100 Minds That Made the Market

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According to a survey by Paola Sapienza and Luigi Zingales, effectively all economists agreed that stock prices are hard to predict. The Energy Information Administration predicts that U. According to economist Stephen Bronars, the new From to , new-home construction outpaced household formation by more than 3 million homes.

Minds That Made the Market - AbeBooks - Ken Fisher Kenneth L. Fisher: X

According to Gallup, According to The Wall Street Journal, Months since last recession: Treasury holders now face a drop in price of nearly nine percentage points. Of the 3. That was the highest percentage since At According to Wired magazine, "In a survey, 30 percent of people without a high school degree said that playing the lottery was a wealth-building strategy. According to David Wessel of The Wall Street Journal, Americans "spend about half of their food budgets at restaurants now, compared to a third in the s.

According to David Leonhardt, median family incomes have fallen substantially over a decade for the first time since the Great Depression. Federal nondefense discretionary spending — all spending minus defense and entitlements — is on track to hit its lowest level as a share of GDP in more than 50 years, according to data from the Congressional Budget Office.

Bonds have become so richly valued that UBS is reportedly reclassifying brokerage clients who are overweight bonds as "aggressive" investors — most likely to avoid future lawsuits if and when bonds lose value. According to The Economist, "Over the past ten years, hedge-fund managers have underperformed not just the stock market, but inflation as well. Department of Agriculture data. In June , Japan's working-age population is on track to decline from The unemployment rate for those with a bachelor's degree is just 3.

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Buffett had had trouble with people, too, in his youth. Mike Burry came of age in a different money culture. The Internet had displaced Dale Carnegie. He could explain himself online and wait for investors to find him. He could write up his elaborate thoughts and wait for people to read them and wire him their money to handle. This method of attracting funds suited Mike Burry.

More to the point, it worked. Right from the start, Scion Capital was madly, almost comically successful. Scion was up 55 percent. The next year, , the stock market finally turned around and rose Scion Capital charged investors only its actual expenses—which typically ran well below 1 percent of the assets. It was unheard of. By the middle of , over a period in which the broad stock-market index had fallen by 6. He used no leverage and avoided shorting stocks. He was doing nothing more promising than buying common stocks and nothing more complicated than sitting in a room reading financial statements.

He went looking for court rulings, deal completions, and government regulatory changes—anything that might change the value of a company. Michael Burry started digging; by the time he was done, he knew more about the Avanti Corporation than any man on earth. He was able to see that even if the executives went to jail as five of them did and the fines were paid as they were , Avanti would be worth a lot more than the market then assumed.

His job was to disagree loudly with popular sentiment. If you gave Scion your money to invest, you were stuck for at least a year. Investing well was all about being paid the right price for risk. He investigated the stocks of homebuilders and then the stocks of companies that insured home mortgages, like PMI. To one of his friends—a big-time East Coast professional investor—he wrote in May that the real-estate bubble was being driven ever higher by the irrational behavior of mortgage lenders who were extending easy credit.

The collateral damage is likely to be orders of magnitude worse than anyone now considers. On May 19, , Mike Burry did his first subprime-mortgage deals.

He likely became the only investor to do the sort of old-fashioned bank credit analysis on the home loans that should have been done before they were made. He was the opposite of an old-fashioned banker, however. He was looking not for the best loans to make but the worst loans—so that he could bet against them. He analyzed the relative importance of the loan-to-value ratios of the home loans, of second liens on the homes, of the location of the homes, of the absence of loan documentation and proof of income of the borrower, and a dozen or so other factors to determine the likelihood that a home loan made in America circa would go bad.

Then he went looking for the bonds backed by the worst of the loans. From their point of view, so far as he could tell, all subprime-mortgage bonds were the same. If he wanted to buy insurance on the supposedly riskless triple-A-rated tranche, he might pay 20 basis points 0. A basis point is one-hundredth of one percentage point.

The triple-B-rated tranches—the ones that would be worth zero if the underlying mortgage pool experienced a loss of just 7 percent—were what he was after. He felt this to be a very conservative bet, which he was able, through analysis, to turn into even more of a sure thing. Anyone who even glanced at the prospectuses could see that there were many critical differences between one triple-B bond and the next—the percentage of interest-only loans contained in their underlying pool of mortgages, for example.

He set out to cherry-pick the absolute worst ones and was a bit worried that the investment banks would catch on to just how much he knew about specific mortgage bonds, and adjust their prices.

Tansy Aspinall and Victoria Van Holthe on the Destinations That Inspire Them

Once again they shocked and delighted him: Goldman Sachs e-mailed him a great long list of crappy mortgage bonds to choose from. It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop. None of the sellers appeared to care very much which bonds they were insuring. He found one mortgage pool that was percent floating-rate negative-amortizing mortgages—where the borrowers could choose the option of not paying any interest at all and simply accumulate a bigger and bigger debt until, presumably, they defaulted on it.

Goldman Sachs not only sold him insurance on the pool but sent him a little note congratulating him on being the first person, on Wall Street or off, ever to buy insurance on that particular item. He was worried that others would catch on and the opportunity would vanish.

100 Minds That Made the Market

The more Wall Street firms jumped into the new business, the easier it became for him to place his bets. The credit-default swap was a zero-sum game. Goldman Sachs was simply standing between insurance buyer and insurance seller and taking a cut. The willingness of whoever this person was to sell him such vast amounts of cheap insurance gave Mike Burry another idea: to start a fund that did nothing but buy insurance on subprime-mortgage bonds.

100 Minds That Made the Market (Fisher Investments Press)

Most of them still had no idea that their champion stock picker had become so diverted by these esoteric insurance contracts called credit-default swaps. Many wanted nothing to do with it; a few wondered if this meant that he was already doing this sort of thing with their money. Instead of raising more money to buy credit-default swaps on subprime-mortgage bonds, he wound up making it more difficult to keep the ones he already owned. His investors were happy to let him pick stocks on their behalf, but they almost universally doubted his ability to foresee big macro-economic trends.

ISBN 13: 9788126519552

In October , in his letter to investors, Burry finally came completely clean and let them know that they owned at least a billion dollars in credit-default swaps on subprime-mortgage bonds. They erred when they bet against George Soros and for the British pound.

And they are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not exist. Opportunities are rare, and large opportunities on which one can put nearly unlimited capital to work at tremendous potential returns are even more rare. Selectively shorting the most problematic mortgage-backed securities in history today amounts to just such an opportunity. In the second quarter of , credit-card delinquencies hit an all-time high—even though house prices had boomed. That is, even with this asset to borrow against, Americans were struggling more than ever to meet their obligations.

The Federal Reserve had raised interest rates, but mortgage rates were still effectively falling—because Wall Street was finding ever more clever ways to enable people to borrow money. So he just laid it out for his investors: the U.

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Treasury notes and bonds. The entire economy was premised on its stability, and its stability in turn depended on house prices continuing to rise. One hallmark of mania is the rapid rise in the incidence and complexity of fraud. The FBI reports mortgage-related fraud is up fivefold since When his investors learned that their money manager had actually put their money directly where his mouth had long been, they were not exactly pleased.