Getting It Right Once Can Be Enough To Retire
What do all those investors who have profited from market inefficiencies in extreme situations have in common?
It is 2005 and Michael Burry starts buying CDS (Credit Default Swaps) on some subprime mortgage bonds. He is convinced that they were going to explode in two years, the moment the interest rates that the system had kept artificially low would rise. No, I am not talking about 2021.
In 2007, subprime mortgages stopped paying off as Burry had predicted, and, in the middle of 2008, he and his fund’s investors made a net profit of 489.34%. Burry alone, not including his fund, made a profit of $100M. Thereafter, he closed the fund and went on to live off and manage his own capital.
This story of Michael Burry is not an isolated one. There are countless cases of people who have benefited from the inefficiencies of the markets and who, as a result of a specific event or ‘black swan’, have retired to devote their lives to other things.
Among the most outstanding examples, we have Nassim Taleb, Lebanese researcher and financier, who took advantage of the collapse of the Dow Jones in 1987 to make a fortune that allowed him to leave his position in a well-known investment bank and dedicate himself to writing essays, books (some of them best-sellers) and continuing his research.
Another case to highlight could be that of the liberal Harry Browne, a financial advisor, writer and liberal politician who managed to accumulate a great fortune during the ’70s by speculating in commodities. From then on, he devoted himself to his love of politics and to develop an investment strategy based on stability and known as ‘The Permanent Portfolio’.
These are just a few examples of the many who have achieved financial independence from one-time events. But what do they all have in common?
Focus on the odds
Most investors would rather have a 99% chance of making $1 than a 1% chance of making $100.
All of them are aware of the risk/reward trade-off and try to minimize it as much as possible so that in case they lose, the losses are minimal.
Perhaps for a person who does not want to take risks, the most sensible thing to do is to invest in a world index (ACWI), since keeping the money in cash is even riskier. This will lead to excellent returns, but let us be aware that it is extremely difficult to achieve the stratospheric returns we have talked about above.
Use leverage to your advantage
“In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” — Warren Buffett
All of the above cases have required the use of derivatives in order to multiply their profits exponentially. This requires perfect knowledge not only of the underlying but also of the derivative itself.
In addition, they use these derivatives in convictions they have in specific assets.
All of them have been able to postpone minimal returns in the present for much higher returns in the future. This aptitude is well contextualized by Spitznagel with his ‘Roundabout Path’ philosophy which consists of getting rid of instant gratification in the short term, as most investors seek, for much greater gratification in the long term.
Moreover, today’s market is being driven by retail speculators and as Burry rightly says:
“All the hype/speculation is doing is attracting retailers in the face of the mother of all crashes. When cryptocurrencies fall out of the trillions, or meme stocks fall out of the tens of trillions, #MainStreet losses will approach country size. The story hasn’t changed.”
Pursuing this freedom is precisely what we seek with our portfolio, we firmly believe that we are in a market situation where central bank policies are not being adequate and that sooner or later it will explode. To this end, we share our portfolio on a weekly basis and in such a way that an individual can replicate all those movements in order to benefit as much as possible from another possible black swan:
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.