Michael Burry UCLA Econ Commencement Address

[haha]

Dr. Michael "The Big Short" Burry's "Brutal Hangover Is Inevitable" State-Of-The-World UCLA Commencement Speech | ZeroHedge

Dr. Michael Burry forsaw the 2007- 2009 contraction and made a pile from nothing on shorts and derivatives.

This is an amazing address, especially amazing in that the faculty invited him and then didn't unplug the sound system when they saw what he had to say.

Ha

 

[Running_Man]

I loved that video!

John Bogle singled out and mocked the same Dr Burry for ridicule in a Forbes piece in 2001 about how Hedge Funds are a bad investment.

I don't know what to do about Scion Capital, started by Michael Burry M.D. after leaving his third year of residency in neurology. He started it mostly with his own money, $1.4 million, and he's looking for more. He looks for opportunities to take advantage of illiquidity and inefficient sectors. His technique to manage risk is to buy on the cheap and, if he takes a short position--I hope you're all sitting down for this--it is because he believes the stock will decline." .....The unhappy truth is most hedge funds can't deliver on their promise of beating the broader stock market over the long haul. During the last five years (through May 2001), the S&P 500 returned an annual 15%. But 9 of the 10 weight-averaged classes of hedge funds monitored by CSFB Tremont delivered sub-S&P returns, after fees.

From the publishing of that article until he closed the fund down Dr Burry's hedge fund outperformed the S&P by 450 times over. That fact of course no more invalidates index investing than does John Bogle's mocking of another money manager invalidate the money manager's approach.

Bogle's counterpoint written in 2001 is attached:

Forbes.com - Magazine Article

 

[LOL!]

So when will a busted hedge fund manager appear as the commencement speaker?

 

[haha]

So when will a busted hedge fund manager appear as the commencement speaker?

Running a hedge fund no more makes you intelligent than being a boxer makes you a champion.

If you think Burry is a random event, think again, and read The Big Short to get a few facts.

 

[NW-Bound]

Yes, I have read The Big Short by Michael Lewis. An extremely good read. And of course I enjoyed his Liar's Poker many years earlier.

In the time period of 2005-2007, I believe many people understood the housing bubble as an unsustainable economic development, but Michael Burry is among the few who dared cry out that the emperor was naked, and then took the contrarian daring steps to profit from it.

Yes, market shorters have a place in any free economy. Even as a minority, contrarians keep a bubble from further inflating and eventually crashing even harder. They do not always come out ahead, but when one takes the risk of stepping out of the lemming lines, and gets to be successful through perseverance like Michael Burry, he deserves some credits.

 

[LOL!]

I have read The Big Short and personally know people who invested with Scion Capital.

I think UCLA is looking for a big donation down the road. More power to them.

 

[gerntz]

^ Donate to a CA government institution? Why? CA has plenty of money already.

 

[FIRE'd@51]

Excellent stuff. Thanks for posting, HA.

 

[yakers]

And that leaves me with the question I have pondered. It was clear enough to me that RE was in a bubble but I was nearly paid off, needed somewhere to live and am still 'positive' on my house bought in 1986. I did not see 'what to do' to capitalize on the impending decline. Burry figured out how to hedge and threw $1M+ and made a lot. Someone will, I didn't, but I did OK. The question I have is if I were some Japanese working person in the last 20 years or a retired person here now and I expect a decline. 'what do I do?' Foreign stocks/bonds? They are taking a beating, Treasuries are a disaster. No where to go for me, so I hold my 60/40 AA because I don't know what to do.
I am a fan of Bogle but he obviously was being disingenuous in stating that Burry 'expected the market to decline' and then stating that most hedge funds did not do well for their owners. Obviously Burry's did. Which fund should I use now?

 

[Masquernom]

Great question Yakkers. I read a story about the Scion investments. He determined that the mortgage market was a mess, but it took him some time to figure out how to profit from it himself. He finally found credit default swaps. He actually made most of the money by buying insurance on mortgage trances.

The trick now, is how to position yourself if you believe world markets are going to drop in the future. Great question, I sure don't have a good answer.

But if anyone has ideas, I'd sure like to hear about them!

 

[NW-Bound]

I have not read any book written by Bogle, but A Random Walk Down Wall Street, a book written by Malkiel (a director of Vanguard, and I believe a friend of Bogle), is a favorite of mine.

