This is the first of a multi-part series on Dr Michael Burry, value investor, founder of Scion Capital and one of the first fund managers to bet against the subprime housing market.
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Dr. Michael Burry — Part one: Starting small
Like many of the great value investors, few have heard of Dr. Michael Burry outside of value circles. However, Michael Burry wasn’t just a standard value investor; he was one of the first — possibly the first — hedge fund manager to bet against the subprime housing market. In addition, Michael Burry was instrumental in creating a market for credit default swaps, which allowed other investors to bet against the subprime mortgage market.
Michael Burry first started to take a serious interest in the market while he was doing his medical residency at Stanford Hospital. The dotcom bubble was reaching its height, and Michael Burry wanted to know why the market was acting so irrationally.
After 16-hour shifts at the hospital, he would work on his investments and blog, posting stock-market trends and his opinion for making trades. These blog posts were well research and thorough. Soon they started to attract attention, although Burry unaware at first.
The first time Michael Burry realized that other people were reading his work, was when he wrote a post criticizing Vanguard and some of their funds. Soon after, a cease and desist letter arrived from Vanguard’s lawyers.
Soon after, Burry left medicine and started his fund. Named Scion Capital, the fund was started with a small investment from Burry’s family members. But before Burry has even begun to allocate his newly found capital, he received a phone call from Gotham Capital, founded by Joel Greenblatt, which, as it turns out had been following his trades for some time and wanted to invest. At the same time, Michael Burry also received a call from insurance group, White Mountains, which offered him $10 million to invest and a further $600,000 to buy a share of Scion.
After being in business for only a few weeks, with no background in the fund management industry, Michael Burry’s Scion Capital was managing money for some of the most respected investors around.
Michael Burry’s investment philosophy is very different from that of other value investors. Contrarian in nature, Burry was on the lookout for unloved, unknown companies with an upcoming catalyst. In the same way that Graham and Schloss shunned management and outside opinions, in favor of their own rigorous analysis of balance sheets, Burry conducted all of his research online. Sitting alone in his offer with the blinds shut he looked for investments. According to Michael Lewis’ book, The Big Short, Burry employed analysts at Scion but failed to find a use for them. He often conducted all of the work himself.
Michael Burry’s investment philosophy was to look for what he called the “ick factor.” Essentially companies suffering from serious problems, but which are still, good 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
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