Novel Investor • Page 7 of 13 • Compounding investing wisdom...

How WorldCom Bonds Led to Michael Burry’s Housing Bet

September 27, 2019

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Jon

Michael Burry’s bet against the housing bubble began with WorldCom bonds. Had he never learned from his WorldCom bet, it’s unlikely his housing bubble bet pays off so big.

Here’s the thing, Burry made money on WorldCom bonds. But he missed out on a lot more. So he asked why?

I was onto WorldCom pretty early and they went from investment grade to bankrupt overnight. And so, I ended up doing okay with their bonds on the way back up. But, I wondered why didn’t I make more money on this? And so, I wasn’t a short. I don’t like to short equities… So I basically noted though, it went investment grade to bankrupt overnight. And it hit me. That’s the way to short companies that you think look so gilded now, but you think might tumble, as a result of asymmetric risk taking — so, especially leveraged companies. And I noted that there were a lot of these highly-rated, super leveraged companies where you could buy credit — because you can’t buy credit default swaps on junk or stuff that’s below investment grade. So, that was how I came to investigate CDS’s. So I bought books.

The right question drove Burry to learn about credit default swaps. Then he sat on the information.

As he explained in his FCIC interview, a look into home builders was the next thread that eventually led to his big short: Continue Reading…
Peter Bernstein: Embracing Mistakes

September 25, 2019

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Jon

Stan Druckenmiller once said, “Every great money manager I’ve ever met, all they want to talk about is their mistakes. There’s a great humility there.”

So what’s the benefit of constantly talking about their mistakes? For one, they embrace the inevitable.

Investing is just a long series of decisions where some end in gains and others end in losses. If you’re doing it right, the gains outweigh the losses in the end, hopefully, by a large enough margin that your goals are reasonably satisfied.

In other words, every investor makes mistakes. Those that don’t are lying. That’s the uncomfortable truth. Those that go on to be great investors, learn this through experience…and apparently love to talk about it.

Howard Marks, in his latest book, shared a great excerpt by Peter Bernstein which drives home the importance of this realization and why it matters: Continue Reading…
Wise Words from Gerald Loeb

September 20, 2019

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Jon

Gerald Loeb’s classic might as well be called The Battle for Investment Survival and other writings. The original was published in 1935.

Since then, it’s been revised so many times that it’s doubled in size. In the copy I read, the other writings made up half the book.

The writings are a collection of articles and lectures by Loeb that repeats his main points on investing and strays into a number of other topics — taxes, retirement, job advice, travel, architecture, and a recipe for ice cream soda. So because of that, I purposely left most of it out of the notes.

That said, Loeb is highly quotable, so here are a few lines that stood out: Continue Reading…
A Few Lessons from The Battle for Investment Survival

September 18, 2019

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Jon

Investing is more art than science because psychology affects prices. That’s what makes investing difficult.

Yet, the difficulty is what most investors underestimate at first. Gerald Loeb points out the difficulties of investing throughout his book, The Battle for Investment Survival, before finally summarizing it:

The most important things any reader of these chapters can learn are likewise that investment and speculation are difficult, not easy; uncertain, not clearcut; treacherous, not logical. Here, more than anywhere in the world, is the land of illusion. Things are not what they seem. Two and two don’t always make four. “Stocks were made to sell.” Caveat emptor —”Let the buyer beware.”

And that’s the first of many lessons from the book. Here’s another. Losing is part of the battle: Continue Reading…
The Battle for Investment Survival by Gerald Loeb

September 18, 2019

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Buy the Book: Print

Gerald Loeb takes the contrary view that preservation capital requires some level of speculation to earn a return high enough to overcome the inevitable “losses” investors will experience in their lifetime.

The Notes

Continue Reading…
Philip Carret on Forecasting Market Swings

September 11, 2019

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Jon

There’s a long history of market timing methods that work some of the time. Yet, the search for the holy grail strategy to get in and out of the market before every turn has been a failed endeavor. That hasn’t stopped people from searching or trying the latest and greatest method that worked twice in a row.

I’ve been reading a series of articles written by Philip Carret in 1926-27. Buffett was a big fan of his (so I did some digging). Carret would base a book on the series — The Art of Speculation — titled with the same name.

Despite the title, Carret was a value investor. He would go on to found one of the first mutual funds in 1928, ran it for the next 55 years while beating the market in the process. He also had a solid understanding of market history, market cycles, and the tendencies of its participants.

In one article, he points out why market timing methods fail eventually and how difficult forecasting can be. Continue Reading…

How WorldCom Bonds Led to Michael Burry’s Housing Bet

Peter Bernstein: Embracing Mistakes

Wise Words from Gerald Loeb

A Few Lessons from The Battle for Investment Survival

The Battle for Investment Survival by Gerald Loeb

The Notes

Philip Carret on Forecasting Market Swings