In Malkiel's book, he allows that the Efficient-Market Hypothesis (EMH) does have some holes. He himself tells of a joke that if one sees a $20 bill laying on the sidewalk, an EMH economist would not bother to bend down to get it. Our economist would reason that the stray dollar bill would have to be an illusion, for if it were real, someone would have already picked it up, and it would not be his luck to remain there.

I remember an article in WSJ back then about the housing bubble, and it opened with this sentence: "This is going to end in tears". One did not have to be very smart to know the mania was not going to last. But it took more work, and a strong conviction, to capitalize on it. In the case of Michael Burry, he was early, but had a strong stomach to wait to be proven right.

Same as Yakers and many of us, I shook my head at the housing mania, and tried to protect myself by making sure I owned no home builders, no banks, no mortgage companies. It was not enough! I surely did not have the courage to short the "bastards" that caused us this mess.

I did not see the $20 bill on the sidewalk. I did not even know where to look. Michael Burry did see that stray dollar bill, and he reached for it despite being ridiculed at that time. Note that Bogle's mention of Burry's hedge fund was made way back in 2001, before the start of the housing mania. So, from that article, one could not say what Bogle thought of Burry's betting against the banking industry a few years later.

About what to do now, I am no economist, nor money manager, to have a strong conviction of what to do. However, I will mention that I have read or seen Malkiel in the media recently, on more than one occasion, pointing out that emerging markets are cheaper than developed countries, in terms of P/E, potential for growth, and also dividend yields. These countries also have lower debts, in terms of their GDP. As I do not know about individual foreign stocks, particularly small-cap stocks, nor know of a way to easily purchase foreign stocks that do not exist in ADR form, I just buy indexed ETFs. So far, they have been beaten down and do not look good compared to the S&P. So, I may be a bit early, but by nibbling here and there, it is still a small percentage of portfolio, and I have learned to be patient.

By the way, I saw the following in Wikipedia. Note the 2nd paragraph.

Burton Gordon Malkiel (born August 28, 1932) is an American economist and writer, most famous for his classic finance book A Random Walk Down Wall Street (now in its 10th edition, 2011). He is a leading proponent of the efficient market hypothesis, which contends that prices of publicly traded assets reflect all publicly available information, although he has also pointed out that some markets are evidently inefficient, exhibiting signs of non-random walk.

Malkiel in general supports buying and holding index funds as the most effective portfolio-management strategy, but does think it is viable to actively manage "around the edges" of such a portfolio, as financial markets are not totally efficient.
​

 

[LOL!]

If one reads "The Big Short", as I recall one will see that Burry did not find the $20 laying on the sidewalk. He had to convince some folks to create a new product that he would buy from them. Basically, he got folks to throw $20 bills onto the sidewalk that he could scoop up.

Maybe this was why the FBI visited him? Did he get folks to create a product that would lose them lots of money? Yes. Is that fraud if you don't explain why you need to have that product? No, but someone once said there is a sucker born every minute.

 

[NW-Bound]

Do we call our extinguished bankers suckers now, eh? I can be sympathetic to suckers, but highly-paid suckers who do not deserve their salaries and bonuses from publicly held companies are something else. Michael Lewis described a lot of this type in his book.

I will have to read the book again... I remember one of the characters who made big money out of this (it might not be Burry) could not buy these derivatives as an individual investor. So he had to jump through hoops to get in on these deals.

Well, these guys were leveraging their shorts, hence they got return of 100X. In my case, if I would know to just bet enough against these bankers and to make some money to partially cancel out my losses on other "innocent" and productive companies, I would be happy.

 

[PrayforSurf]

I enjoyed the speech but it was pretty depressing. I've heard the argument that the US is just stalling the eventual correction that is coming with all the outside intervention from the policy makers, the Fed, and the big banks. The 2008-2009 correction didn't do enough and before it could, the politicians came in with TARP.

The same could be said for the Euro Crisis that has been going on for two years now. Germany is stalling the inevitable because they are making a killing on exports and they will be the biggest loser regardless of the eventual solution.

I just sold a house and I'm sitting on the cash for now. I would considering shorting SPY but no telling when the propping up will stop or stop working. I know timing is for suckers, but I don't feel like now is the time to go all in.

