About

This is a speech I found really interesting by Michael Burry so I decided to take a few notes below. I also generated a transcript of the commencement speech using otter.ai (you can find the transcript below).

Summary

When Michael studied, he would be starved for information (taking near-daily trips to Westwood to pick up the WSJ for the previous day’s stock quotes). Today, information swarms us, comforts us, disrupts us. It’s an age of infinite distractions for those so willing.

Michael discovered that life for all its amazing possibilities very often does not make sense and at least as often is not fair.

One can drop out, run away, get angry and fight. One can also accept the world for what it is, work hard to exploit the opportunities it presents and try to do so in as just a manner as possible.

One can work smart or one can work dumb. Hard work for hard work sake alone would not do. Michael began to doubt traditional education and committed himself to educate himself as opportunities arose.

Graduating in economics is a path fairly well worn, but it is a path that in and of itself defines little about our future.

Whatever you see as the next obvious step, consider whether you’re being true to yourself, your strengths, your weaknesses, your needs. The decade before you have kids and get married is the most flexible and most genius decade of your life. You ought to consider stepping outside your paradigm for a fresh look now and again.

If you end up working in finance, consider the motto “first, do no harm” (primum non nocere in latin).

The decision to start an investment firm came very easily. Michael simply weighed the paths before him, without considering the path on which he had been. He figured, as long as he kept asking questions, working hard to answer questions, he would eventually find his way.

Each of our lives is an epic chance:

You can choose to never stop learning and never stop asking questions but it will not be without staggering difficulties. Faced with a setback, you will be most creative under stress, you will think better and act stronger. So much so, that looking back, it will seem as though it was all meant to be.

Transcript

00:04

Now it is with great honor that I introduce today’s keynote speaker, Dr. Michael Berry. Michael is one of our own, and economics graduate at the class of 1993. And we are thrilled that he has come back to campus to speak today. He is joined by his wife on T and his sons Michael and Nicholas, his brother in law john and sister in law on men. Michael was an exceptional undergraduate here at UCLA. As a full course load as an econ major wasn’t enough. He also managed to fulfill rigorous pre med requirements. After leaving UCLA, he proceeded to earn his medical degree at Vanderbilt. But the drawer of the investment world soon overcame his desire to practice medicine. By the time he founded psi on capital in 2000, Michael had already earned a stellar reputation As an investor with extraordinary vision. Now, about a year and a half after the financial crisis hit in 2008, Queen Elizabeth of England visited the London School of Economics. And she asked the distinguished faculty there. Why nobody had predicted the financial crisis. She should have come to UCLA because Michael did. He used his vision to predict the collapse of America’s financial and real estate markets. he foresaw the failure of companies such as AIG, Fannie Mae, Freddie Mac, countrywide, financial and Washington Mutual, you might recognize his story from his profile and Michael lewis’s 2010 best selling book, The Big Show, Michael closed sigh on capital in 2008. And these days, he funds startups and invest his own money. Michael will no doubt have some predictions for all of us in the audience today, and certainly some prescient words of advice for the class of 2012 I know we will all be inspired by his story and his vision. And now it gives me great pleasure to welcome the UCLA economics commencement speaker for the class of 2012. Dr. Michael Berry.

02:27

Thank you, Professor farmer, class of 2012. Congratulations. It’s a quite an achievement to graduate from UCLA. You know, it’s nice to be back in Westwood. I certainly have fond memories of my time here. In many ways, the campus is much the same, but in some ways I can see it’s different. I do know your campus life has been much different than mine.

02:54

20 years ago, I had no internet. No, no smartphone. No cellphone, I don’t think, you know, but I did invest my summer earnings and stocks and futures. And I remember being absolutely starved for information. I had to send away for financial statements, sometimes waiting weeks for a response. And I would take a near daily trip to Westwood pick up a wall street journal to check yesterday’s stock quotes. Today, it’s much different information swarms us comfort us, it disrupts us. It’s an age of infinite distraction. For those so willing. You are the generation that has had instant messaging, Facebook, Twitter, and Angry Birds nagging your fingertips at every moment. It’s been arguably as addictive as any drug throughout history. And I do imagine It took some terrific willpower during your studies to study.

04:08

Of course, it’s not lost on anyone that you started your term at UCLA in the midst of a global financial panic, the consequences of which are far from settled. The fault is not your own, but the future it leaves certainly is. As a result of what happened while you were growing up, you now face a future that will feature either another great recession during your 20s or during your 40s the US debt to GDP ratio exceeding 200%. And that’s not me. That’s the Congressional Budget Office. me. I think they’re ignoring reflexivity. And I think you face both Now Greece was at 160% GDP debt to GDP when its last of its Nine Lives started running out.

