Who is Michael Burry and what is his investment strategy and philosophy?
Photo of Michael Burry, retrieved from Barron’s.
Michael Burry, most famously known as the “Big Short,” is an American investor that focuses on investing using the investment strategy of value investing.
Background
Prior to joining the field of investments, Burry was a Pre-Medicine student at the University of California, Los Angeles, and he later earned his medical degree at Vanderbilt University. He then proceeded to start his residency at Stanford; however, he left school to pursue his own hedge fund company, by the name of Scion Capital.
He is a follower of Benjamin Graham’s fundamental value of investment, which is also practiced by Warren Buffett. Burry made his money by realizing early on that the internet had overvalued companies with little to no revenue or profit. In the first year of his own hedge fund company, 2000, he invested in stocks that were undervalued, and returned 55%, despite the S&P 500 falling 12%. Markets continued to fall dramatically in preceding two years, yet Burry returned 16% and 50%.
In addition, Burry realized the risk of the subprime market prior to the market crash of 2008. He shifted to research and analysis of the subprime market in 2007, and was able to accurately predict the burst of the real estate bubble around 2007. He, in turn, shorted the market, and bought credit default swaps against subprime deals he saw as vulnerable, as he was able to realize through his research that bonds based on subprime mortgages would lose value when original rates were replaced by higher rates. From this, he made personal profit of $100m and profit for remaining investors of over $700m. (Hence his name the “Big Short”. And fun fact, there is a book and a movie adaptation of Burry’s story called “The Big Short”.)
Investment style
Burry’s investment style is best described as value investing. Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value; ferret out stocks they think the stock market is underestimating. (Investopedia) In addition, he is a worshiper of Security Analysis by Benjamin Graham, Buffett’s professor at Columbia, and David Dodd. This book in short discusses what security analysis is and the criteria for investing in fixed-value securities.
The 3 functions of security analysis includes: (1) Descriptive function, which presents relevant facts in an understandable manner and compares different securities, (2) Selective function, which judges whether an investor should buy, sell, or hold onto a security, and (3) Critical function, which monitors corporate policies, management, and company structure on an ongoing basis so that changes can be made if necessary. In addition, there are two types of market analysis, technical analysis that relies on past price to predict future values, and fundamental analysis that uses economic indicators that influence security prices. Moreover, the intrinsic value of the security is crucial in security analysis, as this is the actual worth of assets, rather than the market value. In other words, the present value of the company’s future cash flows.
The questions you want to consider when buying stocks are: Is this business worth more than what I’m investing? Can this business survive even if there’s a recession or depression? You want to consider the margin of safety of the company and whether the company is financially strong and can pay off its debts.
Philosophy
Burry can be best described as “takes contrarian approach to value investing by applying basic technical analysis and not fully reliant on fundamental analysis.” Contrarian investing is “investment strategy that involves bucking against existing market trends to generate profits; the idea is that markets are subject to herding behavior augmented by fear and greed, making markets periodically over- and underpriced.” (Investopedia) Fundamental analysis is “a method of determining a stock's real or “fair market” value.” (Investopedia) He also claims that his stock picking is 100% based on margin of safety.
Burry “looks for best-of-breed companies in out-of-favor industries and buys around 10-15% above the 52 week low. If the company reaches a new low, he sells.”
His personal personal preferences include:
Focus on the free cash flow and enterprise value
Screens through large numbers of companies by looking at EV/EBITDA ratio (ratio accepted varying growth industry and economic cycle)
Ignore P/E ratios
ROE is deceptive and dangerous
Prefer minimal debt, am careful to adjust book value to realistic number
Tax implications not a primary concern
“Like to hold 12 to 18 stocks diversified among various depressed industries, and tend to be fully invested. This number seems to provide enough room for my best ideas while smoothing out volatility, not that I feel volatility in any way is related to risk.”
Not afraid to sell after a quick 40-50% pop
