Jan 072016
 

Learning About Incentives From The Big Short

An incentive is something that motivates us to do something. The study of incentive structures can help determine economic activities. If our goal is to have money then we are motivated to work and get paid. 🙂

Understanding how incentives and disincentives work is important to analyzing the financial markets. The subprime mortgage crisis of 2007 in the U.S. was largely predictable for anyone who understands the incentive structures in the world of high finance. 🙂 In the early 2000s the banks started to securitize riskier and riskier mortgages. They sold these mortgages to other investors and claimed the loans were safe when in fact they were filled with toxic and sub-prime mortgages. Sub-prime refers to a borrower with poor credit history and has a relatively high probability of not paying back their mortgage. Around 2007 the entire house of cards collapsed which lead to a global financial crisis. All of this happened because of incentives.

  • Bank executives made a lot of money by underwriting risky mortgages. They lacked the incentive to guard against such risks because they were protected from the negative consequences thanks to insurance and the high probability of government bail outs.
  • Mortgage brokers earned higher compensation from selling variable rate loans than fixed rate loans, even though floating rate loans were more risky.
  • Potential homeowners were motivated to apply for variable rate mortgages because the introductory rates were lower than fixed rate loans.
  • People who didn’t even have jobs or steady incomes still received home loans because some mortgages offered a delayed payments program.
  • The credit rating agencies who were suppose to assess the financial risk of these mortgages gave these funds triple “A” ratings despite the high probability of default because rating agencies are funded by the banks who put together the mortgage funds. That’s like if a health inspection agency was paid by a restaurant to conduct a health and safety inspection on that same restaurant. What are the chances the health inspector is going to write up a negative report? lol. If a credit rating agency such as Moody’s decided to not comply with the bank’s self interest, then the bank will just pay some other agency such as Standard & Poors to rate their mortgage funds instead and Moody’s will lose out on that paycheque.

So in every part of the system people were motivated to take unsubstantiated risks due to the incentive programs that were in place. There’s a book called The Big Short written by Michael Lewis which explains how the sub-prime mortgage crisis unfolded. Lewis says that people see what they’re incentivized to see. If you pay someone not to see the truth, they will believe your lie. Wall Street is organized in a way where sometimes people will pay to see something other than the truth.

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The handful of individuals who understood how financial incentives work were able to predict the great recession. In 2006 a trader from Deutsche Bank paid $11 million to insure against $4 billion of triple A rated bonds from a U.S. bank. About 11 months later his bet paid off to the tune of a mind-blowing $3.7 billion! Holy ham sandwich! That’s an annualized return of more than 30,000%.

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Dec 242015
 

It’s a Wonderful Life – Movie

I recently watched a black and white film from 1946 called It’s a Wonderful Life. The story is about a man named George Bailey who becomes overwhelmed with family obligations and a sense of responsibility towards his work and the people in his community of Bedford Falls. Faced with mounting financial challenges George starts to fall into despair. But just when things start to look really grim, an angel appears and tries to help George.?

The angel shows George how dreadful the town would have been if he had never been born. Through a vision we see that those who are close to George are either ruined, or miserable. George learns to appreciate his family and his happiness. He realizes that he has touched many people in a positive way and that he truly has a wonderful life. 🙂

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The lesson we can take away from this movie is that wealth isn’t only measured by numbers in a bank account. Our character and virtue can mean a lot too. Have a great holiday everyone! 😀

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Jul 132015
 

Minions are cute yellow critters created by the brilliant minds who work at Universal Studios, and they are taking the world by storm. The Minions movie opened last month in Indonesia and then subsequently released in Australia, UK, and other countries. This past weekend was the North American début. Across Canada and the U.S., Minions opened in 4,302 threatres. On average each location sold $26,800 of tickets means the movie made an estimated $115 million domestically. 🙂 That makes it the 2nd biggest opening for an animated film ever! only behind Shrek the Third. But all the Shrek movies are ogre rated if you ask me. 😆

The Minions Are Everywhere

Minions are taking over the world, drawing in consumers globally, and making large profits for its shareholders. Universal is owned by the publicly traded company, Comcast (CMCSA.) It only cost Universal $74 million to make Minions, according to Wikipedia, but the film has already made over $395 million at the box office world wide. Golly. What a terrific return on investment! 😉 It’s rare for the 3rd movie in a franchise to perform this well. The chances of that are probably one in a minion. 😆

Another way to have those Minions work for us is to buy Minion toys from McDonald’s. This investment method requires only $2 to get started so anyone can do it. The popular fast food company has teamed up with Universal to deliver little Minion toys that can talk. They come with every Happy Meal or can be purchased separately. If we manage to collect all 12 different Minions from McDonald’s then decades from now we could sell these toys for potentially hundreds of dollars. Ka-ching, baby. 😉

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Universal’s other summer blockbuster this year, Jurassic World, raked in $1.47 billion at the box office so far and is the 5th highest grossing film of all time, right behind Furious 7, which also happens to be a Universal film, lol. I suppose that’s why Comcast shares are up 9% over the past month. 🙂 What a great start to the summer.

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Nov 122013
 

Space Is Within Reach

Some readers will probably know that one of my long term goals as stated on my “About Me” page is to go into outer space 😀 I haven’t gone up there yet because 3 factors in the past have always kept me grounded 😉 Money: It costs about $200,000 to get into space. Safety: Based on historical data 1 out of 20 astronauts (5%) have died on missions. And practicality: There hasn’t been any commercially viable way for the general public to space travel yet.

However, all that is starting to change. Last month my net worth passed the $200,000 milestone. Money is not an issue anymore for me 🙂 Safety standards and technology have also improved dramatically for space flight. There hasn’t been a space related death in a long time. And finally thanks to daredevils like Felix Baumgartner, film directors like J.J. Abrams, astronauts like Chris Hadfield, celebrity entrepreneurs like Richard Branson, and actors like George Clooney and Sandra Bullock, there has never been more social interest and curiosity about the final frontier!

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Half a century ago we saw the first human spaceflight ever. Since then many astronauts have gone into space, orbited the earth, built the International Space Station (I.S.S.), and have even gone to the moon 😉 We are living in a very fortunate time right now because space travel today is more accessible than ever before for the average person. We don’t have to be a NASA trained astronaut anymore to enjoy this once in a lifetime experience 🙂 This post will explain space tourism and how I plan to fly in a passenger space plane.

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Nov 142011
 

This idea came to me after watching an episode of The Big Bang Theory in which Leonard and Penny bicker about which movie they should see. Morale of that episode seems to be that guys are willing sit through boring movies with their girlfriend if it means they can score afterwards. I did a little research on the whole film distribution business and found that Cineplex Inc (TSE:CGX) practically has a monopoly in Canada.

After further scrutiny I put about $2000 into this company. I purchased 80 shares at $25.28/share. I think this will be a very good investment in the long run. They serve over 70 million guests every year and operate all the largest theaters in the country like Famous Players, SilverCity, Scotiabank Theatres, and IMAX. They make serious doe from concession sales as well. 85% margin on popcorn and drinks! And they are still growing and opening up new locations.

Their financials hold up nicely too. A long track record of solid earnings, a 5% dividend yield, and 50% payout ratio. What does that mean? Well, even if the economy and Cineplex’s earnings stagnate forever then one year from now this company will still be worth 10% more than today. Even if it drops in the short term, no big deal, I’m getting paid $100 in cash every year just for holding on to it. Patience begets wisdom. Or was it the other way around?