How a Doctor beat Wall Street

http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004?printable=true&currentPage=1

by jakarta • 16 years ago

142 68 16 years ago

vanityfair.com

bpick• 16 years ago

The article was good, but the personal life stuff was a waste of time.

The message is clear - don't be afraid to see what others are blind to.

jakarta5• 16 years ago

I don't know if I quite agree with that.

If you look at a lot of value investors / contrarians, you will see that a good number of them were exposed early on to the kinds of irrational thinking that can occur with crowds. I think these experiences make it much easier to take the approach where you go buy something that everyone else hates.

Buffett grew up when the Great Depression was still fresh in people's minds. Carl Icahn experienced prejudice for being jewish. George Soros had to hide from Nazis as a child.

sbaqai• 16 years ago

Sorry for the offtopic, but jakarta, would you mind if I ask for your email? I had a few questions regarding analyst work. (My contact is in my profile). I'd appreciate your feedback if you have some time.

miked• 16 years ago

George Soros had to hide from Nazis as a child.

I hardly blame him for having to hide, but did he have to go out and help confiscate the property of his fellow jews? Couldn't he have stayed home? Not to mention that he's been convicted of insider trading.

http://www.google.com/search?client=safari&rls=en&q=...

KROFT: (Voiceover) You're a Hungarian Jew...

Mr. SOROS: (Voiceover) Mm-hmm.

KROFT: (Voiceover) ...who escaped the Holocaust...

(Vintage footage of women walking by train)

Mr. SOROS: (Voiceover) Mm-hmm.

(Vintage footage of people getting on train)

KROFT: (Voiceover) ... by -- by posing as a Christian.

Mr. SOROS: (Voiceover) Right.

(Vintage footage of women helping each other get on train; train door closing with people in boxcar)

KROFT: (Voiceover) And you watched lots of people get shipped off to the death camps.

Mr. SOROS: Right. I was 14 years old. And I would say that that's when my character was made.

KROFT: In what way?

Mr. SOROS: That one should think ahead. One should understand and -- and anticipate events and when -- when one is threatened. It was a tremendous threat of evil. I mean, it was a -- a very personal experience of evil.

KROFT: My understanding is that you went out with this protector of yours who swore that you were his adopted godson.

Mr. SOROS: Yes. Yes.

KROFT: Went out, in fact, and helped in the confiscation of property from the Jews.

Mr. SOROS: Yes. That's right. Yes.

KROFT: I mean, that's -- that sounds like an experience that would send lots of people to the psychiatric couch for many, many years. Was it difficult?

Mr. SOROS: Not -- not at all. Not at all. Maybe as a child you don't -- you don't see the connection. But it was -- it created no -- no problem at all.

KROFT: No feeling of guilt?

Mr. SOROS: No.

KROFT: For example that, 'I'm Jewish and here I am, watching these people go. I could just as easily be there. I should be there.' None of that?

Mr. SOROS: Well, of course I c -- I could be on the other side or I could be the one from whom the thing is being taken away. But there was no sense that I shouldn't be there, because that was -- well, actually, in a funny way, it's just like in markets -- that if I weren't there -- of course, I wasn't doing it, but somebody else would -- would -- would be taking it away anyhow. And it was the -- whether I was there or not, I was only a spectator, the property was being taken away. So the -- I had no role in taking away that property. So I had no sense of guilt.

clistctrl• 16 years ago

I agreed with you at first, but as the article progressed I think the personal life was an extremely important aspect for connecting with him. Personally I really enjoyed it.

defen• 16 years ago

I agree. I had trouble identifying with the guy so I ended up skipping the personal life stuff. The part about the market and his hedge fund was fascinating though.

GFischer• 16 years ago

I actually liked the personal life stuff a lot - I can describe myself as someone "happy in my own head" and with few friends too (but with far less money :P ).

I find it fascinating that he married twice, too. Maybe I should move to the US :) .

Of course the personal stuff has been novelized and simplified a bit, but that's to be expected :)

greenlblue7• 16 years ago

It's great that this guy has a gift but let's call what he does for what it is: exploitation. Countless pension funds and state budgets are in shambles because of people like him.

tlack• 16 years ago

Those pension funds and states should not have invested in dangerous securities. Let's face it: the money seemed easy and these guys took very dangerous investments, with money that was not safe to play with.

greenlblue7• 16 years ago

That doesn't justify what he did. The right thing to do would have been to let people know of what was happening. Just because the financial system rewards greed/selfishness does not mean people shouldn't act ethically when the consequences of their actions could mean the loss of hard earned money by honest hard working people with families, medical expenses, college loans, etc. Then again the guy has Asperger's syndrome so most of the ethics and empathy is probably lost on him.

owinebarger4• 16 years ago

Actually, they relied on rating agencies that said these were not very dangerous securities. They should have done their own homework, but there are regulations on valuing a pension fund's holdings. The government fell down by not ensuring the soundness of those regulations in practice.

kqr2• 16 years ago

Actually, it's the "shorts" who tend to keep the market honest.

