Wall Street Financial Truth

Chapter 22 How do rich people make money (5)
We had lunch every now and then, and each time we exchanged stock market quotes.Every time I made three to five hundred yuan by hand, I would tell him happily, and his mouth twisted when he heard it, as if he wanted to say that it was too childish.And whenever I asked about his achievements, he always smiled mysteriously, and only said that you will know in the future.Looking at his appearance, I think he must be proud of himself, I am really happy for him.

But before long, I gradually found that David was often restless, his eyes kept scanning the TVs in restaurants (restaurants around Wall Street are all equipped with TVs, broadcasting financial news in real time), and he talked less and less.At that stage, the stock market was rising almost every day, and almost everyone on Wall Street was beaming. How could David be frowning?It dawned on me that David must be "shorting".

Ordinary stock speculators generally hope to buy low and sell high. Wall Street calls it Buy Long (Buy Long). , the selling price minus the buying price is the profit.However, once we are not optimistic about a certain company and feel that its stock price is too high and should fall in a few days, we can do "short selling". (Sell Short) is to borrow the company's stock from your stockbroker and sell it first, and then wait for the stock to fall, then buy it back (Cover Short) and return it to the broker. The difference in stock price is your This method is also called "short selling".

One day David finally told me that he lost more than 10 US dollars in those few months, and his plan to return to China for development will be postponed.He said angrily, "It's unbelievable. According to the stock value analysis method, the prices of many stocks on the market are ridiculously high. Those companies have just gone public and haven't made a penny yet. How can they sell for $50 or even $100 per share?" ?So those days he kept selling short.Among them, he sold a stock for $60 a share, and sold a thousand shares in total.But in less than two weeks, that stock actually rose to 80 US dollars. He refused to accept it and couldn't hold on.But two weeks later, it rose another $20. Seeing that there was no sign of falling, he could only reluctantly buy it.Boy, lost $4 on that one alone!
In fact, the risk of "buying long" is limited, and the stock price will fall to zero at worst.For example, I only used 1 U.S. dollars to speculate in stocks at the time, even if I lost all of it, it would be only 1 U.S. dollars at most; and it is different if I sell short, because theoretically speaking, the stock price rise is infinite, so I will lose money if I sell short. Isn't the money unlimited?This is far more dangerous than entering a casino!
My good friend Dajiang is another tragic example.He stands out among the Chinese on Wall Street, and became the first assistant of a fund manager of Merrill Lynch many years ago.They started shorting the stock market at the end of 2007. As a result, they avoided losses in the financial tsunami and became one of the few profitable funds among the Merrill Lynch funds in 2008.So at the beginning of 2009, Dajiang was poached by Credit Suisse with a high salary to work as a manager of a US stock market fund.At that time, Dajiang was full of ambition and confidence, and one day he formally invited me to join him. But I had already settled down in Toronto, and I didn't want to make any more troubles, so I declined his kindness.

At the beginning of 2009, the five major investment banks on Wall Street were almost completely wiped out, and Bear Stearns and Lehman Brothers completely collapsed; the three century-old automakers, General Motors, Ford and Chrysler, also collapsed in the financial tsunami.At that time, it seemed that everything seemed to come to an end, regardless of the financial system or traditional industries.The U.S. stock market naturally "falls and falls" endlessly.

Dajiang's new official took office, and after analyzing the market situation, he immediately brought out his specialty-short selling.I also feel good.At that time, the market really did not see any hope. Who would expect the stock market to recover in the short term.The Dow hovered around 9000 and looked poised to drop below 8000, 7000, or even 6000 at any moment.

As expected, the stock market fell all the way without any suspense in the first two months. Soon the Dow Jones Index fell below 8000 points and 7000 points, and marched towards 6000 points without hesitation.In those two months, the paper profits of the fund managed by Dajiang went up against the market. Every time he talked with him, he seemed very proud.

Unexpectedly, in early March, on a dull day as usual, the stock suddenly recovered.There was no particularly good news that day, and the stock market rebound seemed very strange.I felt something was wrong, so I immediately called Dajiang to be careful.He said it was okay, "Isn't it just a chance for me to sell short at a high position?" He continued to increase his position.

A few days passed, and the market showed no sign of a pullback, and the stock market continued to rise.I called again and reminded him whether he should close out his short positions and put the hundreds of millions of dollars he earned on paper into his pocket.He smiled and said: "You are too cautious. Look at the unemployment rate in the United States is still rising, the housing market is still falling, and all walks of life are in recession. There must be people making markets in the stock market these days, ignore them."

He was right. Like me, the stock market is a barometer of the economy, and there really is no reason to go up.But I think there seems to be another hand behind the stock market, just like in the "dot com" era, which of those Internet companies really made money, but their stocks kept rising all the way, my friend David was short Did you suffer a lot?

