand and betting each other whether she’d win or lose, and increasing the bets by factors of 100 or more. The chain of events set in place by her one loss created chaos in the room, just like a small percentage of mortgage defaults brought the world economy to its knees. When you’re talking about a complicated financial concept, metaphors can be handy.

5. There’s no such thing as a sure bet.

An investment that can only go up, and can never go down, is the financial world’s equivalent of finding the Fountain of Youth. It’s a myth. “The Big Short” is fundamentally about the myth that housing values could never fall. It was preceded by a myth that the Internet fundamentally changed the laws of economics (that profits didn’t matter).

It will be followed by a new myth. But all these stories are just a retelling of the same lie: that you can make money for nothing. People who make money on Wall Street make it not because they uncovered a sure bet, but because they’ve taken a calculated risk and that risk has worked out for them. (And don’t forget: They lose money too.)

6. “Ratings” are opinions.

Credit ratings are intended to give a sense of the ability of a person or organization to fulfill their financial obligations. But in the movie, Mark Baum and company visit a ratings agency, and an employee there admits the firm frequently gives out AAA ratings (the best) to investments that aren’t really safe.

You probably don’t care about bond ratings. But the financial world is full of third-party experts rating things. Five-star this, AAA that, “hold” this, “sell” that… Ratings are really just an opinion. They can be educated, honest opinions, but they are just opinions. Take all ratings with a grain of salt and always do your own research.

7. Timing is everything.

The film implies only the three companies featured knew the housing bubble would burst. In fact, plenty of folks knew. The movie’s heroes just did a spectacular job of profiting from that. But things could have gone differently for them too if the timing of the collapse had been different.

Over and over, the movie makes the point that while the housing bubble was sure to burst, no one could really say when it would happen.  That’s what makes speculating such a dangerous game. Even the smartest people on Wall Street can’t get it right. What does that mean for you? Never, ever put money you need soon into any kind of risky investment.

Investing in the market over the long haul typically pays off, but for short-term needs, putting your funds in a high-yield savings account can help you be sure the money will be there in full. If you’re shopping for a new home, for example, you don’t want to find the house of your dreams only to find your down payment savings have shrunk because Wall Street had a bad week. Timing is everything.