Steve Eisman’s Wisdom

Question: Is there any wisdom you can impart to average investors?

Do your own homework. I can’t overstate the importance of this. When things start to go bad, speaking to the management of the company may be the worst thing you can do. You can walk away thinking things are okay when in fact they’re not, because seeing outside your own paradigm is sometimes the hardest thing to do. In the big-bank industry from 1995 up until the crisis, every year was basically a good year. Every year, people got paid more, and every year the leverage got bigger. What happened is that the people who ran these firms mistook leverage for genius. If you had gone to one of the senior people in one of these firms in 2006 or 2007 or 2008 and said, “Dude, the entire assumptions by which you have governed your career are wrong,” they would have said, “Are you crazy? I made $50-million last year. How could I be wrong?”

source:  Invest like a legend: Steve Eisman

Even after reading the above, I probably will at times not do my own homework, trust management, and/or lend too much credence to someone due to their recent financial gains…but I am posting this here so I can read this before banging my head against the wall (the next time I err…and there will be a next time).

How To be a Hedge Fund Douchebag: for Dummies Edition

The politicians (and occasionally) media love to vilify “hedge funds” and “hedge fund managers” in an almost Pavlovian manner. I personally think their knee-jerk and indiscriminate hate is unwarranted (especially when your child’s spouse is a hedge fund manager). Having said that, there are times when certain hedge fund professionals live up - and exceed - the douchebag stereotype:

  • You make someone an offer. He/she accepts (after he/she has already slaved away for you before).
  • You don’t provide concrete documentation, instead telling him/her (for several) months you are “working on it”.
  • You ask them for some information, in order to “help put the package together”
  • You then send an e-mail saying the offer is now out of the table. And you offer a bullshit explanation.

Make no mistake: if you make an enemy out of my friends, you make an enemy out of me. I totally understand that sometimes circumstances merit hiring freezes, delays, etc… but otherwise?

It’s a small world and…I eagerly look forward to following your career and 13Fs.

Oil & All Risk Assets Seem to Be Begging Mr. Market for a Sacrificial Lamb

I’m writing this so I can look back and understand what was happening at this period in time. The markets humble all. The markets humble me. Some of my best trades have gone meaningfully against me before paying off handsomely. Other times trades have gone against me…and they just continued to go against me.

I don’t think anyone fully knows what is driving the (statistically significant) decline in risk asset prices world-wide. Some blame the Federal Reserve’s ‘raise’ (despite the fact that rates have actually only declined since). Others blame oil/commodities. Others blame the Sovereign Wealth Funds of these commodities-dependent countries. Yet others blame China currency, and China “macro”. Some have pointed out the European bail-ins. And then there are those who simply attribute it to “cycles”. (even wilder, are the Saudis want it, conspiracy theories).

I don’t know the answer. I do know, however, that the following is a FACT (not opinion): the current decline in oil prices (crude oil spot,as of intraday low for today), from peak to trough, is around -75%…that is the worst decline in history. The other comparable declines (both in the -70% territory) occurred in the 1980s and 2008-2009 respectively. This decline has exceeded both of those prior declines. We are in unchartered territory.

Here’s another fact: the decline in overall risk asset prices since January 1, 2016, has coincided with the accelerated decline of oil prices.

Now, I am not smart nor informed enough to understand nor articulate causation: why are oil prices down? why are they down so much? Some say it’s all supply, specifically pointing to the US shale boom (energy independence!). Or Iran supply. Others point to demand weakening, or anticipated demand weakening, e.g. China (China constructed more blah blah blah than the world has ever seen). Then there’s the credit element to all this. And the strong USD. Again, I don’t know. All I know is whatever serious (or not so serious) supply/demand problems exist, the market is very LOUDLY - in the form of the -75% decline - reflecting that yes, there are some serious problems. Serious problems lead to historical price declines.

Yet another fact: risk asset prices declined - somewhat indiscriminately - in the “correlation -> 1” fashion. It’s as if there were only 2 trades: You’re either long risk assets, or short risk assets (okay fine: you might be fully in cash). Why? again, I don’t know…but I do know that risk assets have historically tended to move together when there is forced selling, market panic, and/or climactic anticipation of some major event.

