When Michael Burry correctly predicted the subprime mortgage crisis that led to the 2007 financial crisis, he did so 2 years earlier. He was sure the market was about to crash and purchased credit default swaps with banks which required him to pay interest for the following two years until the market crashed. Over the course of those 2 years, he lost the trust of several of his investors, but when the market crashed in 2007, he made a profit of just under 490% for his investment firm. Burry’s story was covered in the 2015 movie, The Big Short.
Burry at the premier of the Big Short in 2015 (source: cnbc.com)
Burry was influenced by Graham and Dodd’s book Security Analysis released in 1934, which still has relevance today. Burry also shorted Tesla and got that call wrong, although he was right in the assumption that Tesla’s stock was overvalued. However, timing plays an important role in the stock market, because even if you know your analysis is accurate,
the market can remain irrational for longer than you can remain solvent~Keynes (1930)
Things you learn as an investor
- Verify your sources
Source: SouthPark
An investor needs to verify the source of their information which they use to make an investment decision. For example, an investor may access company books which are published by the company. The investor needs to ensure the books are audited, and confirm the information from external sources as well. Investors can access external sources of information from outside the company such as studies by analysts, news articles, journals, etc. However, an investor also needs to verify the data as much as they can including the source of the information.
2. Expectations of a quick buck
Source: giphy.com
A significant portion of new investors approach the investing market with the expectation of making a quick buck, and being able to repeat the process. However, making a quick buck in the stock market is hard. Long-term investors invest regularly and think about the long term while short-term investors think about short-term gains.
Investors looking for a quick profit can make a series of bad decisions which leads to losses. For example, consider an investor looking to make some quick money because they need to pay off a debt. They take a loan, and invest in stocks, but the stock market is moving too slowly, so they decide to trade futures and options instead. One wrong trade sees the investor’s remaining funds wiped when they get margin called by their broker. It’s important investors don’t make investments out of desperation or based on unrealistic goals. If an investor deviates from their long-term investing plans, then they’re sure to make mistakes along the way.
3. Delay gratification
Source: Southpark
Delaying gratification or postponing something you want now to a later date may seem hard, but it’s a helpful process that enables an investor to plan for the future. An individual that can delay gratification by not getting the latest iPhone as it releases because they have a perfectly working phone will be in a better position to save and invest today, and buy in the future. However, investors shouldn’t delay necessities such as education, medication, food, etc.
Investors should invest in themselves from time to time. An investor just looking at the charts isn’t going to make a difference to a long-term holder. Similarly, an investor looking at their account balance or portfolio balance isn’t going to have an impact on the outcome of the portfolio. Investors should spend time and invest in educating themselves about various components of finance and investment.
4. Time beats timing
Jim Carrey in Dumb and Dumber (source:giphy.com)
An investor investing for the long-run generally beats an investor trying to time the market. The markets are unpredictable in the short run and it’s hard for any investor to accurately predict which direction the market is going to go day in and day out. However, looking at longer term trends, investors can beat the market by staying invested in for the long-term. Peter Lynch’s fund managed to beat the market consistently for several decades. Check out his book ‘Beating the Street’.
5. Don’t take excessive risks
The Wild Thornberrys (source: giphy.com)
Investors should take risks based on how much they can afford to lose without it actually affecting them. Investors should avoid taking excessive risks (stocks or crypto) when utilising important funds such as fees, rent, creditor payments. Fixed interest instruments such as government bonds or fixed deposits give investors a fixed return, while also keeping the principal amount secure.