At the beginning of May, the Dow Jones index returned to above 5 points, and the momentum of further rise appeared.I reminded Dajiang again that the market sometimes ignores common sense, otherwise how could there be bubbles again and again? !But Dajiang's emotions were a little out of control. He kept saying, "Impossible, absolutely impossible! It will definitely fall back, and I will hold on!"

Hearing this, I feel that Dajiang is a bit of a gambler, very emotional.It's inconvenient to persuade him any further, I just sweat for him.Everyone will still remember the next one.The U.S. stock market has been rising all the way, returning to 6 points at the beginning of 2007 six months later, and breaking through 9000 points at the end of the year.

One day, Dajiang, who hadn’t contacted him for a long time, suddenly called, “Sijin, I wish I had listened to you. I lost a lot of money on short positions. My fund lost more than 2 million U.S. dollars, and I have already left Credit Suisse.” This phone call was what I expected, and I said a few words of comfort to him, but it seemed a little redundant, and it was useless.

Putting down the phone, I suddenly remembered the well-recognized famous saying of the speculative master Livermore: "Experience tells me that it is unwise to go against what I call the obvious mass trend." Such ill-advised genius.

Therefore, I always advise all retail investors: "Cherish life, stay away from short selling!"

11. Ubiquitous "credit" transactions

How did the transaction come about? Let me tell you an old story: In ancient times, there were two craftsmen, a carpenter and a shoemaker.A carpenter can make 4 chairs a day, and a shoemaker can make 2 pairs of shoes a day.If you ask a carpenter to make shoes, you can make at most one shoe a day; if you want a shoemaker to make a chair, you can make at most three legs a day.Regardless of the cost of materials, what would the carpenter do if one day the carpenter asked for shoes and the shoemaker asked for a chair?Everyone will definitely say: "They can be exchanged." Exactly!

This way of bartering is the most primitive concept of Wall Street's most complex financial product - SWAP (swap contract, translated into "mutual credit transaction" from Hong Kong and Taiwan).Hundreds of years ago, Adam Smith pointed out: "If it takes more effort to make something by yourself than to buy it with money, then never do it yourself." On Wall Street, as long as you have the 'Comparative Advantage' (relative advantage), that is, if you have nothing, I have it, if you have it, I am stronger, and if you are stronger, I am stronger than you, so I am qualified to do SWAP.And everything can be done, from the most common interest rate swap (Interest rate Swap) and foreign exchange swap (Currency Swap), to all products.

To give a simple example:

Microsoft has a large business in the United States and a high credit rating. If Microsoft borrows from a bank, it can get a very low interest rate, such as 2.5%.However, if Microsoft needs Australian dollars in Australia, if it borrows money from local banks, it will not be able to overwhelm local snakes and lack credit, so it will not be able to get such a low interest rate. At least 5% interest must be paid.And Qantas Airlines is the leader in Australia, and can borrow loans with an interest rate of 2.5% in local banks.Assuming that Qantas Airlines just needs to develop business in the United States, it needs to borrow money from American banks, just like Microsoft borrowing money in Australia, because Qantas does not have enough credit in the United States, and it has to pay at least 5% of the loan interest rate.At this time, as long as Microsoft and Qantas Airlines exchange loans like a carpenter and a shoemaker, there will be a small case.This can be done by designing a SWAP.

Assuming that Microsoft and Qantas each need a loan of US$10 billion, Microsoft borrowed funds from Bank of America at an interest rate of 2.5%, and then gave it to Qantas; Qantas also borrowed a loan in Australia at an interest rate of 2.5%, and then transferred it to Microsoft.Don't underestimate this exchange, so everyone can save 2.5% interest-that's $2500 million a year!Isn't everyone happy? Of course, Wall Street's investment banks have to earn at least 10% of their fees.

However, the above kind of SWAP can only be regarded as a kindergarten level in Wall Street.The culprit of the financial tsunami, CDS (Credit Default Swap, "Credit Default Swap") is also a type of SWAP. When it first debuted, only 10 people understood its complexity.No one in the Federal Reserve understands, including Greenspan. Isn't it difficult for them to supervise?
In the final analysis, any financial tool is just a tool, just like a pistol. Athletes can use it to win Olympic gold medals, and criminals can also use it to kill people. The key depends on how the person holding the gun uses it.

In fact, in our daily life, each of us is often doing SWAP, but we don't realize it.Big shots pay expensive fees to "evade" taxes.The health insurance and car insurance purchased by our little people are actually SWAP. You work for the boss, and the warranty certificate (Warranty, an agreement that the seller agrees to repair or replace the sold goods) that you usually shop in the store is also SWAP. A sort of.

When I first arrived in the United States, I noticed that whenever you buy a product in a store, the clerk will always sell you a warranty.At first, I didn't know the function of the warranty certificate, but then I gradually understood that the customer paid an extra sum of money to purchase the warranty certificate from the manufacturer.During the guarantee period, if the product is broken, the user can get free repair service and even exchange the product.

