“Invert, always invert!” - Charlie Munger
“Show me the incentive and I’ll show you the outcome” - Charlie Munger
“The place was governed by the simple understanding that the unbridled pursuit of perceived self-interest was healthy. Eat or be eaten.” - Salomon Brothers
“The firm was a bunch of fiefdoms. People in the other departments were more concerned with protecting their own business than with developing this new business." - Salomon Brothers
“Gutfreund had no intention of paying anyone "a cut."… his notion was rooted in an era when paying a million dollars to a second-year trader was unthinkable… in the two years following the dinner at Le Périgord, the mortgage department of Salomon Brothers disintegrated.” - no skin in the game at Salomon Brothers
“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 markets, like superchips in a casino that represent a thousand dollars but cost only three… For a tiny down payment, a buyer of a futures contract takes the same risk as in owning a large number of bonds; in a heartbeat he can double or lose his money.” - History never repeats but man always does at Salomon Brothers
“And here I was, selling him something I probably wouldn't touch with a barge pole if there hadn't been such glory in it for me. I knew it was awful.” - Salomon Brothers
“The money game rewarded disloyalty” - Salomon Brothers
“If you aren't in debt, you can't go broke and can't be made to sell, in which case "liquidity" is irrelevant. But a leveraged firm may be forced to sell, lest fast-accumulating losses put it out of business. Leverage always gives rise to this same brutal dynamic, and its dangers cannot be stressed too often.” - Long Term Capital Management, Zeckendorf & Harry Macklowe
“Having little understanding of how Meriwether’s gang actually operated” - FOMO investing into Long Term Capital Management
“Be aware that information flows down a food chain, with those who get it first eat and those who get it late being eaten” - Ed Thorp
“Disturbingly, the traders said there was no demand for Long-Term's trades, despite their seeming soundness. The Tokyo partners reported a similar story: there simply weren't any buyers… Despite the ballyhooed growth in derivatives, there was no liquidity in credit markets. There never is when everyone wants out at the same time. This is what the models had missed. When losses mount, leveraged investors such as Long-Term are forced to sell, lest their losses overwhelm them. When a firm has to sell in a market without buyers, prices run to the extremes beyond the bell curve.” - Long Term Capital Management dependent on the kindness of strangers
“The correlations had gone to one” - Long Term Capital Management experiencing the mass fear and hysteria during a downturn
“The investor who is highly leveraged and illiquid is playing Russian roulette, for he must be right about the market not merely at the end, but every single day. (One wrong day, and he is out of business.) Long-Term was so self-certain as to believe that the markets would never - not even for a wild swing some August and September - stray so far from its predictions.” - Long Term Capital Management
“The market for "synthetics" removed any constraint on the size of risk associated with subprime mortgage lending. To make a billion-dollar bet, you no longer needed to accumulate a billion dollars' worth of actual mortgage loans. All you had to do was find someone else in the market willing to take the other side of the bet.” - financial contagion in The Big Short
“All the rating agencies worried about was maximizing the number of deals they rated for Wall Street investment banks, and the fees they collected from them… The surest way to attract structured finance business was to accept the assumptions of the structured finance industry.” - perverse incentives of the GFC
“The correlation among triple-B-rated subprime bonds was not 30 percent; it was 100 percent. When one collapsed, they all collapsed, because they were all driven by the same broader economic forces.” - Correlations go to 1 during a crisis
“How little, it will perhaps be agreed, was either original or otherwise remarkable about this history. Prices driven up by the expectation that they would go up, the expectation realized by the resulting purchases. Then the inevitable reversal of these expectations because of some seemingly damaging event or development or perhaps merely because the supply of intellectually vulnerable buyers was exhausted. Whatever the reason (and it is unimportant), the absolute certainty, as earlier observed, is that this world ends not with a whimper but with a bang.” - Galbraith describing the Great Depression and any financial euphoria period
“To bankrupt any of these firms, all that was required was a very slight decline in the value of their assets.” - Excessive leverage is like having a gun to your head
“Between the Canadian Industries, Ltd., the Bank of Commerce, and our own Royal Bank buildings, we eventually had three million square feet of new office space simultaneously on the Montreal market. Because of this competition, Webb & Knapp had to offer more attractive and lower terms than might otherwise have been the case in order to fill Place Ville-Marie.” → Zeckendorf experiencing that if Supply surpasses demand, goodbye pricing power
“Unfortunately, these great projects were not money-makers for Webb & Knapp; we were spread too thin in too many places to be able to hold these properties through an unexpectedly hard time, but the flaw was in me (I was trying to do too much too quickly) rather than in the projects.” - William Zeckendorf
“We took first, second, and third mortgages and any other kind of indebtedness possible… Naturally, we mortgaged and leased out these promising properties to the hilt in order to raise cash for the company.” - Zeckendorf on excessive leverage
“Even the GM Building - Harry's greatest triumph, the thing that had transformed him - was not enough. He outgrew it. He needed more fame, more wealth, more everything to cement his place in the pantheon of real estate families.” - Harry Macklowe’s never enough mentality
“The vultures had got there first," he would say. What he meant was word had spread that Macklowe was under pressure. The rival real estate developers who thought they could feed on his carcass told the Middle East investors to hold off. If the markets kept falling, they'd be able to buy the buildings - especially the GM Building - far more cheaply when Macklowe was forced to sell off his assets” - Vultures ready to feed on Macklowe’s carcass
“You never know what the American public is going to do, but you do know they will do it all at once” - Dangerous FOMO or herd investing of bubbles
“Money flowed, not to where it was most needed, not into the projects with the strongest business plans, but into those with the sexiest "story" - those companies whose backers felt confident that they could take it public, at a premium, in a matter of months.” - Stories sell stocks
“During this period, mutual fund managers looking for safe havens gravitated toward a select group of high-growth blue chips, companies like IBM, Kodak, Polaroid, Avon, Merck, and Texas Instruments. Dubbed the "Nifty Fifty," these were the Microsofts, GEs, and Ciscos of their day. Growth was king. "People clung to the belief that if you bought the premier growth companies, they would hold up well, even in a market decline… Investors who bought Polaroid in 1972 still would be waiting to get their money back--without interest---in 1999.” - The Nifty Fifty
“If companies were forced to come clean on their cost, earnings could take ‘a large hit,’ he warned, citing a study that revealed that in the technology sector, if companies charged the cost of options against profits, they would have to admit that their earnings were only about half of what they claimed.” - Dotcom Boom & Bust
"If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?" - Warren Buffett
“This time is different” - Howard Marks describing the four most dangerous words in investing
“Trouble is, "momentum investing" works only in bull markets. When the cycle turns, momentum reverses, and investors quickly discover that last year's high-risk winners are this year's high-risk losers.” - Dotcom Boom & Bust
“The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling "Swing you bum!" - Warren Buffett
“The price of the object of speculation goes up. Securities, land, objects d'art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.” → The next guy will pay more than me phenomenon
“Prices were going up because private investors or institutions and their advisers were persuaded that they were going up more, and this persuasion then produced the increase. Leverage was magnificently available, indeed a special marvel of the time. In its most commonplace form, it allowed the purchase of stock on a 10 percent margin - 10 percent from the aspiring owner, 90 percent from the obliging lender” - excessive leverage during the Great Depression