31 January 2007 The Day the Market Broke
First, he sold bonds on Wall Street back in the late eighties. Then he wrote about the experience in Liars' Poker. Now he is back with a book about the recent debacle entitled The Big Short. Already targeted for production as a movie (Osinski, 96), Michael Lewis' latest plays up the few players in the recent market who really made money, the ones who figured out that there was something wrong with all those mortgages out there, and figured out how to short the mortgage market, all to derision, first, and for great wealth, later. Osinski does a little digging and quotes an optimistic Lewis the day before the bond market broke in January 2007 and compares the quote with Lewis' final realization that, whoops, was he wrong. Rubbing it in when someone takes a bad stand is always fun for Monday morning quarterbacks, as it were.
Lewis got it wrong way back when. Luckily, the star of his book didn't. Michael Burry, a resident neurosurgeon, typed his predictions of doom into the ethers of the web as it existed in the late 1990's (Osinski, 95). People noticed, and sent him money to invest. He continued researching, hitting ultimately on the realization that mortgages "would start to blow up...when the original teaser rates expired" (Osinski, 96). Burry figured out how to invest his point of view and made a fortune.
Contrarians are always interesting to review in hind sight especially if they made money. There are always grey clouds over booming markets. The trick is to know when the rain is going to start. Modern strategy says have a plan and invest heavily in it. It is sensible to realize that everything good ultimately goes bad. Having a plan - having alternative investments already cooking - makes sense in any market. Right now, that means, yes, continue to improve the products and services your current customers happily buy. However, realize that it makes sense to invest in simpler, cheaper combinations for markets you might not normally address. Left a market behind in the last decade? It might make sense to look back to those customers to see if they might be interested in what you are making today, but at a cheaper price/feature point. If they're interested, maybe you have a way to grow, even in a slow growth market.
References
Lewis, Michael. The Big Short: Inside the Doomsday Machine. W. W. Norton. 2010.
Osinski, Michael. The Subprime of Their Lives. Bloomberg Businessweek. 22&29 March 2010. 94. http://www.businessweek.com/magazine/content/10_12/b4171094664065.htm