It may be because my wife and I are "sitting at home", and the office chairs at home are particularly prone to damage.Five years ago, we bought a new chair for $299 with a warranty for $50 for 5 years.From the third year onwards, every few months, a part of this chair broke down, and the manufacturer sent a new part after a phone call.In five years, it is equivalent to getting a new chair, which is too cost-effective.

Once shopping, my wife's petty bourgeois sentiment came up, and she insisted on buying a coffee machine for making cappuccino, which cost $599.Because I have tasted the sweetness of the warranty, this time is no exception, with a three-year guarantee of $75.Soon a friend came to our house as a guest, and I wanted to show off the new machine. I asked my friend "freshly" (meaning showing off) if I would like cappuccino, and of course my friend said yes.My wife went into the kitchen and operated the machine. After waiting for a long time, the cappuccino didn't come out!Now it's time to make a fool of myself.My wife was quick to think, and immediately made a cup of espresso coffee, and then used a cappuccino machine to whip some milk foam on it, and got away with it.My friend kept saying, "It's delicious, it's delicious!"My friend walked away, and I immediately called the manufacturer to complain.At this time, the function of the warranty card came into play again. Due to the quality problem of my coffee machine model, the manufacturer has discontinued production (no wonder it broke after a few days of use), but the manufacturer promised to give us a new model, the market price is 799 US dollars, Here we are again.

Of course, there are also bad deals.A few years ago, I bought a laptop with an extra-large fluorescent screen. It looked very comfortable, but I heard that its cooling system was not good enough.I think, if you buy a warranty for three years, you don't have to worry about it.One morning, the computer could not be started. After checking, the master board was burned out, so I called the manufacturer immediately.Unexpectedly, the computer has been used for three years and six days!If it expires, the warranty will be void, and you will have to pay for repairs yourself.

It seems that most of the buyers can't beat the sellers!In other words, if the seller wants to do SWAP with you, it is usually beneficial to them.Therefore, under normal circumstances, foreign "shopping experts" do not recommend that you buy a warranty certificate, because the money is generally too much to pay.

12. The rich are trying to evade taxes?

On Wall Street, it is often heard that a certain rich man successfully evaded taxes, and that a certain rich man was arrested by the tax bureau for improper tax evasion.There are many ways for the rich to evade taxes.At one stage, the most popular tax evasion method was to reinvest the money earned from investing in a new company. The specific operation is of course very complicated, but the approximate situation is described as follows:
Mr. X earned 1000 million from investment at the beginning of the year. Of course he doesn’t want to pay taxes, so what should he do with the money after cashing out, so as to escape Uncle Sam’s eyes?So he found Mr. Y, a tax guru. Mr. Y told Mr. X about his method. He has designed many methods of tax evasion for many rich people. This is not the first time.

Tax master Y first opened a leather bag company in a European country, and then asked Mr. X to invest 1000 million shares.The leather bag company will never actually take 1000 million to do business, but deposit the 1000 million in a local European bank.And the local bank will remit 1000 million in batches to Mr. X's deposit bank, and Mr. X will apply for a loan.By the end of the year, the leather bag company declared bankruptcy, and Mr. X lost 1000 million on his investment.The investment cash out at the beginning of the year and the investment loss at the end of the year just offset. Mr. X does not need to pay a penny of taxes, and he lives on borrowing. He is considered poor, right?
But the IRS is not a vegetarian, so there is no one who can't see through this clever trick.However, Mr. X's big lawyers and big accountants have been waiting there for a long time. It is very difficult for the IRS to recover the money.In fact, compared with the SWAP (swap contract) I have done, this kind of tax evasion game can only be regarded as a child's play. The gameplay designed by Wall Street for the rich is called a brilliant move.

It is said that we ordinary people can use SWAP to take advantage of "small bargains", such as the guarantee letter for shopping in the store; the health insurance or car insurance that we usually buy; The high-priced apartments in Hong Kong, Taiwan, Beijing and Shanghai, and the purchase of relatively "cheap" villas in Vancouver and Toronto are all a kind of SWAP transaction.However, the big shots can use SWAP to "avoid tax" reasonably and legally after paying expensive handling fees.

For example, when I was in the Bank of America Securities Department, I specialized in SWAP. One day at the end of 2006, a mysterious customer came to the company. As soon as she arrived, she shocked the top people of the company.My boss, Bob, was immediately summoned for a secret meeting.At that time, people speculated a lot about what kind of characters came to make the head of the department disappear into the office one by one, only to return happily one by one after a few hours.It turned out that she was a member of the British royal family, and she came to the company and asked us to help her complete a rather complicated SWAP transaction.

(End of this chapter)