Updated: Aug 20
What does a movie and the greatest financial meltdown in history teach us? We can still invest and make money, EVEN WITH A FINANCIAL CRISIS.
About the author: Jeff Hulett is a career banker, data scientist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his new book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at jeffhulett.com.
Dr. Michael Burry is the hero of the Michael Lewis book, The Big Short. The book is based on a true story. It was also made into a movie of the same name. Dr. Burry created one of the boldest short strategies in history. He shorted the U.S. housing market and mortgage bond market during the hay day of the U.S. housing market. He bet against the wall street elite and won.
The signs of an imminent correction were clear. He and a small number of other enlightened investors talked to market makers, mortgage investors, bond rating agencies, housing investors, mortgage originators, and even home-flipping strippers. All indications were that the U.S. housing market was ridiculously overvalued. Dr. Burry was confident the housing market would correct. He just did not know when.
Finally, after waiting for what they hoped was the right time, Dr. Burry and his hedge fund implemented their short strategy. Then, the real waiting game started. In order to make money, the markets had to go down. They waited. They waited. Nothing happened. Home and bond values continued to go up! The trade was moving in the wrong direction. His hedge fund was being hounded to provide additional capital against their trade. Capital calls are standard when the market moves against a short trade. This "big short" trade initially declined in value owing to the stubborn home market value increases. Dr. Burry’s investors were SCREAMING for him to exit the short trade. He was threatened with lawsuits. Dr. Burry almost had a mental breakdown. But he held on. Then it happened. The U.S. bond and housing markets FINALLY corrected. It was one of the largest financial corrections in history. Dr. Burry and his investors were richly rewarded. But Burry was lucky. Most other traders, whether on the short or long side of the housing trade, ended up with a financial fiasco.
That is why bear market trading is so challenging. In fact, legendary investor Warren Buffett said:
“Only when the tide goes out do you discover who's been swimming naked.”
Buffett is suggesting those with vulnerable trading strategies will be revealed in bear markets. Even the best short strategy is like catching a falling knife.
Dr. Burry was both lucky and good. Normal investors and people that would not find Dr. Burry's experience appealing still would have been better off staying in the equity markets. But there is a big difference between:
Traders, like Dr. Burry and
Investors, like normal people.
For traders, time is the enemy. For investors, time is your friend. Low-cost and disciplined investing strategies, diversification, and commitment devices helping us to stay the course are essential to long-term success.... even given the extreme volatility of the great financial crisis.
To learn how to invest for the long-term, please check out the article:
The article explores:
The difference between an investor and a trader
Zoom-out is a winning investor's mindset
SPRING investing is the investor's tool