- take 5 hours. Like you probably do, I productively fill the gaps that most people leave as dead time. My drive to be productive probably cost me my first marriage and a few days ago almost cost me my fiancée. Before I went to college the military had this ‘we do more before 9am than most people do all day’ and I used to think I do more than the military. As you know there are some select people that just find a drive in certain activities that supersedes everything else.”
- His $40,000 in assets against $145,000 in student loans posed the question of exactly what portfolio he would run. His father had died after another misdiagnosis: a doctor had failed to spot the cancer on an X-ray, and the family had received a small settlement. The father disapproved of the stock market, but the payout from his death funded his son into it. His mother was able to kick in $20,000 from her settlement, his three brothers kicked in $10,000 each of theirs. With that, Dr. Michael Burry opened Scion Capital. (As a teen he’d loved the book The Scions of Shannara. ) He created a grandiose memo to lure people not related to him by blood. “The minimum net worth for investors should be $15 million,” it said, which was interesting, as it excluded not only himself but basically everyone he’d ever known.
- As he scrambled to find office space, buy furniture, and open a brokerage account, he received a pair of surprising phone calls. The first came from a big investment fund in New York City, Gotham Capital. Gotham was founded by a value-investment guru named Joel Greenblatt. Burry had read Greenblatt’s book You Can Be a Stock Market Genius. (“I hated the title but liked the book.”) Greenblatt’s people told him that they had been making money off his ideas for some time and wanted to continue to do so—might Mike Burry consider allowing Gotham to invest in his fund? “Joel Greenblatt himself called,” said Burry, “and said, ‘I’ve been waiting for you to leave medicine.’” Gotham flew Burry and his wife to New York—and it was the first time Michael Burry had flown to New York or flown first-class—and put him up in a suite at the Intercontinental Hotel.
- He arrived at the big New York money-management firm as formally attired as he had ever been in his entire life to find its partners in T-shirts and sweatpants. The exchange went something like this: “We’d like to give you a million dollars.” “Excuse me?” “We want to buy a quarter of your new hedge fund. For a million dollars.” “You do?” “Yes. We’re offering a million dollars.” “After tax!
- Burry didn’t know it, but it was the first time Joel Greenblatt had done such a thing. “He was just obviously this brilliant guy, and there aren’t that many of them,” says Greenblatt.
- Shortly after that odd encounter, he had a call from the insurance holding company White Mountain. White Mountain was run by Jack Byrne, a member of Warren Buffett’s inner circle, and they had spoken to Gotham Capital. “We didn’t know you were selling part of your firm,” they said—and Burry explained that he hadn’t realized it either until a few days earlier, when someone offered a million dollars, after tax, for it. It turned out that White Mountain, too, had been watching Michael Burry closely. “What intrigued us more than anything was that he was a neurology resident,” says Kip Oberting, then at White Mountain. “When the hell was he doing this?” From White Mountain he extracted $600,000 for another piece of his fund, plus a promise to send him $10 million to invest. “And yes,” said Oberting, “he was the only person we found on the Internet and cold-called and gave him money.”
- Thus when Mike Burry went into business he disapproved of the typical hedge-fund manager’s deal. Taking 2 percent of assets off the top, as most did, meant the hedge-fund manager got paid simply for amassing vast amounts of other people’s money. Scion Capital charged investors only its actual expenses—which typically ran well below 1 percent of the assets. To make the first nickel for himself, he had to make investors’ money grow. “Think about the genesis of Scion,” says one of his early investors. “The guy has no money and he chooses to forgo a fee that any other hedge fund takes for granted. It was unheard of.”
- He’d started Scion Capital with a bit more than a million dollars—the money from his mother and brothers and his own million, after tax. Right from the start, Scion Capital was madly, almost comically successful. In his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away. “If he’d run his fund to maximize the amount he had under management, he’d have been running many, many billions of dollars,” says a New York hedge-fund manager who watched Burry’s performance with growing incredulity. “He designed Scion so it was bad for business but good for investing.”
- By the middle of 2005, over a period in which the broad stock-market index had fallen by 6.84 percent, Burry’s fund was up 242 percent, and he was turning away investors. To his swelling audience, it didn’t seem to matter whether the stock market rose or fell; Mike Burry found places to invest money shrewdly. He used no leverage and avoided shorting stocks. He was doing nothing more promising than buying common stocks and nothing more complicated than sitting in a room reading financial statements. Scion Capital’s decision-making apparatus consisted of one guy in a room, with the door closed and the shades down, poring over publicly available information and data on 10-K Wizard. He went looking for court rulings, deal completions, and government regulatory changes—anything that might change the value of a company.
- As often as not, he turned up what he called “ick” investments. In October 2001 he explained the concept in his letter to investors: “Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ‘ick.’”
- Avant! Corporation was a good example. He’d found it searching for the word “accepted” in news stories. He knew that, standing on the edge of the playing field, he needed to find unorthodox ways to tilt it to his advantage, and that usually meant finding unusual situations the world might not be fully aware of. “I wasn’t searching for a news report of a scam or a fraud per se. That would have been too backward-looking, and I was looking to get in front of something I was looking for something happening in the courts that might lead to an investment thesis. An argument being accepted, a plea being accepted, as settlement being accepted by the court.”
- A court had accepted a plea from Avant! Corporation. Avant! had been accused of stealing from a competitor the software code that was the whole foundation of Avant!’s business. The company had $100 million in cash in the bank, was still generating $100 million a year of free cash flow – and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avant! Corporation than any man on earth. He was able to see that even if the executives went to jail (as they did) and the fines were paid (as they were), Avant! would be worth a lot more than the market then assumed. Most of its engineers were Chinese nationals on works visas, and thus trapped – there was no risk that anyone would quit before the lights were out. To make money on Avant!’s stock, however, he’d probably have to stomach short-term losses, as investors puked up shores in horrified response to negative publicity. Burry bought his first shares of Avant! in June 2001 at $12 a share. Avant!’s management then appeared on the cover of an issue of Business Week under the headline “Does Crime Pay?” The stock plunged; Burry bought more. Avant!’s management went to jail. The stock fell some more. Mike Burry kept on buying it – all the way down to $2 a share. He became Avant!’s single largest shareholder; he pressed management for changes. “With [the former CEO’s] criminal aura no longer a part of operating management,” he wrote to the new bosses, “Avant! has a chance to demonstrate its concern for shareholders.” Four months later, Avant! got taken over for $22 a share. “That was a classic Mike Burry trade,” says one of his investors. “It goes up by ten times but first it goes down by half.”
- This isn’t the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn’t do this if he was at the mercy of very short-term market moves, and so he didn’t give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year.
- Burry also designed his fund to attract people who wanted to be long the stock market – who