Which leads me to…

Putting all the above facts together: I can only reasonably conclude that the risk markets are demanding something from the oil complex. Risk assets want a sacrificial lamb as substitutionary atonement. Risk assets don’t care that the intrinsic value of some companies are actually RISING with lower oil prices. No, the market seems obsessed with the fact that the lower the oil prices go, the closer/faster that the intrinsic value of the equity of many of these oil companies -> zero. Market prices don’t merely reflect reality..they alter them too. In fact, perhaps 30-40% of these equities are already intrinsic zeroes. But we have yet to see a major casualty. Let’s suppose that there were a major casualty today/this week/YTD, or several casualties. You generally don’t hear about them at the lows… you tend to hear about them several days/weeks afterward.

We may experience violent bounces (as they say, the worse things get, the less it takes to turn things around), even without a major episodic casualty. but it seems that given all the above facts/conditions the markets need a sacrificial lamb before “bottoming” for good.

The alternative is that risk assets need another narrative to replace the oil one.


2016 and The Limitations of Contrarianism

I find writing immensely therapeutic. and after the last two weeks of banging my head against the wall on a daily basis, I really could use some therapy. Writing may even help me recover from the brain-damage resulting from all this head-banging.

I’ve always had the (un)natural tendency to do or think the opposite of what others think or do. I’ve tended to be contrarian before I even knew the word existed.

What I learned over the years, regarding contrarianism for the purpose of investment/trading:

  • It often leads to losing $ (i.e. “permanent capital impairment”). See oil equity longs circa 12 months ago, and ever since.
  • It tends to be a necessary (but insufficient) characteristic for my best trades (ever)
  • measurement of contrarianism/crowding can be highly valuable…or garbage-in, garbage-out.
  • It is a lonely place to be. Not where you go to make friends.

So I would like to point out a few facts, for my own and posterity’s edification:

  • Many members of The Street/Sellside have been fairly bearish since the end of last year/beginning of this year.
  • Sentiment measures/indicators have been negative.
  • Some measures of positioning have been fairly bearish.
  • Gartman has been as right as he’s been wrong.
  • Harry Dent is looking like a genius.
  • CNBC “markets in turmoil”
  • “2008” and “crash” have been mentioned far more frequently than normal

All the above preceded - yes, preceded - further declines in US equities. If one possessed a Niederhofferian faith in the validity of such signals and contra-signals, and followed the natural course of reasoning and therefore bet in the other direction, one would be down more than -10% YTD. The path to blowing up.

Looking forward, the following complicate matters further:

On one hand,

  • a certain levered long operator (posing as a hedge fund) who seems to have a penchant for blaming quants/HFTs/the boogeyman anytime his fund is down, goes on TV to tell the world he is.. <drumroll> bullish
  • Whitney Tilson, a fan favorite, expressing bullishness.

On the other hand,

  • AAII Sentiment
  • other sentiment indicators, e.g. put/call, etc (something something since Lehman).
  • Markets in Turmoil
  • Mainstream nightly news
  • “2008” and “crash” continue being mentioned far more frequently than normal
  • “funds running net shorts this week surpassed 20%, only 3rd time over last 10 years (prior GFC ’08 and European Sovereign Crisis ’11).”

Some food for thought:

  • A certain macro hf mgr earned enough (unclear if realized or not) just in the last 1-2 weeks (on bearish bets), to wipe out his entire 2015 double digit losses. Another hf mgr (one of the best performing last year), is up half of what they were up in 2015….in the first 2 weeks of 2016.
  • Some funds (the ones that were down -20% or more) probably stand at a knife’s edge… I think it will be difficult for them if market correction this year goes beyond 10-20%. Beyond down 30-40% is very difficult to recover from. -40-50% is (arguably) escape velocity.
  • 2 weeks of 2016 feel like 4-6ish months of most years. I believe my ‘feeling’ squares with statistics. it is with merit.
  • There’s only one person I know (personally) who got the recent price movement(s) right for the reasons… he’s the only one who alerted to look toward China back in November/Draghi, while all eyes were on Draghi/Yellen… even better, he ex ante explained the mechanism by which x -> y -> z… what’s amazing is even after these moves, I’ve seen NO ONE explain the mechanisms!
  • I need to (resume) reading more 10Ks.
  • I mentioned the word ‘bifurcation’ weeks before the new year.  I see more people (via different analytical methods) coming to same conclusions now. Unfortunately, I don’t think there’s been any resolution yet. The only thing that has changed is that risk assets are currently priced lower.
  • There’s one area in markets (I think only?) where I see price momentum…and signs of parabolic rise. I love parabolas.
  • Perhaps widespread confusion may be best explained by a rather simple observation: one chapter ended , and we’re now in a new chapter. No one really knows the rules of this chapter…but what we do know is that those who best exploited the “rules of the game” of the prior chapter are the ones experiencing greatest pain and confusion. I can think of at least 3 different types of market operators/strategies that fit the bill.