The fact that it was so hard to short subprime mortgage bonds probably kept the bubble going even longer.

owinebarger4• 16 years ago

I can only hope you're kidding. Those pension funds and state budgets are in shambles because they were underfunded and relied on the market to tell them the value of their holdings rather than the kind of fundamental analysis performed by Burry, because the market gave their investments ridiculous rates of return.

"Mark to market" is dangerous because it equates your option of selling an asset at the market price with the actual exercise of that option. It would be better to model the asset using the actual stopping times the firm uses to decide when to sell (on the portfolio as a whole).

greenlblue7• 16 years ago

Why would I be joking. How is expecting the common decency from a fellow human being to tell you that you're standing on a live train track funny? The money managers/investors screwed over an entire economy because they were greedy and were willing to exploit esoteric financial laws/practices and consumer ignorance to sacrifice money that wasn't their own. There is no joke here.

dwwoelfel3• 16 years ago

The people you should be mad at are the ones that actually created the problem in the first place. These problems wouldn't have existed without the Federal Reserve's low interest rates and politicians like Barney Frank who enabled the GSEs. You should be outraged at the arrogance of those people who think that they can make decisions for the entire country that should be made by millions of informed individuals.

greenlblue7• 16 years ago

The financial system is so convoluted and complicated that it does not matter how many informed individuals are making choices, there are bound to be loopholes. It's taking advantage of these loopholes that screws millions of people in the process that I find unjustifiable.

greenlblue7• 16 years ago

That's like saying don't be mad at the guy holding the gun and pulling the trigger, be mad at the guy that made the gun. I refuse to reduce people to simple automatons responding to incentives created by those in a more powerful position.

philk2• 16 years ago

Wrong. He was simply betting that subprime loans were a huge risk that was going to go bust. If you need to blame someone, go for the people who made these loans in the first place, or the ratings companies for failing to spot the disaster.

sirrocco• 16 years ago

If by "failing to spot the disaster" you mean : "this thing's gonna crash, now shut up and make some money by saying it won't" - then I agree :) .

asmithmd1• 16 years ago

He did more than just place a bet. He carefully read the prospectus of the individual bonds he was shorting. He looked into the underlying loans that the bond was based on. He saw: no income verification, no down payments, and inflated home prices. This is something the people buying the bonds could have and should have done themselves.

greenlblue7• 16 years ago

I'm not blaming anyone. I'm just pointing out that in a financial system where shit like this happens over and over again, i.e. hard working people entrust their money to money managers/investors (cough heartless gamblers cough) to invest wisely so the economy overall can prosper from the capital infusion and so the people investing in the future can have a future but they only live long enough to see all their savings vanish, is fundamentally broken and needs to be fixed.

oconnore• 16 years ago

I don't think this should be down voted, because it represents a fairly common (and therefore interesting) opinion. Also, the replies are enlightening.

byrneseyeview2• 16 years ago

Common and therefore interesting? What's interesting about it, if it's common?

zanek• 16 years ago

I loved this article (i thought the personal bits were a good foundation to the entire story). Thanks for sharing it.

owinebarger4• 16 years ago

One of the best parts of this story is how crude a model can be and yet yield tremendous value. A dozen metrics on the underlying loans of the security and "most ARMs reset in two years" giving 3 years as the window for the market to fully recognize how bad the loans were.

philk2• 16 years ago

The complicated part is all the crude models that don't do much at all that you have to trudge through to get the few worthwhile models.

nsoonhui3• 16 years ago

Survivor bias: If I let hell loose on enough monkeys to bet on financial market before the bubble bursted, some of them would eventually "beat the wall street" and "forsee the burst" and earned themselves interviews, book deals and recognition.

The monkeys could have a chance to talked about their models then.

rjprins• 16 years ago

Did you even read the article?

nsoonhui3• 16 years ago

I did; what's the problem with my comment?

Just to add: lots of people also bet against bubbles at any point of time of the bubble. But they were forced out of business before the bubbles could even burst( "Market can remain irrational longer than you can remain solvent"). Only a handful survived and we thought that they have special skills or magic formula.

You underestimate the element of luck in the world of investment.

flipbrad• 16 years ago

what part did credit rating agencies like Moodys have to play in all this? They seem to have escaped from quite a lot of scrutiny in all of this...

smokinn• 16 years ago

It's pretty obvious the role they played. They're expected to be the arbiters of what the risk is. They were setting the risk value for things they had no clue about. It was simply incompetent negligence and no one should be trusting them anymore.

OmniLarry2• 16 years ago

I think you're being too kind to them:

http://www.independent.co.uk/news/business/news/congress-mau...

jsm386• 16 years ago

It's a lot worse than 'setting the risk value of things they had no clue about.' It was, flat out, a conflict of interest:

The AAA ratings given by the agencies proved to be wildly inaccurate and unreasonably high, according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities were seriously flawed in conception and incompetently applied

The ratings agencies no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible, according to the Calpers suit.

