“Fully aware that wonderful businesses make wonderful investments only at wonderful prices, I will continue to seek out the bargains amid the refuse.” — Michael Burry
Michael Burry: Background & bio
Michael Burry is the physician turned money manager and founder of Scion Capital LLC hedge fund and successfully ran it for eight years. Then, in 2008, Michael eliminated this fund so that he could concentrate on his private investments. He was one of the rare investors who took the daring step into the field of mortgages during the crisis period.
Michael Burry, born in 1971, is a medical doctor, having graduated from Vanderbilt University’s School of Medicine. He did his residency at Stanford Hospital. It was during his night shift at the hospital where he used to work on his hobby of financial investments, which later became his full-time profession.
As a novice investor, he created his own blog, posting stock-market trends and his opinion for making trades. Soon after, he started being noticed by other high-profile fund managers in the market and investment banks such as Morgan Stanley.
He quit his medical career in 2000 and started his investment company, Scion Capital. Although unaware of it initially, he was diagnosed with Asperger Syndrome. During the time that Burry was managing investments for people, he was uncomfortable talking to them. He communicated with his investors through letters to inform them of their investment progress. Burry has said that whatever group he joins, he feels like a stranger, never comfortable and all the time busy analyzing that group. When he became an investor, he took it very seriously, as a full-time business.
Initially, Burry started his investment company by taking loans and by using his property. He derived the name of his company from the fantasy novel The Scions of Shannara, by Terry Brooks. In 2001, his company generated a large profit for the firm’s investors. Again, in 2002 and 2003 the company did very well. Due to his continuous success, Scion Capital had $600 million AUM at the end of 2004.
Burry is known for being the hedge fund manager who predicted the housing boom.
In 2005, Burry he started researching the real estate market, which led to him getting involved in the mortgage business (shorting credit instruments). He analyzed mortgage lending prices in 2003 and 2004 and accurately forecast that the bubble would burst by 2007. His study on residential real estate convinced him that subprime mortgages and the bonds based on these mortgages would start losing value when the original rates reset, which could happen within two years after commencement.
Based on this conclusion, he bought several hundred million dollars in credit default swaps against subprime deals that he thought were in danger. He believed that as the value of the bonds fell; the value of the credit default swaps would increase. No one thought these trades would work out in his favor, and he faced constant pressure from his investors over his decisions. Investors became concerned about the apparently money-losing trade and at one point even threatened to sue Burry for refusing to unwind his positions.
Burry also had to make a decision of selling corporate CDS because of the Wall Street issue made against him and his investors. He personally thought that the CDS market would collapse. The technical aspects of CDS were there, but synthetic CDOs caused the mortgage market to become more difficult to understand. Burry said Paulson as well as Bernanke could not realize the problem with the sub-prime market because they did not take it seriously. Even many people from the government sector underestimated the issue though they were well-aware of that crisis.
In an interview with The New York Times, Burry said that investors who studied financial markets from 2003 to 2005 could be able to see the risks in subprime markets.
His speculations were right. Not only did he make a big profit privately (as much as $100 million), but also earned his investors $700 million. He liquidated his credit default swap short positions by April 2008 and thus did not benefit from the bailouts of late 2008 and 2009. He subsequently shuttered his company to focus on his personal investments.
Scion Capital managed to record returns of 489.33% between November 2000 and June 2008. At its height, Scion managed about $1 billion.
“We turned the tables on Wall Street and I became the 1% in a way I never imagined sitting where you sit today,” Burry said in a 2012 commencement address to economics graduates at UCLA, his alma mater. “I had bet against America and won.”
Scion Capital returns
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Burry has continued to invest since closing his hedge fund, developing a reputation as an investor by showing astonishing success in value investing. He was very successful from the start and showed an uncanny ability to predict the market.
Burry has since made a comeback into the asset management business. He raised $100 million to $200 million from outside investors during 2013 and started Scion Asset Management, LLC , a private investment firm.
Another facet to Burry’s life is that as a proven money manager, he’s constantly asked for tips by various investors; in response he gives good guidance, and Burry himself is an investor in Bo Shan’s companies, who is his longtime colleague.
In a recent incident of Wall Street banks being sold to the investors, it was noted that Burry was not involved in such trading; Burry only focused on residential mortgages and their securities.
Burry’s predictions have proven to be startlingly accurate in the past. Sometimes he found it hard to convince investors and his partners about the coming financial collapse. In addition, in 2006 he realized that even the government would not be able to take any action against the housing bubble. However, when the crisis came, he could do nothing to stop it though he wrote letters to investors in 2005 and 2006.