05:15

From my perspective, this is all the more tragic because the financial meltdown was both predictable and preventable. This was no black swan and no other serendipitous excuse should be acceptable to anyone. Of late Europe convulsions are in the news. Even this should not be surprising. Back in 2006, when a bunch of us shorted Portugal, Italy, Greece and Spain. We call them the pigs for a reason.

05:48

I can explain it in one sentence. When the entitled elect themselves, the party accelerates the brutal hangover is inevitable. Californians and indeed All Americans ought to take note. My career after UCLA marked in such a manner that I found myself right in the middle of the financial meltdown, Profiting from it because I had predicted it. I had been a Chicken Little or a casandra to Psalm especially in government, I’m one lucky sob. In truth, I was just trying to figure it all out.

06:31

From my earliest years, I found that life for all its amazing possibilities very often does not make sense. And at least as often is not fair. Today, it is absolutely not fair. The world you are being dealt. There are many ways to deal with an unfair world. One may tune out drop out runaway, one may get angry, one may fight one could do ultimately what I did accept the world for what it is, work hard to exploit the opportunities it presents and try to do so in as just a manner as possible.

07:16

Now, there are two kinds of working hard, you can work hard, you can work smart or you can work dumb. When I was in sixth grade, my dad dumped a pile of bricks in the backyard. And after school he had us move me and my brothers move the bricks to the side yard. The next day he had us moving back to the backyard. The next day back to the side yard, and so forth is continued for quite a while. I’m not sure what he intended by this, but I did learn that work. Hard work for hard work sake alone would not do. Later in observing the tenure system so endemic to academic ventures I would think to myself, hey, they’re just moving a pile of bricks. In fact, I began to doubt traditional education. I committed myself to educating myself as opportunities arose.

08:21

Still, as I graduated from UCLA, I headed to Vanderbilt medical school. I had read liars poker by Michael Lewis. And it nearly convinced me that even if I could become a great money manager, I shouldn’t besides medicine appeared just my interest in medicine would fade. However, as the as I studied the economics and regulation of health care, while in Chicago in 1994, the government payer would way far too heavily on that playing field, and I did not think it would be fair enough. So during medical school I put up a website. Some ideas on stocks and markets as I graduated medical school in 1997. Microsoft out of the blue offered me $1, a word to write for the new msn money website.

09:17

Being wordy and being in debt. Naturally, I said yes. So therefore, during my medicine internship, I wrote for Microsoft, and ran my website, there were synergies between two of the three. And I had unknowingly found a back door to Wall Street.

09:42

None of this was nearly as well planned as it seems in retrospect, there were a number of crises, including a divorce. And at one point, I was so despondent over my direction, that I even applied to law school.

10:02

Again and again. I figured as long as I kept asking questions, working so hard to answer questions, I would eventually find my way. As I turned 29, I ran out of reasons why I couldn’t or shouldn’t laugh medicine start an investment firm. That point the decision became came very easily, as perhaps should be the case more often than not. I simply weighed the paths before me, without considering the path on which I had been. At Scion capital, my job 24/7 was to ask questions and seek answers. I mostly examined stocks and bonds as long investments. But one day I came across a subprime residential mortgage backed securitization. And I wondered if I could figure out any of that. Other questions soon followed?

11:07

Why are home prices diverging up and away from the household income trend line? Answer if it’s not income, its leverage. What exactly are the incentives of lenders that make mortgages only to sell them on through the wall street? Answer volume at the expense of credit standards. when interest rates bottom, how far could lenders push mortgage terms in order to keep refinancings home prices and loan volumes rising? The answer to this question would put a ticking timer on the boom and a date on the crash. Back in 2005, other questions stood out. How much is consumer spending dependent on cash out refinancings? What percent have jobs are dependent on the assumption of rising home prices? Won’t AIG have to start posting massive cash collateral for the first time if it were downgraded? Isn’t it worrisome that Fannie Mae cannot find term sheets that describe perfect hedges against its massive mortgage portfolio? Are the rating agencies so conflicted that they could be this blind? In my letters to investors, I described a downturn that would be unprecedented. No with no counterpart in the mount in the modern era. Wall Street’s risk models would fall all at once, and every single CEO and every single politician would be disastrously wrong.