Here is a chart to think about (courtesy of my friends at zerohedge):


Michael Burry Does Not Think Another Financial Crisis Is Looming (?)

New York Magazine‘s recent piece about Michael Burry, is titled Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming. The problem is that the title’s main claim - that Burry believes another financial crisis is looming - appears to be nothing more than a dubious inference made by the author (call me cynical, but…perhaps to attract eyeballs?). Burry’s actual on-the-record statements do not support that claim… at least to me.

The following statements from Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming would superficially appear to support the “Burry thinks another financial crisis is looming” thesis (in red are my opinions as to why they do not):

  1. The little guy will pay for it — the small investor, the borrower. Which is why the little guy needs to be warned to be more diligent and to be more suspicious of society’s sanctioned suits offering free money - Michael Burry is simply saying that no major C-Level executive who contributed to/caused the Credit Crisis pre-2008, specifically fraud-related offenses, were punished to this very day, while plenty of “little guys” did. He’s saying that the same American “Justice” system that have left these criminals untouchable remains intact, and that the “little guy” should watch after his/herself. HE IS NOT PROGNOSTICATING A FINANCIAL CRISIS.
  2. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook - Burry is saying the system is fragile to any shocks due to low interest rates and/or the Federal Reserve’s monetary easing policies. He’s making a descriptive, not predictive point (i.e. “the system is fragile”, not “the system will break”)
  3. What makes you most nervous about the future? Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me - Burry is simply answering the question with what he believes is the biggest ‘Risk Factor’ Americans faces. Nowhere does he elaborate on how serious, or how imminent.
  4. The last line of the movie, printed on a placard, is “Michael Burry is focusing all of his trading on one commodity: Water.” It sounds very ominous - Author This leading question by the author only serves to betray the author’s bias that Burry’s focus on water investing is sufficient proof that Burry is bearish. The inference the author appears to be making is that Burry must believe that the US faces some kind of Mad Max dystopian future, evidenced by his focus on water investing. I believe this is faulty reasoning. I personally can think of one non-macro-bearish future path of the world that renders water more valuable.

While the above statements may provide sufficient bases to the masses (or the author) that Burry believes in a looming financial crisis, note that the term “financial crisis” in practicioner’s lingo, is not merely a recession - but a case where the banking/monetary/securities systems themselves are at risk of failure. i.e., situations where macroeconomic shock/weakness is induced by endogenous/systemic factors.

I am not claiming to know with certainty that Burry does not believe another financial crisis is looming… I am simply showing how the New York Magazine article’s title is not supported by Burry’s statements. It’s possible that Burry believes another financial crisis is looming… but my personal guess is he would not share such claims publicly.



Unrelated: Why I think Michael Burry / Scion Capital was the perfect anti-thesis of today’s “hedge” fund (I write “hedge” in quotations because so many wannabees pose as hedge fund managers, when they’re just closet long-onlys, asset gatherers, and/or excellent marketers/poor investors):