Burry keeps on giving lectures and speeches even though he’s not an active hedge fund manager anymore. One such a speech he gave at Vanderbilt University was attended by a huge crowd. This speech was all about the housing bubble, but his listeners were mostly academics.
He had a great vision about the subject and tried to inform as many people as possible. Michael delivers his speeches with a very light, funny style by declaring that finance professionals are not much smarter than doctors are. He also makes it clear that he is prominent and popular only because of his performance in the field of finance.
For this reason, people should not think that it is because of social status. At the same time, he also has to face critics, as has been criticized in many articles by Bogle. People have also harped on the fact that Burry is mostly interested in “Ick investments.”
During 2010, Burry brought an almond farm that he still owns. He currently lives there with his family.
Michael Burry: Investment philosophy
Burry’s investment philosophy is to look for what he terms as “ick factor.” This is an investment in companies suffering from serious problems, but which are still, essentially, good investments.
Csinvesting has put together a case study of Burry’s published MSN Money Articles, written during 2000/2001. These articles offer a great insight into Burry’s strategy and some of his investments:
My strategy isn’t very complex. I try to buy shares of unpopular companies when they look like road kill, and sell them when they’ve been polished up a bit. Management of my portfolio as a whole is just as important to me as stock picking, and if I can do both well, I know I’ll be successful.
Weapon of choice: research
My weapon of choice as a stock picker is research; it’s critical for me to understand a company’s 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. All my stock picking is 100% based on the concept of a margin of safety, as introduced to the world in the book “Security Analysis,” which Graham co-authored with David Dodd. By now I have my own version of their techniques, but the net is that I want to protect my downside to prevent permanent loss of capital. Specific, known catalysts are not necessary. Sheer, outrageous value is enough.
I prefer to buy within 10% to 15% of a 52-week low that has shown itself to offer some price support. That’s the contrarian part of me. And if a stock — other than the rare birds discussed above — breaks to a new low, in most cases I cut the loss.
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, I’ll 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). I’ll 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.
Beyond stock picking
Successful portfolio management transcends stock picking and requires the answer to several essential questions: What is the optimum number of stocks to hold? When to buy? When to sell? Should one pay attention to diversification among industries and cyclicals vs. non-cyclicals? How much should one let tax implications affect investment decision-making? Is low turnover a goal? In large part this is a skill and personality issue, so there is no need to make excuses if one’s choice differs from the general view of what is proper. I 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. But you see, I have this heartburn problem and don’t need the extra stress.
Here’s another set of investment writeups, which detail Burry’s investment philosophy during his time running Scion:
Huttig Building Products (HBP) – $4.3125 on Aug 27, 2000
I just finished entering a bunch of data such as trailing EPS and revenues. Throw it all out the window. Huttig Building Products may be one of the most ignored, misunderstood stocks on the market, and a big reason is that superficial analysis with readily available data is, well, too superficial. Huttig Building Products (NYSE: HBP), spun-off from Crane (NYSE: CR) last year, is a leading distributor of building products such as doors, windows and trim. Value investors may recognize the opportunity that so often occurs with spin-offs. In this case, simultaneous with the spin-off, Huttig issued 6.5 million shares to acquire Rugby USA from Rugby Group PLC. The net is that even the proxy for the spin-off was worthless because it wouldn’t account for the acquisition. As a spin-off from an S&P 500 company, Huttig was guaranteed hot potato status anyway. But factor in confusing offering documents and an admittedly poor marketing job, and the stock simply could not avoid the doghouse.
The beneath-the-surface numbers follow. The leader in its very fragmented industry, Huttig has a market share of just 8% and will earn revenues topping $1.2 billion. Razor-thin margins are offset by industry-leading working capital management. In fact, the company has been profitable since the CivilWar. This year, the company will see about $60 million in EBITDA plus a substantial one-time gain, yet carries an enterprise value ($89 market capitalization plus $122 million debt less $6 million cash) just about $205 million.
As the industry’s most efficient operator (with management firmly ensconced in a shareholder-friendly EVA compensation model straight out of Stern & Stewart), Huttig is ahead of plan to squeeze $15 million in synergies out of Rugby as well as bring Rugby’s poor working capital management more in line with Huttig’s other operations. Expect another $20 million to drip out of working capital within the next year. Because of these savings, Huttig in effect paid just $40 million for Rugby’s $30 million in annual EBITDA.
While Huttig’s management should get credit, some of it must be shared with the motivated seller. Rugby Group PLC is not the world’s best-managed company, to put it lightly.
