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The Man Who Outsmarted Wall Street

Wall Street signWe saw a great segment on 60 Minutes last Sunday. Steve Kroft interviewed author Michael Lewis about his new book The Big Short: Inside the Doomsday Machine.

There’s just one problem with Michael’s book … he spelled “bigg” wrong!

This book is about the financial crisis on Wall Street. What we found so interesting is that he doesn’t focus on the names we so often hear in the news – people like Ben Bernanke and Henry Paulson – who he believes didn’t really know what was going on until all of us knew it.

He focuses, instead, on a handful of people who predicted the disaster was coming. He says, out of tens of thousands of professionals, there were only ten or twenty people in the whole world who spotted it in time to act upon it.

Not being a doctor is what the doctor ordered

In the 60 Minutes interview, Steve Kroft also interviews one of those people, Dr. Michael Burry. As a boy he had been diagnosed with a rare form of cancer. When they operated on him to remove the tumor, he could no longer see out of his left eye.

He didn’t let that stop him from becoming a physician. There was just one problem. He also has Asperger’s syndrome, a form of autism that affects a person’s ability to socialize.

Because of that, he found it difficult to deal with his patients day in and day out. So he quit practicing as a doctor and started Scion Capital, a hedge fund. At that time, he had $40,000 in assets and $145,000 in student loans.

Sitting in front of his computer looking for investments was just what the doctor ordered! It sure turned out to be a great prescription!

Discovering an opportunity

As early as 2003, he was tracking the pools of sub-prime mortgages that Wall Street was selling to investors. He began plowing through hundreds of prospectuses (We checked it; that’s the plural!) for these pools of securities.

And let’s face it … anyone who can stand to read through even one prospectus is a very special person!

He noticed that the mortgages going into these pools were declining in quality quarter after quarter. Yet neither investors nor the rating agencies seemed to notice.

Acting on his intuition

He kept watching the market and predicted that disaster would hit in 2007 when the teaser rates on the sub-prime mortgages in these pools reset.

This gets pretty technical. There’s an excerpt of the book over at Vanity Fair if you want all the details. His problem was that there was no good way to directly place a bet on his idea.

But he didn’t let that deter him! He’s a bigg goal-getter so he pressed on!

Yeah, he determined that the best way to put his money on the table would be through an insurance agreement called a credit-default swap. But they didn’t exist on sub-prime mortgage bonds.

So he talked with five investment banks that he thought would likely survive the impending calamity. Two of them were interested. He invested.

Two years later – in 2007 – his bet paid off bigg time. His hedge fund made a profit of $725 million!

Bigg success is about entrepreneuring your life. Here are four lessons in this story about bigg success:

Adversity often leads to opportunity
We won’t go into all the details here. You can read the Vanity Fair article or buy the book. But Michael Burry is who he is because he only has one good eye. His first career wasn’t a good fit because of Asperger’s syndrome. But he landed in a place that fit him perfectly. Look at the adversity you’ve faced for clues to where you’ll find bigg success.

Do your homework
Bigg success is life on your own terms. A key negotiating principle is that you can either set the price or the terms, not both. So if you set the terms, bigg success will set the price. Michael Burry leads us by example here. Remember the prospectuses?

Don’t be afraid to define the world differently than the crowd
And that includes the experts! There is wisdom in crowds but there’s also madness!

There’s a great quote by Albert Szent-Gyorgyi that really helps illuminate this point:

“Discovery consists of seeing what everybody has seen and thinking what nobody has thought.”

Everybody could have seen the same thing that Michael Burry saw. In fact, he was surprised nobody figured out what he was doing. Thinking for yourself often pays bigg!

If the vehicle you need doesn’t exist, create it
This is somewhat of a compilation of the first three. Yet it deserves its own place. This is what entrepreneuring is all about. If it’s beyond your scope, find someone who can profit by doing it and buy from them.

Don’t let some little thing keep you from bigg success. Michael Burry didn’t. He pitched his idea and found a willing provider.

It was worth $725 million. Now that’s bigg success!

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