So, some of the pieces of the puzzle were already in place? Yes, and that is as much as you can hope for, because when they are all in place, it is too late.
You mention a contrarian mentality, but that type of thinking could have justified trying to pick a top at much lower rates. Absolutely. People think that being a contrarian implies victory. After all, what is a contrarian but someone
that goes against the crowd. It is almost a cliche that the crowd is always wrong—so the guy who stands against the
crowd must always be right. Well, life doesn't work that way. There were plenty of contrarians who bought bonds
when interest rates went to 8 percent for the first time, and 9 percent, and 10 percent. There was a great deal of
money lost by people buying bonds at what were then all-time high yields.
There is a very important difference between being a theoretical contrarian and dealing with it in practical
terms. In order to win as a contrarian, you need the right timing and you have to put on a position in the appropriate
size. If you do it too small, it's not meaningful; if you do it too big, you can get wiped out if your timing is slightly off.
The process requires courage, commitment, and an understanding of your own psychology.
I assume that you probably had the market run against you for quite a while in that trade. Right, it did. It was a very painful period, because as far as most of my investors were concerned, I was an
equity investor. What did I know about bonds? Who was I to contradict Henry Kaufman who was telling the world that
interest rates were going to the moon? Not only was I doing something that was different than in the past, which
always raises the antennas of investors—particularly those with an institutional mentality—but I was doing it in an
enormous size.
Were you leveraged more than 100 percent on your position? Yes, at one point I had three to four times the firm's capital in five-year maturities. In stocks, you have a
policeman who tells you how much you can speculate: it is called margin requirements. But in treasuries, you can
finance as much as 98 percent of your purchases, depending on maturity, so there is no real constraint.