  1. #1 priority = investment returns, not asset gathering - Scion capped assets under management within ability to invest. How many ~$10+ billion aum hedge funds with mediocre/abysmal returns today should really be $ 1 billion aum funds? How many ~$1 billion hedge funds should really be ~$100 million aum funds? etc. Not everyone can be Soros/Renaissance Technologies/Bridgewater/etc
  2. Ability to weather draw-downs- Scion demonstrated the ability to weather 10-30% drawdowns (due to putting on concentrated asymmetric positions). It also put on positions with such risk but commensurate return potential… these are behaviors asset gathering types simply will not and cannot achieve.
  3. Position sizing - Scion demonstrated ability to “go for the jugular” with large position sizing, when it mattered. It’s not clear what value-added most so-called “long/short”, “value-oriented”, “special situation”, and/or “event driven” provide beyond synthetic beta (minus 2 and 20).
  4. De facto flexibility in net exposure - 20%+ position short sub-prime, although quite different from shorting equities (I get it)… Most hedge funds today seem closet long onlys that somehow justify 2/20 compensation (they must thank God there exist such gullible “investors”)
  5. Atypical backgrounds - Dr. Burry was a medical student turned resident (he was poor/technically insolvent, as his debts exceeded his liabilities) turned stock message board fanatic, turned highly performing investor. He did not attend Wharton, nor did he do 2 years of banking/consulting, nor did he work at a private equity firm… etc etc etc. Burry was not a member of the financial Brahman caste, yet he handily outperformed them anyway.

Burry is an imperfect man, like you and I, with his fair share of flaws/weaknesses/imperfections. I’ve learned over time not to idolize any human being (particularly if they’re still alive!).

That said, I have found his story personally inspiring and motivating. There is much to be learned by one’s own and others’ failures…as well as successes.

Review of 2015 and Considerations for 2016

The below shows self-evaluation of my 2015 “considerations”…but none of the below matters, because I was not up 10x-100x for 2015. Being “right” absent application (i.e. putting $ where mouth is) is little more than mental masturbation. Fortunately, the below roadmap helped me preserve/enhance wealth… a reason to be thankful. 2011 and 2015 were both (rare) years where I could relate both to the “winners” and “losers”.

Considerations for 2015

  • Volatility - YES
  • Us equities market: chop-fest / consolidation - YES
  • The bubble in formation is in bonds, not equities. “first thing I do when i see a bubble is I buy” – the palindrome - YES
  • EURUSD parity is in sight within 24 month - CLOSE ENOUGH
  • Single-name short selling: 2013 was disastrous, 2014 was okay, 2015 okay/meh. The few years after a disastrous year tend to be okay - YES
  • Watching, but not sure what to make of for 2015: (1) Biotech (2) Shareholder activism (3) Mainland China - RIGHT IDEA
  • Gold:2013, Oil:2014, ???:2015


Considerations for 2016 (for my own self assessment. may share publicly… tbd)

Having been quite “right” for 2015… I have to assume I may be the perfect contrary signal for 2016. In order to protect myself, therefore, from hostile/nefarious parties who may want to take advantage of me at my own expense, I will keep most of my considerations private. The goal is to be right AND capitalize on being right…ego vindication should be the least of considerations.

  • Key Question for 2016 (across various assets) = Bifurcation


  • Continued cross-asset volatility (I am not implying a specific directional bias)
  • Short Theme X =
  • Short Theme Y =
  • Short Theme Z =
  • Long Theme A =
  • Long Theme B =
  • Long Theme C =
  • Pair Trade A =
  • Pair Trade B =
  • Pair Trade C =
  • Pair Trade D =
  • Special Situation A =

Food For Thought re: 2016

  • Think for yourself
  • Druckenmiller’s comment in that NYTIMES dealbook interview, regarding what will be necessary for survival/excellence in coming years.
  • Why did the SAC/Millennium, and those type of funds/strategies fare well in 2015, both in (debatably) absolute and (unambiguously) relative terms? What does this portend for 2016 (if anything)? Or am I looking for “Moses in the clouds” when there is no such thing?
  • Other than the obvious sector-specific “hedge funds”, why were some US “hedge funds” down 15-30%, in an otherwise flattish (in the indices) year? e.g. Buffett/BRK down -11%? What do these losses portend, if anything?
  • What happened to Passport Capital’s returns in 2015? up 18% through September, and now up 8%?
  • How do momentum and reversion factors play out in 2016 (e.g. oil and gas, gold, etc etc)? Applicable to many disparate situations. Where will momentum persist, versus where will reversion take place?
  • What do the popularity of Bernie Sanders and Donald Trump (and formerly Ben Carson) suggest? Similar question applicable in many other countries.
  • If you’re an active manager, question: in your heart of hearts can you justify your compensation to yourself? Is it possible that as an analyst/portfolio manager/etc… you might actually be pretty useless as an investor/analyst? Worse than useless as an investor/analyst? Why should you get paid 6 figure or more compensation for losing money? Why should you be structured to get paid 2/20 or more for being little more than a closet index guy, or beta monkey?
  • If you’re a passive manager / etf creating machine, question: If your products/services were to disappear tomorrow, would the markets be any worse off?
  • I don’t know what the words inflation/deflation mean anymore. The only phrase that makes sense to me: purchasing power


