Learning From Michael Burry by Street Capitalist
If you have ever wanted to learn about Michael Burry, read this post. It is long, but if you feel like skipping what I think, just read the content in the block-quotes, those come straight from Michael Burry of Scion Capital.
“you’re a doctor, ipso facto a lousy investor.”
That was one of the first messages Michael Burry received when he started his value investing thread on Silicon Investor, back in 1996. Now however, Michael Burry is a pretty well-regarded investor, having made it big with inventing the credit default swap trade as a means of profiting from the financial crisis and being prominently featured in The Greatest Trade Ever by George Zuckerman and The Big Short by Michael Lewis.
What I wanted to find out is how Michael Burry went from being a medical resident to being regarded as one of the greatest investors in recent history. Burry’s story is pretty inspirational to investment bloggers — he started out in relative obscurity, posting his ideas on message boards and eventually his own site, until he built a strong institutional following. Eventually, his amateur analyst work attracted the likes of Joel Greenblatt’s Gotham Capital and White Mountains Insurance Group (NYSE:WTM). With their money, he started Scion Capital and built a market beating track record. In recent years, Burry unwound his fund in favor of managing his own money.
We are lucky in a way that the internet archives of Burry’s posts are still readily available. These archives let us see how Michael Burry invested and the evolution in his process from about 1996 to 2000. I am sure that his approach changed while he was running Scion as well, but I still think the information here is really insightful to young investors.
- I’ve read way too much
The first thing that strikes you about Michael Burry is the fact that at the time of his initial post, he has read a lot:
Ok, how about a value investing thread?
What we are looking for are value plays. Obscene value plays. In the Graham tradition.
This week’s Barron’s lists a tech stock named Premenos, which trades at 9 and has 5 1/2 bucks in cash. The business is valued at 3 1/2, and it has a lot of potential. Interesting.
We want to stay away from the obscenely high PE’s and look at net working capital models, etc. Schooling in the art of fundamental analysis is also appropriate here.
Good luck to all. Hope this thread survives.
Look at the type of value investing that Michael Burry is referring to. Remember, most people mistakenly believe value investing is just copying whatever Warren Buffett does, but value investing is actually more diverse than that. The Graham tradition refers to Benjamin Graham, Buffett’s teacher, and indicates a more quantitative approach to investing. Graham targeted net-nets, stocks trading at 2/3 their net current asset value. He sought hard assets and did not mind investing in terrible businesses as long as the liquidation value was in tact and protected.
Burry later notes that he is an MD, not an MBA. He picked up most of his knowledge by reading. I believe that if you want to be successful in investing, it is important to be willing to learn and explore new concepts on your own.
This must have been especially true for Michael Burry because when he started posting he was just an outsider. He was no Wall Street analyst and lacked the same resources as many institutional investors. But, Burry made up for his lack of professional knowledge with his drive and determination to learn. Here are some of the books he recommended:
To get started, I’d suggest the following four books:
The Intelligent Investor by Graham
Common Stocks and Uncommon Profits by Fisher
Why Stocks Go Up and Down By Pike
Buffettology by Buffett and Clark
If you read these books thoroughly and in that order and never touch another book, you’ll have all you need to know. Another book you might want to consider is Value Investing Made Easy by Janet Lowe – a quick read. I have a fairly extensive listing of books on my site, with my reviews of them, and links to purchase them at amazon.
My problem is I’ve read way too much. One book stated, “If you’re not a voracious reader, you’ll probably never be a great investor.” But sometimes I wish I had a more focused knowledge base so that my investment strategy wouldn’t get all cluttered up.
Re: Security Analysis you can get a lot of the same info in a more accessible format elsewhere, but everyone says that Buffett’s favorite version is the 1951 edition. Yes there are differences, and the current version has a lot of non-Graham like stuff in it.
From the period of 1996 to 2000, Michael Burry wrote 3,304 posts or about 2.3 posts per day. He didn’t let the criticism of more experienced investors get to him, on occasion he was lambasted for being a doctor or not a financial professional. But he kept posting anyway. Many of these posts give us a glimpse of his thought process and the kinds of questions he asked. We can see that he mostly used the site as a sounding board to gauge investment ideas and learn from more experienced investors. His constant asking of questions and stock analysis posts are demonstrative of his intellectual curiosity and how he tried to continuously improve his own abilities as an analyst.
- There’s a way to win at everything. It just has to be found.
If you go back and read Michael Burry’s posting history, you will see that his investment style was influenced by Graham and Buffett but also had a number of unique qualities. Note his use of technical analysis:
As I’ve brought up on this thread before, I was a growth/technical analysis investor for quite a while. I studied TA pretty extensively. Hence, when I felt the market getting toppy last December and became a student of value investing, I found it hard to leave TA completely behind. Mainly I use it only to avoid falling knives and to find buy points at very solid support. I try not to use it to sell stocks
because my horizon remains long-term. With the market this toppy though, I find it hard to ignore when TA says sell after a fast rise. It’s the old take the money and run. It has helped me tremendously, and I have been hurt when I ignore it completely. The four companies I hold now I’m not even charting, though I would do so if one or more gains 40-50% in a few weeks, as WHX has done.
Most value investors I think would cringe at the very thought of using TA, but Michael Burry found a way to incorporate it into his approach. Part of this has to do with the fact that he actually starting his trading not in stocks, but in coffee futures:
Jim, I guess I still watch the