The Big Short

The Big Short

By

Michael Lewis

The one thing that I picked up from this book is that “If you want to predict how people will behave you only have to look at their incentives.” In the book it mentions several examples of this, but one that stuck out to me was of Xerox. They had made a better machine, but because their salesman were getting less commission off of them they actually sold fewer machines than was normal and kept selling the older and less dependable machines to increase their commissions.

There are a plethora of things that could be taken from this and implemented in my life. In my personal life with my wife I could change or implement structure in how I interact with her so that we both mutually benefit from an increased love for each other since the incentives are properly placed. One way of doing that change is doing activities together that we both like to do.

In business if I don’t like how I’m being compensated I could ask for a change in how my pay or bonus structure is so that achieving those incentives is challenging, exciting, and rewarding. Who really wants to do a job they know they can’t get done no matter how hard they try? Let me answer my own question since it is my blog. Nobody. In fact over time I bet that people will naturally tend to work less and less diligently if that is their particular situation.

Recently my company rolled out a program for the bonus structure that almost completely rules out getting your full bonus potential. It is possible to get, but it is very difficult. I spoke up in the meeting saying that the new program didn’t quite feel right and after the meeting (nobody else spoke up about it until I had and they almost closed the meeting until I piped up) several people, including my own boss, said that they didn’t like the structure and that they were glad that I said something.

We could also implement incentive changes in government. To be honest I’m not really sure what would be the best way to change things. What if we disallowed somehow that a private sector individual could not become a public sector representative and vice versa? This would avoid people being manipulated by lobbyists since they wouldn’t receive later benefits based on how they voted. There a million ways I’m sure we could change the incentives of our elected that would be for the better of our country, but changes could and should occur based on our current issues we face as a nation.

1031 Exchange

Who cares about this and why is it important to make the leap to big investment money? A 1031 Exchange is a tool you can utilize to avoid paying taxes on the gains from selling your property. You have to roll it into another property within a certain period of time and it has to be into another property of similar use. This allows you to capture the gains instead of losing them to taxes and roll those gains into another place as an investment.


What’s great about this is that you can take a property that you’ve fully depreciated throughout the years and sell it with its value also having appreciated and roll those gains into another property. There are many reasons to do a 1031 exchange. The following are just a few reasons why you’d want to. Upgrade or consolidate property, relocation to another area, and change ownership of property types, i.e. change from owning residential real estate to commercial or retail.

Ultimately my goal is to own enough rental property or businesses that allow me to live comfortably on the monthly cash flow in retirement. This exchange allows me the ability to potentially grow my investments exponentially through economies of scale. That is what I’m excited about in the future. This is what Robert Kiyosaki did with his wife when they were starting out in rental properties. They were able to take their 20 or so rental properties, sell them, and traded up for 2 bigger apartment complex units. What is nice about this is the track that it leads them down. Eventually with enough experience/success larger investors will start to come at you with deals that you’d be able to finance or find financing for that would lead to infinite return deals using OPM (Other People’s Money), which is the best possible way to maximize your returns.

Infinite Return

If I have zero dollars invested in an asset and I receive $1, a return on zero is infinite. How is this possible?


In real estate they way it works is you buy something and force appreciation through improvements to the dwelling, at which point you would then refinance the property and since it is refinanced it is tax free the amount you get out of the refinance. Once that is done you can then roll the proceeds into another property via a 1031 exchange, but you still get to keep the first asset, which means you have an infinite return on the first property since you technically have no money invested in the property.