You know the guy.
Star of The Big Short.
Prescient genius who saw the housing crash coming…
I hate him.
Not personally.
I just hate the Michael Burry that you all know…
The caricature.
What he represents.
This idea that you have to bet it all on one big idea.
The notion that you have to see things that no-one else has seen.
That you have to be RIGHT.
That’s what I hate.
(Burry’s probably a nice guy)
We’re constantly bombarded by stories of people who make INSANE bets that pay off
Those outliers that bet big & get lucky/rich…
Every high profile gazillionaire has an origin story.
Cults sprout from the seeds of their mythical success.
How did they do it?
Maybe I could do it too…
There’s usually a load of missing, inconvenient details, but who cares?
Society celebrates winners.
Outcomes.
Burry’s often lauded as a genius. Maybe he is.
Even a genius needs luck though…
People tend to forget the part where he nearly blew up.
The premiums on those (eventually profitable) swaps were leeches on Scion’s Capital, sucking away the lifeblood of the fund.
Then Burry gated withdrawals because ‘he knew he was right’.
Investors were furious.
He was ‘all in’ on one bet.
Things could’ve turned out VERY differently.
Banks were marking the value of those contracts themselves, ensuring the premiums Scion paid remained high.
If it had taken another year for the subprime crisis to start, would Scion have made it?
Burry flirted with risk of ruin.
Fortunately for him, it worked out in the end.
Another guy who made similar bets to Burry, lost BIG.
Although surprisingly few have heard of him…
Howie Hubler (Bennie Kleeger)
Howie gets a couple of tiny mentions in the film (under the alias Benny Kleeger), but we never meet him.
He should have had the starring role.
See, when the SHTF, Howie Hubler was responsible for the largest trading loss ever recorded: Nine billion dollars.
(Howie held that title for 13 years until Archegos’ Bill Hwang saw his massive levered bets liquidated in 2021)
Hubler, like Burry, saw that the housing market was in trouble.
However, Burry only started to get interested in 2004/5.
Hubler was already working it in 2003.
In 2003, Morgan Stanley created a proprietary credit default swap for the purpose of shorting bad subprime mortgage bonds. When a group was being formed in 2003 to short subprime mortgages, Hubler was co-opted as the group’s manager and placed in charge of the team.
Things were going so well that Hubler was promoted.
After early successes shorting subprime mortgage bonds, as well as selling bonds, he was promoted to run the newly created Global Proprietary Credit Group (GPCG) in 2006.
So where did it all go wrong?
He made a successful short trade in risky subprime mortgages in the U.S., but to fund his trade he sold insurance on AAA-rated mortgage-backed collateralized debt obligations that market analysts considered less risky, that also turned out to be worthless, resulting in a massive net loss on his trades.
Yep. That one decision was the key difference.
Burry funded his premiums by freezing withdrawals.
Hubler sold insurance on the top tier tranches. The ones that everyone assumed to be safe.
That was his fatal error.
Burry & Hubler both bet BIG on the same outcome. Yet only one of them achieved fame & fortune.
Howie Hubler should have been more boring
David VanBenschoten, head of the General Mills pension fund told me that, in his 14 years in the job,the fund’s equity return had never ranked above the 27th percentile of the pension fund universe or below the 47th percentile.
And where did those solidly second-quartile annual returns place the fund for the 14 years overall?
Fourth percentile!
I was wowed. It turns out that most investors aiming for top-decile performance eventually shoot themselves in the foot, but Dave never did.
The age-old story of the tortoise and the hare.
Slow & steady wins the race.
Dave was consistently in the middle of the bell curve.
Could barely be more middle of the road.
Mr Average personified.
Boring. Consistent. Progress.
But here’s the magic.
If you REPEAT that performance consistently across 14 years, it compounds.
And you end up doing better than 96% (!) of your peers…
Marks continued:
Around the same time, a prominent value investing firm reported terrible results, causing its president to issue an easy rationalization:
“If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too.”
My reaction was immediate: “My clients don’t care whether I’m in the top 5% in any single year – they (and I) have absolutely no interest in me ever being in the bottom 5%.”
I’ll never sit here and say that people shouldn’t be ambitious.
You absolutely should.
Risk-taking makes the world work.
Just keep in mind the game you’re playing.
Compounding is a superpower.
But you have to stay in the game long enough for it to work.
Big outlier bets rarely work. That’s what makes them outliers!
(and why we make films about them)
There’s a timeless Hemingway quote about going broke.
“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”
Compounding consistently is the precise opposite:
“How did you get rich?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”
Buffett is a fantastic example:
As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.
~ Morgan Housel
One final point on ‘boring’ being best…
There are roughly 2,640 billionaires in the world.
How many could you name? How many of their stories do you know?
Most of these are as yawn-inducing as you could get.
Ever heard of Pang Kang?
Worth $16 billion and chairman of a food flavouring company.
BORING!
Stefan Persson?
That’s an easier one.
Former chairman of H&M. Still owns 36% of the business.
H&M was founded in 1947 – One solitary boutique in Stockholm.
The next store opened in Norway in 1964.
SEVENTEEN years later.
Nowadays?
4,800 stores around the world.