But there is another type of trade that is put on by big players that requires a long term outlook, a special talent for going against accepted thinking, and the patience of a saint. This is the long-term "bet" that the rest of the world is wrong, based typically on a top-down broad view of economies and markets. Soros et. al. are famous for this type of blockbuster billion dollar trades. This is the kind of trade described by Michael Lewis in The Big Short. Lewis describes a number of individuals who put it all on the line and bet big against the housing market and conventional wisdom. They believed that the rating agencies, the investment bankers, and even Alan Greenspan and friends were all dead wrong. It is a must read for any student of markets.
Michael Burry is one of the traders profiled. After it was all over, he writes:
"I must say that I have been astonished by how many people now say they saw the subprime meltdown, the commodities boom, and the fading economy coming," Burry wrote, in April 2008, to his remaining investors, "And if they don't always say it in so many words, they do it by appearing on TV or extending interviews to journalists, stridently projecting their own confidence in what will happen next. And surely, these people would never have the nerve to tell you what's happening next, if they were so horribly wrong on what happened last, right? Yet I simply don't recall too many people agreeing with me back then."
(p.246, The Big Short, Michael Lewis)
Two more investors in the book were Jamie Mai and Charlie Ledley, two 30-year-old men, working out of a friend's garage in California in early 2003 with a $110,000 Schwab account. They called themselves Cornwall Capital Management, and Wall Street called them "Cornhole Capital." They were only able to find one Wall Street firm that would do business with them - you guessed it, Bear Stearns. They turned the $100,000 into $30 million by forseeing the meltdown of the U.S. housing market and learning how to put on the short trade.
"Jamie Mai was tall and strikingly handsome and so, almost by definition, had the art of a man in charge - until he opened his mouth and betrayed his lack of confidence in everything from tomorrow's sunrise to the future of the human race. Jamie had a habit of stopping midsentence and stammmering - "uh, uh, uh" - as if he was somehow unsettled by his own thought, Charlie Ledley was even worse. He had the pallor of a mortician and the manner of a man bent on putting off, for as long as possible, definite action. Asked a simple question, he'd stare mutely into space, nodding, and blinking like an actor who has forgotten his lines, so that when he finally opened his mouth the sound that emerged caused you to jolt in your chair. It speaks!". (p. 108, The Big Short, Michael Lewis).
As an academic exercise, suppose you feel very strongly about something that the rest of the world doesn't see. How would you go about putting on a trade to profit from your perceived insight? That was where Jamie and Charlie stood in early 2003 with their $110,000. They had no idea of how to put on a trade to make money from a collapsing housing market. They set out to learn how. Along the way, they kept asking people what was wrong in their thinking. After all, if 99 people out of 100 said that housing prices must continue to rise, how could one person say they were all wrong?