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Comment by Confusion | Hacker News Reader

The problem is: Greenspan may very well be right in his assessment that Burry may just have been 'a supremely lucky flipper of coins'. There are thousands of people in similar positions making predictions about all kinds of phenomena. Whatever the outcome, there are always a number of predictions that are 'uncannily' close to that outcome. Unfortunately, these 'correct' predictions are only seldomly made by the same people. If someone truly had better insight, you would expect them to make the right predictions more often. However, if history teaches anything, it is that I can safely predict that Burry will never again make such an accurate prediction and that it will never be clear whether he was a prophet or a lucky bastard.

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I think that Burry is simply arguing that the methods he and other shorts used to call this crisis (which Taleb refers to as a gray swan -- since so many called it) should be more closely examined, rather than being simply dismissed as statistical aberrations. Maybe investors/wall street can learn a useful thing or two from them.

To me, spotting bubbles is not so difficult. There are a few great investors who have excellent track records when it comes to dodging bubbles/crises. They may not profit immensely, but their downside is usually protected and they are cash rich to pick up securities on the cheap.

The real difficulty comes from figuring out when a bubble will burst -- which is really anyone's guess. Burry himself ran into trouble on this end which created friction and eventually lawsuits with his investors.

This could be total confirmation bias but I myself was somewhat amazed that everyone seemed to have been so surprised by the crisis. I don’t care all that much about what’s happening in the US (not being from there and all) but I have been clicking through the current New York Times cartoons for the past few years or so. In retrospect it looked to me as though there were constantly crumbling houses in those cartoons (I was always confused by them, it was only later that it made ‘click’), years and months before the bubble burst. If even the cartoonists knew it …

Figuring out the "when" is definitely the most difficult part. I had been watching the markets and the housing bubble very carefully for years before the crisis finally arrived. It is so amazing how long these things take to play out, and how distorted the markets can get before they finally snap.

Despite the attention I paid to it, I still failed to make a profit. When things finally started unravelling, I took several put option positions (assuming the price would decrease) in the obviously doomed companies, for really cheap prices. But my mistake was not goibg out further time wise. I was up substantially (500% was my best) in almost all my positions within a week or two, but when the fed and other players weighed in with changes to the rules of the stock market, and CEO's taking actions that are blatently fraudulent but not enforced by the SEC, things turned against me and I ended up selling for a 40% loss. Of course if I had simply taken a boring short position I could have made a guaranteed 40-60 percent, but how exciting is that?? :)

Making money in the market, even when you KNOW what is going to happen, is amazingly hard. Especially when the FED and SEC are literally changing the rules on a daily basis, as they were back then, and when CEO's can lie, cheat, and steal with impunity.

For ordinary investors, the housing bubble was a tricky thing to play.

There were two public companies that had CDS portfolios where they stood to make a lot of money. A direct equity investment or LEAPS would have worked well there. I took this approach.

Alternatively, it seems like out the money puts on financial institutions would have done really well. Michael Lewis chronicles a few guys from Cornwall Capital that made something like 100:1 payouts on out the money puts for Bear Stearns. These guys crushed it when Bear went BK. This cheap insurance approach is used by a few really well known investors and it is the one I'm gravitating towards for the future.

Ya, out of the money puts was the route I took as well. However, when the company you buy puts in suddenly takes on a couple hundred million of new debt in order to do a share buy back so the CEO can cash his shares out, puts don't perform too well.

Nor do they do so well when the SEC decides to suddenly ban short selling on a certain subset of stocks.

I think the phenomenon you describe does exist and explains a lot of correct predictions. I don't think it is what we have seen in this case though.

If you look at long term indicators of indebtedness it is utterly clear that the US (and some other countries) were at extreme levels in 2007. There was never a dispute about that and it's easy to check. The dispute was about the interpretation of these numbers.

Greenspan and many others argued that the more sophisticated financial system should be able to sustain these levels. He thought that the new securitisation market led to more flexibility and risk tolerance. He turned out to be wrong. This time was not different (see Rogoff on that one).

People who predicted that this time was not different and high levels of debt would lead to a crash were not predicting some freak event. They just followed the conservative assumption that history is going to repeat itself. And it has.

Saying someone was just a "supremely lucky flipper of coins" always seems like a cop out to me. It's not so much the fact that he was right but the reasons he gives for being right. He gives very good explanations for his reasoning and it was sound. Explain how his reasoning was not sound and then you can make statements about how he was just "super lucky." Otherwise you're just guessing about how lucky he is and that doesn't really help anyone.

A lot of reasons can sound totally justified in retrospect. "The Colts will win the Super Bowl because they have superior talent." "The Saints will win the Super Bowl because the Colts' ego will go to their head." A lot of people take actions and have reasons for them -- when those actions turn out to be right, the reasons are often given undue credibility.

If the Colts did indeed have superior talent and then win the super bowl then obviously the reason was justified. If the Colts' ego is obviously making them overconfident and does indeed go to their head and cost them the game then again the reason is justified.

The point is that the reason isn't justified because the person correctly predicted an outcome. The reason is justified because the reason was based on true fact and is demonstrably capable of causing the effect.

Now if the Colts win the super bowl despite having worse talent because the opposing Saints team members all got drunk the night before and were playing with hangovers, then you would be justified in saying the predictor was lucky. It's not enough to say someone could have been lucky and then dismiss them. You should show they were lucky or accept they were correct in their reasoning.

"If the Colts did indeed have superior talent and then win the super bowl then obviously the reason was justified."

It should be pointed out that with Aristotelian logic, that is false. "Previously I said X will happen because of Y, and X happened." is basically "Y implies X; X is true; therefore Y".

Nevertheless, it is true that if a person makes a claim that something will happen for a given reason, gives plausible logical reasons, that we have priors that also indicate the causative connection is sound, and the prediction ultimately comes true, we should not just ignore it. We may not be justified in using Aristotelian logic to conclude with 100% confidence the person's reasoning was correct, but we are justified in taking it into account and concluding that there is some reason to believe this person, who made a prediction contrary to many people's other beliefs, may in fact have something.

After all, if you're not going to listen to people who make accurate predictions with plausible reasons used for their predictions, you can just give up on science right now, because that's all it is.

Right. It's the classical data mining problem. What should be done is to take the reasons given and use them as a hypothesis to predict other events. Reinhart and Rogoff have done just that in their book. After reading it I find it very difficult to accept the claim that people predicting this crash were just lucky or that all their reasons are bogus.

And I think you're making a mistake to equate ball games with debt markets. The fortunes in ball games can quickly and unpredictably turn. Debt doesn't work that way. If many people on low income take out mortgages on a teaser rate that goes up two years later to levels they cannot afford unless house prices keep rising at historically exceptional rates so they can remortgage, you know you're going to be in trouble eventually.

Or you could check out Scion Capital's track record.

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