The problem was how he made those billions of dollars. Burry’s initial investment thesis was stocks. When he pitched his fund to investors, it was a stock fund. Then, later, as Burry found that there was no way in the stock market to short the housing market, he branched out into the sorts of exotic collateralized debt obligations that would make him his profits.
From the perspective of his investors (a perspective I personally agree with), Burry was a loose cannon. The only reason he made a bunch of money instead of going down with every penny that his investors entrusted him with is that he managed to get lucky. Ask yourself, what would have happened to Burry’s fund if the housing market hadn’t cratered in 2007-2008. What if the housing market rally had gone on for another five or six years?
Ah, so they’re very grateful that he made billions of dollars with their money, but that it was through a process that had a massive amount of risk, and they just weren’t interested in risking that much again in the future.
I still think that they’d be interested in risking a smaller fraction of their money (e.g. give him 10-20% of what they gave last time and then invest the rest elsewhere). I don’t get the ‘frozen’ out part.
It’s not so much that the process had a massive amount of risk as it implemented a Taleb-style anti-fragile strategy. It lost money, by dribs and drabs every year when times were good, but when times turned bad, it made a massive amount of money. According to The Big Short Burry was paying out premiums on CDO insurance every year while times were good, and got the insurance payout when the market turned and things went bad. So, for three or four years, he was invested in these really weird securities, securities that his investors hadn’t signed up for, securities that were losing money, while they waited for a payout.
As far as why they wouldn’t be interested in risking a smaller fraction of their money, the strategy only works if you have enough buffer to wait out the good years and capitalize on the inevitable downturn when it happens. We’ve seen this with Taleb himself. While he did well in the dotcom crash and the global financial crisis, he’s had basically negative returns since.
Don’t think I disagree, I’ve made a very similar point to yours in a previous LW thread here.
Also, my point is not that the gains from being a correct contrarian in the financial market always outweigh the social punishment for contrarianism, or that you can always trade between the two currencies. But despite being frozen out of investing, Michael Burry is still a multi-millionaire. That is an interesting observation. It’s related to why I think Robin Hanson is excited about prediction markets—they present a remarkable degree of robustness to social status games and manipulability.
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Also I’m very curious about the outcome of Taleb’s investments (some people say they’re going awfully, which is why he’s selling books...), so please share any links.
The problem was how he made those billions of dollars. Burry’s initial investment thesis was stocks. When he pitched his fund to investors, it was a stock fund. Then, later, as Burry found that there was no way in the stock market to short the housing market, he branched out into the sorts of exotic collateralized debt obligations that would make him his profits.
From the perspective of his investors (a perspective I personally agree with), Burry was a loose cannon. The only reason he made a bunch of money instead of going down with every penny that his investors entrusted him with is that he managed to get lucky. Ask yourself, what would have happened to Burry’s fund if the housing market hadn’t cratered in 2007-2008. What if the housing market rally had gone on for another five or six years?
Ah, so they’re very grateful that he made billions of dollars with their money, but that it was through a process that had a massive amount of risk, and they just weren’t interested in risking that much again in the future.
I still think that they’d be interested in risking a smaller fraction of their money (e.g. give him 10-20% of what they gave last time and then invest the rest elsewhere). I don’t get the ‘frozen’ out part.
It’s not so much that the process had a massive amount of risk as it implemented a Taleb-style anti-fragile strategy. It lost money, by dribs and drabs every year when times were good, but when times turned bad, it made a massive amount of money. According to The Big Short Burry was paying out premiums on CDO insurance every year while times were good, and got the insurance payout when the market turned and things went bad. So, for three or four years, he was invested in these really weird securities, securities that his investors hadn’t signed up for, securities that were losing money, while they waited for a payout.
As far as why they wouldn’t be interested in risking a smaller fraction of their money, the strategy only works if you have enough buffer to wait out the good years and capitalize on the inevitable downturn when it happens. We’ve seen this with Taleb himself. While he did well in the dotcom crash and the global financial crisis, he’s had basically negative returns since.
Don’t think I disagree, I’ve made a very similar point to yours in a previous LW thread here.
Also, my point is not that the gains from being a correct contrarian in the financial market always outweigh the social punishment for contrarianism, or that you can always trade between the two currencies. But despite being frozen out of investing, Michael Burry is still a multi-millionaire. That is an interesting observation. It’s related to why I think Robin Hanson is excited about prediction markets—they present a remarkable degree of robustness to social status games and manipulability.
___
Also I’m very curious about the outcome of Taleb’s investments (some people say they’re going awfully, which is why he’s selling books...), so please share any links.
Also found this chain interesting. Thanks!
Thanks, this was really interesting.