• Choose a category
• All
• Classic-Fiction

By Root 339 0

upset that a guy they had hired to pick stocks had gone off to pick rotten mortgage bonds instead; some wondered, if credit default swaps were such a great deal, why Goldman Sachs would be selling them; some questioned the wisdom of trying to call the top of a seventy-year housing cycle; some didn't really understand exactly what a credit default swap was, or how it worked. "It has been my experience that apocalyptic forecasts on the U.S. financial markets are rarely realized within limited horizons," one investor wrote to Burry. "There have been legitimate apocalyptic cases to be made on U.S. financial markets during most of my career. They usually have not been realized." Burry replied that while it was true that he foresaw Armageddon, he wasn't betting on it. That was the beauty of credit default swaps: They enabled him to make a fortune if just a tiny fraction of these dubious pools of mortgages went bad.

Inadvertently, he'd opened up a debate with his own investors, which he counted among his least favorite activities. "I hated discussing ideas with investors," he said, "because I then become a Defender of the Idea, and that influences your thought process." Once you became an idea's defender you had a harder time changing your mind about it. He had no choice: Among the people who gave him money there was pretty obviously a built-in skepticism of so-called macro thinking. They could understand why this very bright guy rooting around in financial statements might stumble across a small company no one else was paying attention to. They couldn't see why he should have a deeper understanding of trends and global forces apparent to any American who flipped on a cable news program. "I have heard that White Mountain would rather I stick to my knitting," he wrote, testily, to his original backer, "though it is not clear to me that White Mountain has historically understood what my knitting really is." No one seemed able to see what was so plain to him: These credit default swaps were all part of his global search for value. "I don't take breaks in my search for value," he wrote to White Mountains. "There is no golf or other hobby to distract me. Seeing value is what I do."

When he'd started Scion, he'd told potential investors that, because he was in the business of making unfashionable bets, they should evaluate him over the long term--say, five years. Now he was being evaluated moment to moment. "Early on, people invested in me because of my letters," he said. "And then somehow after they invested, they stopped reading them." His fantastic success attracted lots of new investors, but they were less interested in the spirit of his enterprise than in how much money he could make them quickly. Every quarter, he told them how much he'd made or lost from his stock picks. Now he had to explain that they had to subtract from that number these...subprime mortgage bond insurance premiums. One of his New York investors called and said ominously, "You know a lot of people are talking about withdrawing funds from you."

As their funds were contractually stuck inside Scion Capital for some time, the investors' only recourse was to send him disturbed-sounding e-mails asking him to justify his new strategy. "People get hung up on the difference between +5% and -5% for a couple of years," Burry replied to one investor who had protested the new strategy. "When the real issue is: over 10 years who does 10% basis points better annually? And I firmly believe that to achieve that advantage on an annual basis, I have to be able to look out past the next couple of years.... I have to be steadfast in the face of popular discontent if that's what the fundamentals tell me." In the five years since he had started, the S&P 500, against which he was measured, was down 6.84 percent. In the same period, he reminded his investors, Scion Capital was up 242 percent. He assumed he'd earned the rope to hang himself. He assumed wrong. "I'm building breathtaking sand castles," he wrote, "but nothing stops the tide from coming and coming and coming."

Oddly,