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Overview

The book Liar’s Poker tells the story of Salomon Brothers, an investment bank that was a leader in the bond market in the 1980s. It explains how this company became one of Wall Street’s most profitable firms by establishing and dominating a new market—the mortgage bond market—and what it did once it was at the top.

Hedge funds are known for their secrecy, because they often find opportunities before other people do. They’re also known for being successful at investing in these areas. In this article, you’ll learn how to spot a good opportunity and when it makes sense to invest big money into that area.

In this book, you will learn how one investor made $30 million in eight minutes with a small hedge fund. It will also explain why hedge funds never need a bailout and can help reverse the economic fortunes of an entire nation.

Big Idea #1: Hedge funds are a type of investment that can take multiple approaches, including buying stocks at high prices.

You’ve probably heard the term hedge fund before. What does it mean and how do hedge funds actually work? In 1949, A. W. Jones founded the first “hedged fund,” as it was called at the time. Since then, hedge funds have become major financial institutions that have changed over time to meet market demands and investor expectations.

Today, the vast majority of hedge funds follow Jones’ original model for stock market trading.

Hedge fund managers are like other investors. They buy stocks of promising companies, hoping the values will increase, thus earning a profit.

Hedge funds are different from other investment vehicles because they’re designed to make money in any market condition. They do this by short selling stocks, which means borrowing them for a small fee and then selling them when the price falls, hoping that it will go down even more so you can buy back the shares at an even lower price and keep the difference as profit.

For example, if you think a certain company is overvalued, you can borrow 50 stocks from the company and sell them for $2 each. Next week, when stock prices fall to $1 per share, buy back those 50 shares and return them to the person who lent them to you. You’ll have made a profit of $50 in this transaction.

Essentially, hedge fund managers are good at buying stocks that they believe will increase in value and selling those that will decrease. They do this with borrowed money from other investors to maximize their profits, but they have little capital of their own. Therefore, they find large sums of money from other investors, which allows them to invest on a massive scale. This is how hedge funds make most of their money. Hedge fund managers also earn extra fees if the investments perform well so it motivates them to be successful when trading with other people’s money.

Big Idea #2: Hedge funds have an element of gambling, but they tend to be risk averse.

Are you worried that hedge funds are too much like gambling? How can they be sure which stocks will rise and fall? What if a trader loses all of his or her money in one bad bet? Of course, trading is always risky because no one knows for sure what’s going to happen. However, hedge fund portfolios are diversified, so investors aren’t taking on as much risk. Traders build diverse portfolios by buying “long” and selling “short,” which protects them from swings in the market.

An example is that if the market value goes up, your stocks will also go up, and they’ll make up for any bad decisions you may have made.

Alternatively, if the market goes up and stock prices rise, you’ll make profits on the “long” stocks to compensate for losses in other investments. You can also protect against a downturn by investing in short stocks. Therefore, it’s best to invest in both long and short stocks so that your overall investment is safe no matter what happens with the market.