The Bigger Short

In early 2005, Dr. Michael Burry, an eccentric hedge fund manager, analysed the mortgage lending practices in the U.S, and was convinced that the subprime mortgage bonds would lose its value by as early as 2007. Dr. Burry anticipated that this would lead the real estate bubble to burst. Following his research, Dr. Burry persuaded Goldman Sachs & other big Investment Banks to sell him Credit Default Swaps against the subprime mortgage bonds, effectively getting a short exposure on housing market.

Dr. Burry’s bet paid off in 2007 when the housing market crashed & he clocked a profit of whopping $2.69 billion for his Hedge Fund. Dr Burry made a personal profit of $100 million.

The story of how Dr. Burry & handful of other people saw the crash coming & made billions of dollars is immortalised in Michael Lewis’ book The Big Short, which was later made into the film by the same name. This 130 min long financial-thriller has lasting impression on the audience & makes one wonder if they too could turn an adversity into opportunity by spotting it early on?

The longest bull run of the market that started in 2009 came to an end on 27th Feb 2020 when S&P 500 closed down 4.4% amidst the Coronavirus fear.

The early cases of Coronavirus were registered in Jan 2020 and thanks to the internet, we saw the cases grow exponentially day on day.

We knew how contagious the Coronavirus is, we knew how connected the world is & more importantly we knew how compounding works. & this leaves us with one question. Could the crash of market following coronavirus fears be anticipated? & could one take a similar short bet on market to make big bucks? The answer is Yes, at least it is so in the case of Bill Ackman.

Bill Ackman is a celebrated Hedge fund manager who manages over $12 Billion AUM.

In Feb 2020, Ackman was increasingly worried that the markets would blow up due to the coronavirus. Managing a hedge fund of over $12 Bn, Ackman tried to protect his portfolio from downward market volatility. He insured his portfolio by buying CDS on corporate bonds. Ackman paid a monthly premium of $27 million to get the exposure on corporate bonds worth $64.5 Billion. 

In March 2020, the stock market crashed amidst the coronavirus fear & the spreads on CDS increased threefold making Ackman earn whopping $2.6 billion in less than 30 days!

This however wasn’t Bill Ackman’s first attempt at the Big Short.

In 2013 Ackman tried unsuccessfully to short Herbalife, a nutrition supplement company, which he said was a pyramid scheme disguised as a business. This ended up in his firm losing close to a billion dollars.

In 2006, Ackman began to accumulate what eventually became 37% in Borders (books, music & movies cafe), which went bankrupt in 2011 (with the rise of Amazon). Ackman ended up losing hundreds of millions of dollars.

In 2007, Ackman was bullish on Target & began accumulating the stock. 3 years later he sold his holdings realising $1.1 billion loss.

In 2011, Ackman invested $1 billion in JC Penney, making him the largest shareholder & member of the Board. In 2013, the sales of JC Penney plunged and the company lost close to billion dollars. Ackman’s JC Penney investment lost $250 million until the time he resigned the Board. 

Is this the Greatest Trade of All Time?

The term ‘Greatest’ is subjective, and quite often one man’s greatest is other mans miserable. So I will let you be the judge of it.

There are many trades which are hailed as the greatest.

In 2007, John Paulson made $4 billion betting short on housing market. Which is bigger than what Bill Ackman made even without adjusting for inflation.

However, the success of the trade should not be determined solely based on its absolute value of gain but based on its ROI.

Bill Ackman turned $27 million into $2.6 billion in less than 30 days. This gives us the annualised return of 65 Septillion % (65 x 10^24), (a number so big, I had to count the zeroes twice)

It took Bill several big losses to stumble upon the greatest trade he ever made. His fund returned negative returns constantly from 2015 to 2018.

Stock market isn’t the place where you can always be right. It’s neither the place where you need always to be right. 

As Warren Buffett once said, "You don't always have to be right. Everything I have goes to 10 right decisions I made."

~ Sangram Kakad

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