More @ http://www.ritholtz.com/blog/2009/07/calpers-rating-agencies... (this is just but one example of Barry Ritholtz extensive coverage of this issue. McGraw Hill dropped his book b/c of his payola (acurrate) line about S&P's efforts at this in particular.

anamax3• 16 years ago

> what part did credit rating agencies like Moodys have to play in all this?

Don't forget the SEC. It gave a ratings monopoly to Moodys and two others (whose name escapes me).

Yes - the SEC said that the ratings from Moodys and the other two are the only ones that count for regulatory purposes. What could go wrong....

Regulation is systemic risk.

albertcardona• 16 years ago

A very compelling read.

scotty79• 16 years ago

I second that. It was as if I read smoothly written SF novel (by Henry Kuttner). And yet it was about real people and events.

delackner2• 16 years ago

A lot of people are suggesting that it was immoral of Burry to profit from his insight instead of warning people of the impending calamity, yet what message speaks more forcefully? Saying you think the market is going to implode, vs. paying millions of dollars to insure specifically against that happening?

No one would have listened to his warning, and indeed his investors didn't like hearing it. Burry is not the bad guy in this epic catastrophe.

Retric• 16 years ago

Also he was not exactly an outsider:

In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry

For everyone that lost big in the collapse someone made out like a bandit beforek, durring, or after it.

OmniLarry2• 16 years ago

Not exactly an insider either - raising money for his hedge fund as a doctor with a blog.

yummyfajitas2• 16 years ago

Instead of profiting off people suffering from bad investments in housing, Burry should have stuck with his career in neurology and profited off people suffering from brain cancer.

delackner2• 16 years ago

In the article he described in several ways how he had no real interest in medicine, just drifting into it because it seemed easy to study, and was physically repelled by the sight of people being operated on. This is not the kind of person you want operating on you.

known• 16 years ago

http://www.worldtopinvestor.com/pub/index

patrickk• 16 years ago

Another superb article from vanity fair. There was another one a week or so ago about a former sniper in Afghanistan.

Reading this reminded me of when I read about Jeff Greene about a year ago - another guy who made a mint from the housing/mortgage bubble collapse. See: http://www.forbes.com/forbes/2008/1006/266.html

I love these types of stories - an 'outcast' who spots a trend and is either ignored or heavily critised for their point of view, but ultimately proved right and met with a deafening slience.

It echoes a now infamous incident that happened in Ireland in 2007, when we were at the height of our own property boom. The then Prime Minister (or Taoiseach) Bertie Ahern, said that "that he did not know how people who engaged in moaning about the economy did not commit suicide". http://www.rte.ie/news/2007/0704/economy.html Since then, Bertie has left his office in controversial circumstances over alleged corruption, and those who his remarks have been aimed at, such as courageous economists David McWilliams and George Lee, are held up as visionaries who warned about the dangers of excess when everyone else was gorging at the trough. As a result, the Irish taxpayer is to become the single largest owner of real estate in the WORLD, to the tune of €55bn ($75bn), because of the generous nature of the Irish Government bailout of the greedy Irish banks. This is in a country of just 4.5m people, which makes it all the more staggering. The Irish Government has bet the future of our country on the recovery of the Irish real estate market, and the youngest generation currently will end up paying for this stupidity over the next 50 years.

p.s. For all those who reckon it's morally wrong to make a fortune from a slump or crash, how is that different from making money in the good times? People are always borrowing foolishly (when the banks allow them to) and get into trouble even when the economy is doing ok. It's just these stories dont receive a mention when the media, along with everyone else, gets caught up reporting how fabulously brilliant we all are when times are good.

sireat2• 16 years ago

Not that Vanity Fair doesn't have high standards, but the author of the article(actually a chapter of his new book) was Michael Lewis, who is quite a good writer by himself. :)

jderick2• 16 years ago

It is too bad that there isn't a place in the medical field for people like this. I think medicine is suffering from a lack of analytical minds.

jderick2• 16 years ago

What is he doing now? I hope he is still investing.

jakarta5• 16 years ago

From what I have heard, he is in the middle of a lawsuit right now with some of his investors.

sireat2• 16 years ago

I reread the article, it is that good. However, one moment does seem extremely unusual.

How does one go from being active on investment forums to securing a few million from very experienced investors.

It is one of those one in billion occurences. I am sure Mike Burry would have done alright even without it, but still there must be more to the story.

Hopefully, full book goes into more detail.

jakarta5• 16 years ago

Maybe I can help fill the gap a bit.

There is an online forum for value investors called value investors club.

In order to become a member, you have to submit an investment idea which is then evaluated. If it is good enough, you get in and become a member.

The forum was started by Joel Greenblatt, of Gotham Partners. What Greenblatt does is monitor the users on the site and gauge their abilities based on ideas... if their ideas are good enough he usually contacts them to make a seed investment so that they can start a hedge fund.

Pretty much any fund connected to Gotham gets the attention of other investors and it is usually pretty easy for them to scale up afterwards. e.g.: going from 0M --> 200M in just a few years. Its sort of akin to how companies funded by YC can sometimes have it easier when attracting VC funding.

How a Doctor beat Wall Street

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