I have a hot take that’s been pre-heating in the oven for a while that goes like this:
The Big Short by Michael Lewis has lost investors more money than the last 3 bear markets combined.
Allow me to explain.
We’ve all read (or watched the movie) about the band of misfits who made a contrarian bet against the housing market and made a fortune.
Unfortunately, I think a lot of people took the wrong lessons from Lewis’s book.
Few people saw the Great Financial Crisis coming. The book made it seem so obvious in hindsight that a bunch of investors decided they could do the same thing if they were only given another chance.
I too can be the next John Paulson or Steve Eisman!
Everyone wanted to find the next Big Short and become an unexpected financial hero.
The problem with finding once-in-a-lifetime trades is they only come around like once…in a lifetime.
John Paulson made billions shorting the subprime mortgage market. You know what happened to Paulson after making the greatest trade ever?
Not much really.
People were throwing money at the guy, there was a gold-denominated hedge fund right as gold was peaking and eventually, he decided to run all the billions he made and close up shop.
Lightning didn’t strike twice.
The endowment fund I used to work for invested in a hedge fund that made a tiny bet with Paulson’s subprime short but it was such a small piece of their portfolio that it didn’t make help their overall returns very much during the crash.
But they got a taste of what it was like to hit the jackpot on that kind of bet so they created a new fund that was tasked with finding the biggest and best trades. They shorted Japanese government bonds and a bunch of other stuff that didn’t pan out. That fund closed too.
As much as some people would like to watch the world burn, we don’t get a global financial crisis every year.
The lesson people should have taken away from the 2008 debacle is that the markets can be a humbling place.
Instead, many people assumed the takeaway is being a contrarian is the best way to make money at all times. Being contrarian felt like a more comfortable stance to take.
Don’t get me wrong, going against the grain at opportune moments can be a wonderful strategy. The best investment opportunities almost always occur when there is blood in the streets.
The problem is you can’t be a contrarian at all times. Most of the time the trend is right and fighting it is a losing strategy.
As Jeff Bezos once said, “Contrarians are usually wrong.”
Warren Buffett is famous for being greedy when others are fearful. Guess what Buffett’s biggest holding is now? Apple. Literally the biggest company in the U.S. stock market.
There just aren’t that many opportunities to swing at fat pitches these days.
The Great Financial Crisis broke so many brains that instead of admitting the error of their ways, many of these newfound contrarians dug their heels in.
I’m not wrong, I’m just early!
I would have been right if it wasn’t for the Fed!
Listen, the system didn’t collapse yet but it was close.
If none of those excuses work then you start questioning the data.
Surely it’s not me that’s wrong. It’s the economic data!
Listen, I don’t really hold Michael Lewis personally responsible for all of the perma-contrarians that were born out of the 2008 crisis.
It’s not his fault he crafted such wonderful stories about the people who bet against the housing industry and won.
I do think a lot of investors missed out on one of the biggest bull markets in history and will be constantly in search of the next big short to their own detriment.
The life of a perma-bear looks something like this:
Wrong.
Wrong.
Wrong.
Wrong.
Right. I told you so!
Wrong again.
Wrong.
Wrong.
Still wrong.
You get the picture.
I get the appeal of trying to bet against the system to find fame, glory, profits and Steve Carell or Ryan Gosling playing you in the movie version.
Fingers crossed, maybe one day you’ll win the lottery.
But is that really a strategy that gives the highest probability of success?
Call me crazy but I prefer betting on the big long over trying to find the next big short.
Further Reading:
Re-Kindled: The Big Short
