The most difficult subjects can be explained to the slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already without a shadow of a doubt, what is laid before him.
In early February of this year, my roommate Ben recommended I read The Big Short by Michael Lewis. This book tells the story of individuals who foresaw the impending 2008 financial crisis and made off like gangbusters by betting against the housing market.
The 10-20 people in the world to pull this off included Steve Eisman, an “offensive” and “obnoxious” fund manager at Frontpoint Capital who was convinced the entire mortgage lending market was a giant Ponzi scheme. Charles Ledley and Ben Hockett started a hedge fund in their garage with $110,000 in a Schwab account. Being contrarian and using “event-based investing,” they grew their fund to $120 million by the time the market crashed. Then there was Michael Burry an ex-neurologist with Aspergers who discovered the absurdity of the market in isolation by looking at data and human incentives.
After reading Lewis’ sober and hard-bitten prose, my reaction was the exact opposite as Ben’s. Whereas he was indignant of our modern financial system’s unfairness and misaligned incentives, I was excited by the prospect of getting in on a piece of the action. The Big Short painted a bleak picture of the excesses of corporate greed and the horribly misguided leveraging of middle-class America, but it also showed that silver linings exist even in catastrophic events if you can predict them. Ben wanted to fix the system. I was more interested in figuring it out and exploiting it for personal gain.
Lewis writes that financiers are marked by an “animal impulse to see the world as it is, rather than as it should be.” Perhaps I’ll write a future post about this darker side that we all have, but for now I’ll summarize what Ben and I were inspired to do.
We researched Tesla, an electric car company, for a week and became confident in the company’s ability to ship more cars than the market expected. Then I bought 500 shares at $38.30. After TSLA went down to $35.10, I bought another 600 shares. This pushed me into margin by over $8,000. I sold these 600 shares after Tesla increased to $36.43 and came away just about break-even. A few weeks later, TSLA announced it expected to be profitable for the first time, and the market went wild driving the stock up 22% in a couple of hours to $46.22. I cashed out the remainder of my shares at $46 and had a total realized gain of $4,894.79. That was a good day, but if I had kept those other 600 shares, I would’ve made almost 12 grand.
I’m not deluding myself by thinking this wasn’t mostly blind luck. I’ve made bad bets before, but my track record has been slightly positive. Going forward I’ll reread the notes I took on Benjamin Graham’s The Intelligent Investor and do more thoughtful fundamental analysis.