What Principles Do Great Investors Follow
The Big Short recounts how, after Lewis Ranieri devised mortgage‑backed securities in 1972 (what Charlie Munger called “high financial engineering” in Poor Charlie’s Almanack), the U.S. housing market boomed until just before the 2008 subprime crisis. A group of “outsiders,” through deep research, judged that the U.S. housing market would collapse and proceeded to short it. I watched the film two years ago and wrote about its puzzle; revisiting it today, I tried to record some takeaways from an investor’s perspective.
Value investing is the root of all investing, whether long or short. Its only essence is to find mispriced assets. Dr. Burry — the “doctor who plays rock” — discovered in U.S. mortgage data that the loan structure contained a large share of high‑rate, high‑risk subprime loans. If rates reset and defaults exceeded 15%, the value of the MBS would go to zero. Two other teams, using methods they were good at, reached the same conclusion.
Think and judge independently. Dr. Burry read through the mortgage contracts and statistics to spot holes in the system. After Mark’s team heard about subprime risks, they didn’t act solely on that tip: they visited suburban tracts and interviewed brokers before making an initial, small BBB bet of $50 million at Garibaldi. After attending the American Securitization Forum and witnessing the collusion between CDO managers and Merrill Lynch, they sized up and bought $500 million of CDOs.
Use leverage — responsibly — to amplify expected returns. Dr. Burry put up all of his fund’s available cash and had several banks structure $200 million of mortgage CDS. Bén’s team obtained an ISDA via contacts inside Deutsche Bank to lever their position.
Trust your judgment and hold with conviction. Charlie’s team faced the risk of reset‑to‑zero if they failed; Dr. Burry faced mass investor redemptions. Yet both stuck to their theses, kept concentrated positions, and waited for the market to break.
Hold to your principles. Charlie kept buying underpriced, low‑probability options because he believed “people consistently underestimate the odds of bad things,” turning 110,000 into 30 million. In the subprime crisis, this same principle led them to buy AA CDS — loved by the crowd — and profit massively.
Treat stakeholder data with skepticism; only instruments that trade are “real.” Brokers will fake borrower credit to earn commissions; rating agencies will compromise for competition and profit; CDO managers, supposedly representing investors, wear the same pants as the investment banks.
Beware of mystifying jargon. Finance loves fancy terms to project competence. Behind the complexity lie simple operating rules of the world. Real investors admit ignorance and probe the logic behind what only looks right.
Published at: Oct 8, 2025 · Modified at: Oct 26, 2025
