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Dr. Michael Burry is the founder of Scion Capital. He was recently made famous with the
general public as a character in the movie adaptation of Michael Lewis book The Big Short,
but even before then he was famous in investing circles for his astute investing during times
like the financial crisis of 2007. Michael Burry is portrayed in the movie by Christian Bale.
The real Michael Burry started out as a part time investor and blogger and built his
reputation and AUM with great results and original thinking. He is a physician by training and
has diagnosed himself as having Aspergers Syndrome. Burry is particularly interesting for
investors in that he has adapted value investing principles to his personality, skills and
nature. Like Charlie Munger did many years before, Burry found new ways for value
investing to evolve beyond using the system to find cigar butt stocks. Burrys approach
indicates that value investing can work for technology and other stocks that people like
Warren Buffet may invest in if circle of competence exists and the holding period is not as
long that used by someone like Warren Buffett. Technology changes too much to adopt the
same holding period as Munger and Buffett. What is Burry doing today? Michael Burry is
still managing a hedge fund named Scion and is still critical of the way the financial system
is being run, but now hes more interested in water than real estate wrote the author of a
New York magazine article who interviewed him in late 2015. Burrys story demonstrates
several important things. Most importantly, the power of being rational and the power of
fundamental bottoms up research. It also demonstrates the huge value that permanent
capital provides to a rational money manager since as Keynes once said: Markets can
remain irrational longer than you can remain solvent. Even as rational as Burry is, it took
courage to make and to hold on to the investments that made him famous. Being right, but
too early, is indistinguishable from being wrong.
1. My weapon of choice as a stock picker is research; its critical for me to
understand a companys value before laying down a dime. I really had no
choice in this matter, for when I first happened upon the writings of
Benjamin Graham, I felt as if I was born to play the role of value investor.
Investors in the habit of overturning the most stones will find the most
success. The late 90s almost forced me to identify myself as a value
investor, because I thought what everybody else was doing was
insane. Burry has not completely adopted the ideas of Warren Buffett or Ben
Graham and has instead developed his own approach that remains true to the
fundamental bedrock of value investing. Burrys example illustrates how it is possible
to follow the value investing system and yet have your own unique style. Again, he is
at his core a value investor. Burry makes clear in this set of quotes that he treats
shares of stock as a partial ownership of a real business and that understanding any
business requires research. You must genuinely understand of the underlying
business. A share of stock is not a piece of paper to be traded like a baseball card.
The movie version of The Big Short conveys that the style of Burry has a lot more
stress associated with it than a Buffett approach, but for Burry it has worked out well
financially.
3. I try to buy shares of unpopular companies when they look like road kill,
and sell them when theyve been polished up a bit. Fully aware that
wonderful businesses make wonderful investments only at wonderful
prices, I will continue to seek out the bargains amid the refuse. The third
bedrock value investing principle is: Mr. Market is your servant and not your master.
Howard Marks makes the same point Burry is making about the necessity of
sometime being contrarian: It is our job as contrarians to catch falling knives,
hopefully with care and skill. Thats why the concept of intrinsic value is so
important. If we hold a view of value that enables us to buy when everyone else is
selling and if our view turns out to be right thats the route to the greatest
rewards earned with the least risk. To achieve superior investment results, your
insight into value has to be superior. Thus you must learn things others dont, see
things differently or do a better job of analyzing them ideally all three. Adopting
the popular viewpoint will not result in market out-performance if the popular
forecast is also right. Some roadkill is really roadkill, and some refuse is really refuse.
Finding an out-of-favor business selling at a substantial bargain and then waiting is
the name of the value investing game. It is easier to say than do.
4. If you are going to be a great investor, you have to fit the style to who you
are. At one point I recognized that Warren Buffett, though he had every
advantage in learning from Ben Graham, did not copy Ben Graham, but
rather set out on his own path, and ran money his way, by his own rules. I
also immediately internalized the idea that no school could teach someone
how to be a great investor. If it were true, itd be the most popular school
in the world, with an impossibly high tuition. So it must not be true. Ick
investing means taking a special analytical interest in stocks that inspire a
first reaction of ick. I tend to become interested in stocks that by their
very names or circumstances inspire unwillingness and an ick
accompanied by a wrinkle of the nose on the part of most investors to
delve any further. In his book The Big Short Michael Lewis describes Burrys view:
The lesson of Buffett is, to succeed in a spectacular fashion you have to be
spectacularly unusual. The movie version of The Big Shortcertainly portrays Burry
as a very usual character due to his Aspergers syndrome. Burry believes he has an
advantage in the investing process since Aspergers allows him to be more
rational/less emotional. There will be times when Mr. Market will offer up shares in a
business at a price that reflects a substantial margin of safety, and to find that
bargain wise investors try to find something that is out-of-fashion. Burry believes
there is no better place to look for something that is out-of-fashion than the ick
category.
6. It is Buffett, not Graham that espouses low turnover. Graham actually set
targets: 50% gain or 2 years. That actually ensures rather high
turnover. The actual Ben Graham quote from an interview is: If a stock hasnt met
your objective by the end of the second calendar year from the time of purchase, sell
it regardless of price. This statement by Graham is not consistent with Warren
Buffetts view of the world, but it is perfectly acceptable for a value investor to do as
long as the holding period is not so short that it falls within the definition of
speculation. Burry feels comfortable buying stocks and other assets that Buffett
would avoid. Both approaches are still value investing.
9. One hedges when one is unsure. I do not seek out investments of which I
am unsure. It is always wise to have what Charlie Munger calls a too hard pile
and avoid investment about which you are unsure. But this approach is especially
important if an investor has as few as 12 stocks in their investment portfolio like
Burry. One way to make peace with this approach and avoid hyperactive investor
syndrome is to realize that you can be a successful investor by making only one of
two sound decisions a year. Joel Greenblatt says: Even finding one good opportunity
a month is far more than you should need or want.
10. How do I determine the discount? I usually focus on free cash flow and
enterprise value (market capitalization less cash plus debt). I will screen
through large numbers of companies by looking at the enterprise
value/EBITDA ratio, though the ratio I am willing to accept tends to vary
with the industry and its position in the economic cycle. If a stock passes
this loose screen, Ill then look harder to determine a more specific price
and value for the company. I also invest in rare birds asset plays and, to
a lesser extent, arbitrage opportunities and companies selling at less than
two-thirds of net value (net working capital less liabilities). Ill happily mix
in the types of companies favored by Warren Buffett those with a
sustainable competitive advantage, as demonstrated by longstanding and
stable high returns on invested capital if they become available at good
prices. Burry is not like Buffett in every way and not like Graham either. Burry
shows how it is possible to follow the value investing system and yet have your own
unique style. But he is still a value investor since he buys at a price that reflects a
margin of safety, does not make Mr. Market his master and treats shares of stock as
a partial ownership of a real business. Burrys style is opportunistic and fits with who
is he is. You are not Michael Burry and neither am I. Most everyone is far better off
investing in a low cost portfolio of diversified index funds.