- wanted to bet on stocks going up frather than stocks going down. “I am not a short at heart. I don’t dig into companies looking to short them, generally. I want the upside to be much more than the downside, fundamentally.” He also didn’t like the idea of taking the risk of selling a stock short, as the risk was, theoretically, unlimited. It could only fall to zero, but it could rise to infinity.
- Investing well was all about being paid the right price for risk. Increasingly, Burry felt that he wasn’t. The problem wasn’t confined to individual stocks. The Internet bubble had burst, and yet house prices in San Jose, the bubble’s epicenter, were still rising. He investigated the stocks of homebuilders and then the stocks of companies that insured home mortgages, like PMI. To one of his friends—a big-time East Coast professional investor—he wrote in May 2003 that the real-estate bubble was being driven ever higher by the irrational behavior of mortgage lenders who were extending easy credit. “You just have to watch for the level at which even nearly unlimited or unprecedented credit can no longer drive the [housing] market higher,” he wrote. “I am extremely bearish, and feel the consequences could very easily be a 50% drop in residential real estate in theU.S.…A large portion of current [housing] demand at current prices would disappear if only people became convinced that prices weren’t rising. The collateral damage is likely to be orders of magnitude worse than anyone now considers.”
- He gave a talk [at a Bank of America cap intro conference] in which he argued that the way they measured risk was completely idiotic. They measured risk by volatility: how much a stock or bond happened to have jumped around in the past few years. Real risk was not volatility; real risk was stupid investment decisions. “By and large,” he later put it, “the wealthiest of the wealthy and their representatives have accepted that most managers are average, and the better ones are able to achieve average returns while exhibiting below-average volatility. By this logic a dollar selling for fifty cents one day, sixty cents the next day, and forty cents the next somehow becomes worth less than a dollar selling for fifty cents all three days. I would argue that the ability to buy at forty cents presents opportunity, not risk, and that the dollar is still worth a dollar.”
- “Sometimes markets err big time. Markets erred when they gave America Online the currency to buy Time Warner. They erred when they bet against George Soros and for the British pound. And they are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not exist. Opportunities are rare, and large opportunities on which one can put nearly unlimited capital to work at tremendous potential returns are even more rare. Selectively shorting the most problematic mortgage-backed securities in history today amounts to just such an opportunity.”
- “It is ludicrous to believe that asset bubbles can only be recognized in hindsight,” he wrote. “There are specific identifiers that are entirely recognizable during the bubble’s inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud.… The FBI reports mortgage-related fraud is up fivefold since 2000.” Bad behavior was no longer on the fringes of an otherwise sound economy; it was its central feature. “The salient point about the modern vintage of housing-related fraud is its integral place within our nation’s institutions,” he added.
- 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. “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 Mountain. “There is no golf or other hobby to distract me. Seeing value is what I do.”
- When he’d started Scion, he 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.”
- “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% or 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.”
- In January 2007…Michael Burry sat down to explain to his investors hw, in a year when the S&P had risen by more than 10 percent, he had lost 18.4 percent. A person who had had money with him from the beginning would have enjoyed gains of 186 percent over those six years, compared to 10.13 percent for the S&P 500 Index, but Burry’s long-term success was no longer relevant. He was now being judged monthly. “The year just completed was one in which I underperformed nearly all my peers and friends by, variably, thirty or forty percentage points. A money manager does not go from being a near nobody to being nearly universally applauded to being nearly universally vilified without some effect.”
- “I have always believed that a single talent analyst, working very hard, can cover an amazing amount of investment landscape, and this belief remains unchallenged in my mind.”
- “With all that has gone on recently, I’ve had the opportunity to talk with many of our investors, which is the first time I’ve done so in the history of the funds. I’ve been shocked by what I’ve heard. It appears that investors only have passingly paid attention to my letters, and many have been clinging to various rumors and hearsay in place of analysis or original thought. I’ve variably launched a private equity fund, tried to buy a Venezuelan gold company, launched a separate hedge fund called Milton’s Opus, got divorced, got blown up, never disclosed the derivatives trade, borrowed $8 billion, spent much of the past two years in Asia, accused everyone but me on Wall Street of being idiots, siphoned off the capital of the funds into my personal account, and more or less turned Scion into the next Amaranth. None of this made up.”
Jim Chanos
“What we define as a bubble is any kind of debt fueled asset inflation, where the cash flow generation from the asst itself a rental property apartment building does not cover the debt service and the debt incurred to buy the asset. So you depend on the greater fool. Minsky called it Ponzi finance, meaning you need the greater fool to come in and buy it at a higher price because as an income producing property it’s not going to do it. And that’s certainly the case inChinaright now.” — Jim Chanos, 4-12-10
“Chinais a world class if not the world class property bubble, primarily high-rise buildings, offices and condos.” – Jim Chanos, 4-12-10
“Bubbles are best identified by credit excesses, not valuation excesses.” – Jim Chanos
“I call it the Rule of Three. If you read a company’s financial statements three times, and you still can’t figure out how they make their money, that’s usually for a reason.” – Jim Chanos
Regarding the notion that since security prices are bounded by zero and infinity, it is always better to be long. “I’ve seen a lot more go to zero than infinity.” – Jim Chanos
More thoughts from Chanos’s 2010 CFA conference presentation:
- According to Chanos, citing CFO magazine, 2/3 of all CFOs have been asked to cook the books (55% declined, but 12% did it.)
- Always a good idea to avoid management, since they’re either clueless or lying.
- Two ways to handle risk: stop loss orders (but fundamentals, rather than price alone, should dictate the outcome) and position sizing. Chanos sizes short positions between a minimum 0.5% and maximum 5%.
