You have probably come here to learn about global markets – how they work, why they are important, and whether you should invest in them.

We will get to that.

But before we talk about global investing, there is something more basic we need to understand and we wish to explain.

Most of us already believe we are diversified. We feel that because we have money in different places, maybe some in deposits, some in mutual funds, a few stocks, and perhaps real estate, we have reduced risk. That feels sensible, and in many ways it is.

This chapter is not about saying that the approach is wrong. But it is about asking a simple question: when we say we are diversified, what exactly are we diversifying?

Are we spreading risk across assets? Across sectors? Or across something larger?

Once we are clear about that, the rest of it becomes much easier to follow.

Let me begin with a scene from The Big Short.

Source: Scene from the movie “The Big Short”

Christian Bale plays Michael Burry, the same actor most of us remember as Batman. 

In the film, he walks into a large US investment bank (by the way, it is still one of the largest banks) and explains that he wants to bet against the US housing market (by the way, this is a real story, and if you haven’t watched the film, then I recommend that you must watch it). It sounds absurd to the bankers sitting across the table.

They are not careless people. They have research teams, historical data, and complex models. From their point of view, the system (or risk) looks well-diversified. Mortgages have been packaged and distributed widely.

They believe the structure they are operating with is near-perfect!

Burry looks at the same structure and asks a different question. He is not denying that mortgages are widely held. He is questioning whether the risk is truly distributed (or well-diversified) in the way everyone assumes.

That scene is useful for our discussion.

When most of us say we are diversified from the investing portfolio standpoint, we genuinely believe it. We have not placed all our money in one product or one stock. We have made an effort to spread our savings across different instruments.

But sometimes the important question is not whether we own many things. It is whether those things are exposed to the same underlying system.