Achieving (or surpassing) the below-like returns, as an investor, matters more than ego vindication:


Remember: the above investor is a “one hit wonder”, as believed/preached by the Central Banking apologists.

There’s also the following return profile of a macro investor:

2005: +46.8%

2006: +25.7%

2007: +25.6%

2008: -33% ?

2009: +63%

2010: +22% ?

2011: -31.9%




2015: +120%


The purpose of this post is to serve as a large self-reminder (for reasons I don’t quite fully understand, putting things in writing increases the likelihood that I will commit to doing them!). It was largely inspired by my friend. If it helps you, great.

Reviewing 2015

  • Review all 2015 trades (open, closed, realized, unrealized, etc)
  • If + gains (realized or unrealized):
    1. Why/causation - “right”, luck, or dumbluck
    2. What was/were the basis/bases of my decision-making?
    3. What could I have done differently? What was out of my control?
  • If - losses (realized or unrealized):
    1. Why/causation - “right”, luck, or dumbluck
    2. What was/were the basis/bases of my decision-making?
    3. What could I have done differently? What was out of my control?
    4. Are there patterns that imply behavioral and/or intellectual/analytical tendencies that can be improved upon?
  • Review errors of omission, i.e. trades/ideas I did not follow through (and the inverse, i.e. bullets dodged)
  • Optional: Do the above (quickly) for all trades since 2011.

Comments: I already know (I think) the answers to the above questions with respect to my biggest 2015 losses/gains.

Considerations for 2016

  • Was I simply lucky in 2015, i.e. the macro/market/etc conditions were precisely favorable for me (and those like me) who behave and think certain ways in certain market environments? I may just be a “fool of randomness”
    1. in 1970s, Steinhardt was the “genius” and Buffett the “fool”… and visa versa in other environments.
    2. Who is looking like the “genius” this year? Who looks like the fool?
    3. Are they actually geniuses and/or fools? Is the supposed genius actually a fool of randomness? Is the supposed fool the proverbial Job?
  • If I were merely a “fool of randomness” in 2015, what can I do differently in 2016 so that I may either (a) not be a fool of randomness (b) make money even if I am the fool (or mitigate risk of becoming the ultimate “Thanksgiving Turkey”, the proverbial ‘patsy on the table’)?
  • Make list and/ aggregate existing lists of specific themes, sectors, securities, etc. that are of highest interest for 2016
    1. Have I positioned already? if so do I have too much or too little allocation? If not, why not?
  • Look left when everyone else is looking right. Visa versa.

The (Bursting) of the Bond Manager Bubble

US market history seems to be characterized by some form of hero worship at each point of the cycle. You know, the investment managers that the journalists, investment professionals, and (sometimes) general public drool over:

  • 1980s - The “Corporate Raider”
  • early/mid 1990s = the macro speculator / bond vigilantes
  • mid/late 1990s = The Star Mutual Fund Manager and Venture Capitalists
  • Early 2000s = Equity Short Sellers
  • Mid 2000s = Real Estate and Private Equity “Moguls” … and “value investing”
  • Late 2000s = Housing/Credit Short sellers
  • Early 2010s = The Bond Fund Managers

If history is any guide, R.I.P. Star Bond Fund Managers (not just “high yield”). It was good while it lasted. It’s your turn to come back down to earth…for good.

