A version of this post originally published on UNREASONABLE.is in June 2013. It has been updated and reposted to inspire further conversation.
I listen to recorded books in my car (when I’m not on the phone with entrepreneurs or old friends). Right now, I’m listening to the always-reliable Michael Lewis’ book about the financial crisis, “The Big Short.”
One of the characters I learned about in the book is Michael Burry, a former medical doctor turned hedge-fund manager who delivered amazing returns for his investors. During the life of his fund (11/2000 to 06/2008), investors made a 489% return—after expenses and fees—in comparison to a 2% return for the S&P 500 in the same period.
Being unusual is the prerequisite of success. Tweet This Quote
Burry is a colorful character; since diagnosed with Asperger’s Syndrome, he grew up simply thinking himself unusual—a condition he attributed to a childhood cancer that left him with only one eye.
As it turned out, however, his willingness to be unusual turned out to be the trait that made his fortune. As an investor, Burry specialized in making value investments. He looked for companies that had an “ick” factor—something about them that would disgust or scare off regular investors—and were thus undervalued.
In the book, his investment in Avant is described as typical. He identified the company as an “ick” prospect because its senior management had committed crimes. His analysis showed that even if the management were fired and went to jail, the company was still far more valuable than its current stock price reflected. He started buying at $12/share, continued buying down to $2, and made a mint when the company was sold for $22/share a few months after its top executives were sent to the slammer.
Entrepreneurship could be defined as seeing past conventional wisdom and finding value where others fear to tread. Tweet This Quote
Later, he was the first person to bet against the subprime mortgage market by buying credit default swaps. Unlike the vast majority of Wall Street investors who were content to rely on the ratings agencies, he realized that a large number of subprime mortgages were going to default, and he was able to cherry-pick the pools of mortgages that were the most likely to go belly up—pools full of interest-only adjustable rate mortgages where the borrowers had no documentation to prove their income. For example, a migrant farm worker with an income of $14,000 per year was able to borrow $750,000 to buy a home.
Burry stuck by his guns, even as his investors (from whom he had already made buckets of money as a stockpicker) pressured him to abandon his bet, saying things like, “If this is such a great trade, why isn’t everyone else doing it?” As it turns out, the trade netted Burry and his investors nearly a billion dollars.
As an entrepreneur, you may be better off pursuing an idea that nobody understands. Tweet This Quote
It struck me that this story is a great microcosm of why being unusual is the prerequisite of success. Burry was successful because he could see past conventional wisdom and find value where others feared to tread. Isn’t that a great definition for entrepreneurship?
If you go after a hot market, you’ll be competing with a host of others, some of whom may already be rich and famous, or at least richer and more famous than you. While it may feel comfortable to be going with the crowd, this is a strategy that only works for people with structural advantages—e.g. not you!
Goldman Sachs went along with the conventional wisdom on subprime mortgages and made more money because it’s the most powerful force on Wall Street. When subprime mortgages turned bad, Goldman turned around and bet aggressively on their downfall, which meant that Goldman managed to make money on both their rise and fall, while smaller players like Bear Stearns and Lehman Brothers simply ceased to exist.
As an entrepreneur, you need to be unusual and look for value where others aren’t. Tweet This Quote
You’re not Goldman Sachs. As a first-time entrepreneur, you need to be unusual, and look for value where others aren’t. This may be lonely and uncomfortable. People may make fun of you. But when that value is proven by traction and results, they’ll claim they believed in you all along.
It’s tempting to test your ideas by finding one that everyone likes. But you may be better off pursuing one that nobody understands.
Update: I wish I’d provided more information on how to be unusual. It’s easy to recommend bucking conventional wisdom; it’s much harder to provide a step-by-step guide on how to do so. My recommendation is to develop the habit of taking a second look when something seems off. We’ve all had the experience where everything seems to make sense, but we get a nagging feeling that there’s something missing. Because we’re all so busy, it’s easiest to simply assume that we’re paranoid, or suffering from indigestion. But investigating those queasy feelings is a great way to find places where conventional wisdom fails, and the laziness of others presents you with an opportunity.