Shorting subprime mortgages before 2008
A neurologist who quit medicine to run a fund, then spent two years being hated for a trade that turned out to be right. Burry's method is reading primary documents nobody else reads.
Burry trained as a neurologist and wrote about stocks at night on a message board, well enough that professional investors started sending him money. He opened Scion Capital in 2000 with a small inheritance and a reputation built entirely in public.
The trade he is known for came from reading. In 2005 he worked through the prospectuses of individual subprime mortgage-backed securities and found that the loans underneath them were far worse than the ratings implied. He then had to invent the instrument to bet against them, persuading banks to write him credit default swaps on mortgage bonds that had never been shorted before.
The position bled for nearly two years. His investors were furious, several sued, and he suspended withdrawals to stop the fund being forced out of the trade before it paid. It eventually returned close to 490% for those who stayed. The lesson people take from this is usually the wrong one: the story is not that conviction pays, it is that conviction without survivable structure would have paid nothing.
Where it fails: Burry has called several crashes since that did not arrive on his schedule. The method finds genuine fragility but says almost nothing about when fragility becomes a break, and a permanent bear is right expensively and rarely.
Biographical reference only. Nothing here is investment advice, and no affiliation with or endorsement by the people profiled is implied.