As @barbariancap eloquently stated: “when talking heads argue which one of the two is more deserving of the bond god/bond king title, you know the end is near”


  1. What does the bursting of a bond bubble look like?
  2. Who will be worshipped from Mid 2010s - end 2010?

The Turkey of Nevada and the Turkey of Canada #TurkeyOfCanada

Last week, we learned:

  • There are turkeys in Nevada
  • Nevada is a haven for yachts
  • People who are not “regulated” can do whatever they want.
  • A bear raid is when bulls sell on historic trading volume
  • The Turkey Of Canada thinks he can “move” Canadian bank stocks 10%
  • Free speech is equivalent to “undermining the integrity of capital markets”

On a serious note, here is the turkey himself:

Black Wednesday - October 21st, 2015 - The Last Time a $50+ Billion Stock Declined 40% Intra-day


Today will be a day to remember for many market participants. It is a day I will never forget. Today bore a faint resemblance to the October 1987 crash, but for stockpickers.

Valeant Pharmaceutical’s (VRX) stock fell intra-day (at its lowest point) -40% . -40%!!! That’s right, a $50+ billion market value company declined 40% in value within the day. That rarely happens.

I may write a more coherent post later, but here are a few things I’d like to write so that I can look back to this day in remembrance:

  • Congratulations to the public shorts and skeptics — Roddy Boyd, John Hempton, that AZ_Value guy, Jim Grant/Chanos, Andrew Left, and others.
  • Deep condolences to the longs. The magnitude of the market reaction made as much sense to you as it did to me (especially given that the “incremental” finding in today’s “report” was already in the public sphere).The so called “smoking gun” was available in plain sight. PLAIN SIGHT!! NOT HIDING, but widely available!
  • I can relate to both sides - I’ve been on both sides of similar type situations, where the security price went against me 50-80% within a day, or went in my favor in similar magnitude. Having been both the beneficiary and unlucky loser, I truly can and do understand both sides here.
  • The amount of schadenfreude amongst both the longs and (more recently) shorts has been quite high.
  • Yesterday’s Village Idiot, and Today’s Evil Genius - Earlier this year and last year, short sellers were considered the village idiots. Today they are considered (evil) geniuses… neither are correct.
  • DO YOUR OWN WORK - A certain trend-following guy wrote today: note to self: “Short future Citron picks” … except he and/or similar types traded against Citron picks (gainfully) from 2012-2014. Those chasing Citron here are wise as those chasing Ackman long VRX in the 200s. DO YOUR OWN WORK.
  • Intrinsic Value and Nonlinear Dynamics - What is VRX’s intrinsic value? Now is the time to be kicking the tire regarding free cash flow generation. That being said, I find the business school approach to valuation insufficient for purpose of evaluating roll=ups/platform companies. How can one arrive at a stable intrinsic value estimate, when the value is non-linearly dependent on its stock price? (even though it may have not used its stock as currency, it creates chaotic/nonlinear outcomes for purpose of estimating intrinsic value)
  • Too Difficult Bucket - Placed it in “too difficult” bucket in Q4 2014/Q1 2015 … no regrets. It remains in the “too difficult” bucket for me today. Arguably, it’s Hillary Clinton who created the recent short opportunity.
  • Shorting is hard - you probably made more money long VRX today vs most shorts did shorting it. ever.
  • Valueact won the war - Coulda/woulda/shoulda sold more (granted, that’s without knowing the future trajectory fo the stock), but they already won the war, pretty much no matter what happens from hereonforth.
  • Ackman-Freude <-> VIX - Fade it when it spikes up, and buy it when it comes crashing back down and stays down
  • Fool Of Randomness? - Today was one of the rare “drop everything you’re doing and laser focus on one thing and one thing alone!” days. Simply by NOT being the fool of randomness today, I was in a position to take advantage of opportunity. I was fortunate (not smart) to have been able to navigate gainfully today. I coulda/woulda/shoulda handled today better, but no regrets. Being self-critical is highly important, but also have to note that today allowed my longer-term learning/growth to shine through… I have more room to grow.
  • Statistical/historical significance - largest trading volume in history - by factor of 4x! Largest intraday percentage swing in history - yet it is not even in the top 5 among one-day percentage decline.. there have been 35 instances of over -10% one-day percentage declines. So yesterday was not so special in that regard… the -40% intra-day decline was VERY special.

“Strong minds discuss ideas, average minds discuss events, weak minds discuss people”