Going forward, Huttig will have tremendous free cash flow. Free cash flow averaged $21 million per year for the three years before the acquisition of Rugby. Now, EBITDA jumps to at least $60 million, and free cash flow jumps to at least $35 million. Plus, in the short term, we get the $20 million or so that comes out of Rugby’s working capital. As a result of this, during calendar 2000 Huttig is well on track to bring its $122 million in debt down to $82 million. Management’s reasons for the debt-reduction? Reduced interest expense and expanded ability to pursue acquisitions. So what we are looking at is an enterprise trading at just 3.1 times EBITDA, and only about 5.1 times free cash flow. Remember – 130 years of continuous profitability.
Management follows strict return-on-investment criteria according to Stern Stewart’s EVA theory and model’s operations on GE’s Six Sigma program. The Chairman comes from Crane and is known to be a shareholder advocate.
Books featuring Michael Burry
- The Big Short: Inside the Doomsday Machine by Michael Lewis
- The Greatest Trade Ever: How John Paulson Bet Against The Markets and Made $20 Billion by Gregory Zuckerman
Michael Burry: Quotes
“I knew I was getting attention when I said something I think in late 1999. I said that Vanguard funds are the worst funds to invest in now. Those index products are going to do horribly over the next decade and I linked to the site and I got a cease and desist from Vanguard. So I realized, oh, people are reading this.”
“I started getting paid a dollar a word to write, which was — I didn’t have a lot of money, and I was actually in a lot of debt. So that was tremendous validation for what I was doing in that space.”
“I prefer to look at specific investments within the inefficient parts of the market.”
“The bulk of opportunities remain in undervalued, smaller, more illiquid situations that often represent average or slightly above-average businesses”
“Fully aware that wonderful businesses make wonderful investments only at wonderful prices, I will continue to seek out the bargains amid the refuse.”
“It is likely, however, that the investors in the habit of overturning the most stones will find the most success.”
“My firm opinion is that the best hedge is buying an appropriately safe and cheap stock.”
“It is a tenet of my investment style that, on the subject of common stock investment, maximizing the upside means first and foremost minimizing the downside.”
“Lost dollars are simply harder to replace than gained dollars are to lose.”
“The Fund maintains a high degree of concentration – typically 15-25 stocks, or even less. Some or all of these stocks may be relatively illiquid.”
“Volatility does not determine risk.”
“I certainly view volatility as my friend; volatility is on sale because 99% of the institutions out there are doing their best to avoid it.”
“In essence, the stock market represents three separate categories of business. They are, adjusted for inflation, those with shrinking intrinsic value, those with approximately stable intrinsic value, and those with steadily growing intrinsic value. The preference, always, would be to buy a long-term franchise at a substantial discount from growing intrinsic value.”
“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.”
“One hedges when one is unsure. I do not seek out investments of which I am unsure.”
“I will always choose the dollar bill carrying a wildly fluctuating discount rather than the dollar bill selling for a quite stable premium.”
“With all seriousness, a 2,500-share sell when no one is looking could torpedo the apparent market value of several of the Fund’s holdings.”
Michael Burry: Articles
- http://michaelburryblog.blogspot.co.uk/ < A great collection of Burry articles and video
Michael Burry: Notes from Vanderbilt Speech
- Joel Greenblatt: The Big Secret For Value Investors (Presentation From Value Investing Congress)
- Fund Star from Crisis Looks to Raise Money Again
- This Is The Photo Hedge Fund Manager Michael Burry Sent To Investors After He Made Them Tons Of Money In 2007
- Profiling “The Big Short’s” Michael Burry
- Burry, Predictor of Mortgage Crisis, Bets on Farmland
- I Saw the Crisis Coming. Why Didn’t the Fed?
- Learning from Buffett and Burry
- Ira Sohn Conference Notes: Hedge Fund Manager Presentations
- Favorite Quotes from Q1 Hedge Fund Letters: Passport, Kleinheinz Capita, and Omega
- Michael Burry Speech at Vanderbilt: Transcribed
- Michael Burry’s Testimony Before The Financial Crisis Inquiry Committee
- Betting on the Blind Side | Business | Vanity Fair
- We’ve Become a Nation of Bubbleheads – Forbes
- Michael Burry “Really Went After Goldman” At A Speech Last Night
- Before Crisis, Wall Street Knew
- Mortgage crisis seer Michael Burry bets on farms – SFGate
- After shorting subprime, hedge fund is moving on
- Michael Burry: Subprime Short-Seller No. 1 – NYTimes.com
- The Outsiders Who Foresaw The Subprime Crisis : NPR
- Paulson Subprime Plan Offers Little Aid, Analysts Say
- Standard & Poor’s, Moody’s come under fire – Aug. 20, 2007
- Overwhelming yes for Gold Fields’ Bolivar bid
- Gold Fields Exaggerated Venezuela Risk, Scion Says (Update2)…