 

[Khufu]

And that leaves me with the question I have pondered. It was clear enough to me that RE was in a bubble but I was nearly paid off, needed somewhere to live and am still 'positive' on my house bought in 1986. I did not see 'what to do' to capitalize on the impending decline. Burry figured out how to hedge and threw $1M+ and made a lot. Someone will, I didn't, but I did OK. The question I have is if I were some Japanese working person in the last 20 years or a retired person here now and I expect a decline. 'what do I do?' Foreign stocks/bonds? They are taking a beating, Treasuries are a disaster. No where to go for me, so I hold my 60/40 AA because I don't know what to do.
I am a fan of Bogle but he obviously was being disingenuous in stating that Burry 'expected the market to decline' and then stating that most hedge funds did not do well for their owners. Obviously Burry's did. Which fund should I use now?

I also knew about the bubble by 2005 mostly from the economists: Stephen Roach, Roubini, John Calverley and, especially, Robert Shiller. At the time I tried to think of how to protect the equity in my apartment which was probably half of my net worth. Eventually I realized that the only way to protect it was to sell it. So, I sold in July, 2005. Subsequently I realized that a recession and a market drop were coming and exited stocks in May, 2006.

I also read a financial journalist, John Rubino, "How to Profit from the Coming Housing Bust" that focused on the investment consequences more than the economic causes. His first advice was to sell your house. But he also recommended shorting Fannie and Freddie and the large banks. I didn't take those steps because I considered selling my home to be a sufficient large bet against the bubble for me. Since my goal was to preserve assets to retire on schedule, I am satisfied that I did so.

If you are doing ok now, that's the most important thing, after all. But just strictly from the financial viewpoint, you should have sold your house. Not having a mortgage wouldn't change the decision at all. The discipline of managing your own money is to take steps at all times that foster net worth and avoid overweighting consumption that is not worth its long-term cost. Had you sold then you could have bought back since at a substantial savings, to state the obvious. Houses have cost people far too much of their well-being just because they represent a collective financial blind spot.

With respect to your question of what to do now, I am in the same boat as you: retired and facing increasing risk along with declining yields. While I do have an opinion as to the future of the markets I do not hold it with the same conviction that I had facing the housing bubble in 2005. Events that are three standard deviations out do not come along often. My opinion is that low growth and/or negative growth will persist for some time, longer than people expect. During that time low-yielding fixed income is a better bet than it looks like historically. Those who have predicted high or even hyper inflation for the last four years have been flat wrong and will continue to be. It seems probable that other financial shocks are in store, because of insufficient reform, and that recessions may therefore be more frequent. A recession in the next year for the US looks very possible, exacerbated by the current policy errors of austerity. Historically the stock market drops 28% in a recession. I think 60% in equities is way too high for a retiree under any circumstances. I hold about 8% in equities myself.

My other recommendation is to read the economists since in a globalized world macro events are more important than among relatively isolated national economies that prevailed after WWII. Bogle and Malkiel represented a viewpoint that is more sophisticated than amateur stock-picking or performance-chasing, for example. But who could believe in a fully efficient market after 2008? That being so, we should keep our eyes peeled for dangerous anomalies, knowing that most of the time we won't be able to recognize them.

 

[NW-Bound]

One does not have to be an avid reader of The Economist to realize that the US's first place in economic ranking is getting challenged, meaning that the Chinese are catching up fast. I also do not follow any financial guru specifically, and just read articles from various sources here and there.

We all know the Nikkei has been terrible for the last few decades. However, until recently, the Japanese economy was still #2 in the world. So, some Japanese exporters should be doing well, or at least a lot better than the Nikkei.

I just checked. While the Nikkei was around 10,000 in 1980 and still about the same now, Honda Motor stock appreciated 30X in the same period, in US dollars. The performance figures do not include dividend yield which is around 2% for Honda, but it proves my point that some Japanese companies have been doing well relative to the Nikkei.

So, I would not write off US stocks. Many large US companies are multinationals, and some even derive more than 50% sales from overseas. I own Caterpillar and Cummins for example, among others.

 

[Spanky]

Thank you for sharing the inspiring story of a person diagnosed with Aspergers Syndrome became successful in academics and the financial world.

 

[Spanky]

About what to do now, I am no economist, nor money manager, to have a strong conviction of what to do. However, I will mention that I have read or seen Malkiel in the media recently, on more than one occasion, pointing out that emerging markets are cheaper than developed countries, in terms of P/E, potential for growth, and also dividend yields.

This settlement is echoed by Jeremy Grantham at GMO.

 

[nun]

I'm becoming more and more convinced that the Old Testament had something in it's condemnation of usury.