A story for our times, in a nutshell, for non-investment experts.
Mike Burry is brilliant, but has trouble dealing with people face to face. As a young boy he was obsessed with fairness and honesty. He learned recently that he has Aspergers, which explains in part some of his gifts and peculiarities, and perhaps also why he was able to see the truth of our troubles before many others did. “Only someone who has Asperger’s,” he said, “Would read a subprime-mortgage-bond prospectus.” (p. 183, “The Big Short”).
Starting from a young age, one of his hobbies was studying the stock market.
He recognized early that there was little or no logic behind the charts and graphs of the investment professionals. He also recognized that success in investing isn’t something that can be taught: “If that were true,” he said, “It’d be the most popular school in the world, with an impossibly high tuition.” p. 35, “The Big Short” by Michael Lewis
He had trouble talking to people but he was very good at focusing on one thing and learning about it, and that’s what he did with investing. He searched for out-of-favor companies with sound fundamentals that no one wanted to invest in. Even as a medical resident, he continued to study markets, and eventually began blogging about his trades, some of which were very successful. He attracted a broad following.
In 2000 he left medicine and started an investment company, Scion Capital.
He went into his office, closed the blinds and the door, read about investing and started making trades.
He was phenomenally successful.
In about 2004, he realized that something strange was happening in the home lending and mortgage business.
A lot of lenders were making loans that looked unusually risky.
Investment bankers and brokers were “packaging” and selling questionable loans into bonds to “spread the risk.” They argued that it was unlikely that all the loans would go bad at once, so these bonds were a good bet. Rating agencies like Moody’s and Standard and Poor’s agreed, and gave the bonds AAA ratings. This worked so well, bankers and brokers divided the bonds up into more bonds, clumping together the worst of the worst and the not quite so horrible, and sold those. The ratings agencies rated these AAA, AA, BBB, etc., depending on how stinky they were. The market boomed. Traders’, bankers’ and investment managers’ salaries soared.
This is a gross oversimplification. Here’s a picture of how it worked, by someone who really understands it:
It did not look like a good way to do business. Burry set out to figure how the parties involved were getting away with it.
He discovered that most people didn’t know or didn’t want to know what was going on. Investors who bought the loans didn’t know what was in them.
The rating agencies didn’t either. People on the street trusted the banks, newspapers, brokers, regulators, news commentators and rating agencies, and all of those entities said things were great. Bigwigs at investment banks like Lehman Brothers and Goldman Sachs might have known what was going on, but they weren’t talking to Mike Burry. They were busy raking in dough.
Burry decided that these types of investments were going to blow up, and he decided to bet against them. He bought some and then bought insurance on them.
Soon things began to look even worse, so he bought insurance on the companies that were insuring his risky bets.
Everyone, including his investors thought he was crazy. He forced some of his clients to stay with him by using legally marginal tactics. Some threatened to sue him.
Then the insurers stopped selling him insurance. Why? Goldman Sachs (and some other big banker/investor firms) realized he was right. They wanted to bet against these type of investments too, even though they were creating them.
Confusing, I know. I don’t think I can describe it any better. Help would be appreciated.
We all the know the rest. The mortgage bubble popped. The investment banks collapsed and tax payers nicely bailed them out.
Mike Burry made $100 million for himself. He made $700 million for the investors who stuck with him. No one said thank you.
Then he closed his investment company.
He’s now buying land with water rights, and gold. I probably would too, if I had $100 million.