The Bottleneck Business That Funnels Two Secular Growth Trends

You don’t need to be original to make a fortune. Sometimes you just need to pay attention.

In 2005, two guys named Charlie Ledley and Jamie Mai were running a tiny hedge fund called Cornwall Capital out of a Berkeley garage with about $110,000 in capital. They didn’t have much in the way of traditional hedge fund infrastructure but they did splurge on a subscription to Grant’s Interest Rate Observer.

In one issue, there was an article discussing the fragility of subprime mortgage bonds: housing prices couldn’t keep rising forever, borrowers were getting terrible loans, and the ratings agencies were asleep at the wheel. And the way to bet on a housing downturn and on the fragility of subprime mortgages was through Credit Default Swaps.

The idea to “short the housing market” was right there, published for anyone willing to read it. But almost nobody did anything with it except Ledley and Mai.

They didn’t dismiss the idea because they hadn’t thought of it first. It was a great idea, and as Pablo Picasso allegedly once said, “good artists copy, great artists steal.”

So they dived into the idea a little further and started buying credit default swaps on subprime mortgages.

But their master stroke came after shorting as much of the riskiest tranches as they could. They moved up in quality. They recognized that CDS on higher-rated AA tranches were not accurately pricing in the risk on these mortgages. So they bought CDS on these tranches too. An opportunity they never would’ve discovered if they hadn’t “stolen” the first idea.

By 2007, Cornwall had turned that $110,000 into $80 million, a 72,000+ % return. They made a fortune by being humble enough to copy someone else’s idea from a newsletter that thousands of other investors read but ignored.

We fetishize originality.

But don’t let originality, or the lack of it, be a barrier to a good investment idea.

We all want to discover the next big original idea. The next Costco. The next Visa. The next Microsoft.

Not just because of the potential returns, but because we also want the glory and the notoriety as the source of that idea. We want books written about us that get turned into Oscar-winning movies with Margot Robbie in a bathtub.

But usually the next Costco is Costco, and the next Visa is Visa.

It’s boring and unoriginal.

But it’s OK to be unoriginal as long as it’s a good investment idea.

And the subject of today’s issue is as unoriginal as they come.

But it’s a dominant company riding several secular growth trends that should keep it in a dominant position for decades to come, and it’s trading at a good price again…