12:56

I put my money where my mouth was at its peak, I was short eight point $4 billion worth of subprime mortgages and certain financial companies. The most we can lose was less than $100 million thanks to credit derivatives

13:12

and at first we did lose it was a negative carry trade, investors, business partners and even employees, questions strategy, lawsuits were threaten. Our distress was reported in the press and Wall Street look to squeeze our short. Besides all this, I had to stomach what I knew was coming. A tragic end to the Follies. This was not fun. I did not tap dance to work. But the firm survived. We turned the tables on Wall Street and I became the 1% in a way I never imagined when I was sitting where you sit today I had bet against America in one. In 2010, I published published an op ed in the New York Times, posting what I thought was a valid question of the Federal Reserve Congress and the President. I saw the crisis coming. Why did not the Fed? never did any member of Congress, any member of government, for that matter? reach out to me for an open collegial discussion on what went wrong, or what could be done. Rather, within two weeks, all six of my defunct funds were audited. The Congressional Financial Crisis Inquiry Commission demanded all my emails and lists of people with whom I Converse, going back to 2003. And a little later, the FBI showed up a million in legal and accounting costs and thousands of hours of time wasted. All because I asked questions It seemed they would pump me at gunpoint or not at all. That summer, the Federal Reserve put out a paper that concluded nothing in the field of economics or finance could have predicted what happened. With regards to the housing bust and subsequent economic fallout. Ben Bernanke, Ben Bernanke, he continues to backfill this logic, and I fear that history is being written wrong yet again. The ignorance is willful. As we move forward as a country, it is worth considering mainstream economics and finance in light of recent events. Our nation’s economic policies are born of a synthesis of theories on how to deal with the Great Depression of the 1930s yet seems unable to honestly examine the most recent one. Sadly, at the highest levels of economic thought and government questions are not tolerated. It is as if we are dealing with the binary judgment of a fundamentalist religion. Finance theory and practice fair no better the continuing crisis makes a mockery of the principles which have guided credit policy and risk management.

16:22

Since the 1960s. As it turns out, information is not perfect volatility does not define risk. Markets are not efficient, the individual is adaptable. But the dark ages of finance allow no such light. mainstream economists and finance practitioners please check your premises. You have contradictions before you.

16:55

Truthfully I do not expect much to change practically speaking history has demonstrated the ability of sovereign nations to justify them themselves and to postpone the moment of crisis. This will be even more true for the United States as the largest economy by far with the strongest central bank. As a result over the course of your lives, you experience weathering, but stealthy attacks on your quality of life.

17:22

As government attempts to manage its faltering finances, you will see declines in the quality of health care, the quality of education, the quality of public safety, and the quality of our currency. Of course, this is a false prophecy. I’m simply describing what is already happening. Class of 2012 by graduating today, you’re taking a step, another step on a path that is fairly well worn.

18:00

A path that in and of itself defines little about your future. Many have started from where you start today, and done great and wonderful things, but many to have lived lives of another sort. Whatever you see as the next obvious step, consider whether you’re being true to yourself, your strengths, your weaknesses, your needs, before you take it the next decade or so, before you have kids, before you get married, is the most flexible, most genius decade of your life. You ought consider stepping outside your paradigm to for a fresh look now and again. If you’re considering a career on Wall Street, or in Washington DC, you should be aware of the social proof that operates there. This is that many if not most people will be doing questionable things that obviously make money and obviously earn respect from common peers.

19:12

If you find yourself in such a place, I would ask you to consider a rule I learned as a physician. First, do no harm. Besides life is not that short life as well and long enough for you to come to regret any activity or habit involving exchange of long term risk for short term benefit. This is what many if not most Americans did during the refinancing and consumption boom of last decade.

19:45

And it was what our government did in egging on the boom. This is also the gospel of drunk drivers and cheating spouses. Of course, when you encounter the opposite, the short term risks exchanged for long term benefit. Consider hitting that button again and again and again. Past maybe prologue, but this is not true for the individual. The individual can think different, and the individual can act different than those that got us all into this mess. No matter how the economic ties may sweep away the majority and an individual can stand clear. Each of your lives individually is an epic chance. You can leave here today and you can choose to never stop learning never to stop asking questions.

20:54

I must say it will not be without staggering difficulties. There will be time when you will stare at yourself in the mirror and wonder why. But faced with a setback, you will be most creative. under stress, you will think better and act stronger. So much so, that looking back, it will seem as though it was all meant to be. Thank you and good luck.