Financial markets are rife with stories about big companies, banks and investment funds going bust or irredeemably going bankrupt, mind-boggling trades and hedge fund wizards making money from wild ideas. ‘The Big Short’, the film adaptation of Michael Lewis’s book, has reverted public attention to the subprime crisis and the strong conviction investing strategy. By watching this movie, not only did we, the Panda Agriculture & Water Fund team, rediscover the book, which we had read, it also prompted us to delve further into Dr. Burry’s investment philosophy. This document humbly seeks to be the most complete compilation of Dr. Michael Burry thoughts. We hereby aim to reveal the ins and outs of a relatively unknown investment philosophy. This appeared as a necessity to us, in a hostile monetary environment in which central banks manipulate the value of money and create a strong ‘monetary illusion’ in financial assets, especially stocks, securities and commodities, among others. In this document we have assembled Dr. Burry’s hedge fund track record, numerous investment cases, invaluable statements about general investment issues and all his operations — buys, sells and shorts made before his time as a money manager.
Why is a compilation of Dr. Michael Burry’s investment philosophy necessary?
In science, knowledge is cumulative. In finance, however, it is cyclical, with market participants making the same mistakes over and over again. One of our commitments to the financial industry is to keep already-learned lessons alive in long-term collective memory. We want to contribute by making financial knowledge less cyclical and more anti-fragile. We are also interested in promoting Dr. Burry’s unorthodox value investing approach. When asked about our investment approach we usually say that our philosophy is 50% value and 50% global macro. When it comes to analyzing companies, we focus on critical value points, paying special attention to cash flow generation (something Dr. Burry also does). As portfolio managers however, we also look at the global environment and macroeconomic trends. In fact, one of the reasons for starting Panda was our having identified agriculture as one of the strongest macroeconomic trends in the coming decades. Our intention is obviously not to take merit for other people’s work. Others have also made significant contributions to unravelling Dr. Burry’s investment philosophy. We want thank those people in advance, starting with Michael Lewis, the author of The Big Short, a book that we highly recommend not only for telling Dr. Burry’s story but also for its accurate description of the financial industry’s guts and plots. In a summary of Dr. Burry’s thoughts, Tren Griffin sets down twelve simple points that capture his vision. We are also indebted to Tariq Ali, who runs the Street Capitalist blog where we found an extremely interesting article entitled Learning from Michael Burry, which inspired us to write this essay. Dr. Burry has a strictly traditional understanding of value. He has said more than once that his investment style is built upon Ben Graham and David Dood’s book “Security Analysis”:
“All my stock picking is 100% based on the concept of a margin of safety”.
But Michael Burry is not an orthodox believer. He believes that had he been alive today, Graham himself would have used hedging, options and other financial innovations. Burry’s behavior suggests that he views value investment as a broader concept — he usually picks technological stocks, made a spectacular bet against mortgages’ ‘fake value’ and now also invests in water and agriculture. Good ideas, such as value investing, have value in themselves. Not acting upon new ideas however, only overexposes people to perpetuating past mistakes or using inaccurate approaches in an ever-changing world. Being an outsider to finance — as Dr. Burry was — helps people keep an open mind. He also is a contrarian investor through and through, always looking for unfashionable stocks and focusing on in-depth research and developing analytical skills. The Scion portfolio was highly concentrated, always with fewer than 25 stocks. The closer we look at what Dr. Michael Burry likes to do and the way he invests, the clearer it becomes that his abilities and approaches are like a shutting circle. His is definitely a unique style.
Good ideas, such as value investing, have value in themselves. Not acting upon new ideas however, only overexposes people to perpetuating past mistakes or using inaccurate approaches in an ever-changing world. Being an outsider to finance — as Dr. Michael Burry was — helps people keep an open mind. He also is a contrarian investor through and through, always looking for unfashionable stocks and focusing on in-depth research and developing analytical skills. The Scion portfolio was highly concentrated, always with fewer than 25 stocks. The closer we look at what Dr. Michael Burry likes to do and the way he invests, the clearer it becomes that his abilities and approaches are like a shutting circle. His is definitely a unique style.
Learning from Dr. Burry’s investment philosophy
We believe that the best way of understanding Dr. Michael Burry’s investment philosophy is through his own words. This paper contains a meticulous compilation of his thoughts, selected statements from his letters to investors, quotes from The Big Short, extracts from posts he made on the amateur internet forum Silicon investor and finally, insightful company analyses he published in a document called MSN Money Articles — essentially an investment diary9. We have done our best to collect and sort through this vast amount of information in the most useful way. We have also included some quotes, highlighted relevant parts and made comments about the contents.
The time frame between Dr. Burry’s first post in Silicon Investor in 1996 and his latest thoughts for Michael Lewis’s book published in 2010 spans over 14 years. One thing is clear, as he was about to become a professional money manager in late 2000 his personality as an investor was already shaped and changes during that preceding period are imperceptible.
When he started his fund, Dr. Michael Burry shut down his personal blog and stopped making his investments public, yet we can get valuable insight into his investing process, incentives and other issues from his letters. One of the best sources that can help us understand him is the MSN Money Article investment diary in which he wrote many investment case studies. It is unfortunate that so little transpires on the specific positions of the Scion Value Fund, but we do have statements from his pre-money manager time and his personal investment diary where he discusses certain stocks.
Before we start our compilation, we would like to offer a short but powerful message of wisdom every investor should always keep in mind:
ID: “Don’t worry about missing a rally. Worry about losing your money.”
1. Investing is a hard, never-ending learning process
If we had to define Dr. Michael Burry in one word, that word would be ‘conviction’. And if that had to be in two words, then it would be ‘Strong Conviction’. Although this is what he is best known for, we would like to point out that Dr. Burry did not restrict this attitude to the subprime issue. He already displayed this type of approach four years before he came up with his famous bet:
SI 5-jul-2000: “I’m not stopping myself out. This is a volatile stock, and I knew that going in. It could easily jump 7 points a day after it falls 6 the prior day. This is one that I could end up crucifying myself on, because I think I know something about the company that others generally don’t. Gives me a sense of bravado in the face of technical weakness.”
Just a few months later, in his second letter to investors (2001, Q1), as he mulled over the idea of stock options as remuneration for hot tech companies’ employees, we can see that the strong(est) conviction strategy was already an important basis for his approach:
MBL: “But, Mike, what if you are the only one that thinks of (stock) options this way? If everyone else thinks another way, doesn’t that make how you think of it irrelevant? I would argue that if I am the only one that thinks in this manner, and if I am correct, then my understanding becomes a competitive advantage that makes the subject even more relevant”
Someone who shows such conviction in their investment theory has to be a contrarian investor most of the time. Which is what Dr. Burry is, not only because it fits his investment style but because he has lived through the bubbles, dotcom and subprime times. His fixation on rationality and keeping things simple brings him to an extreme defense of his positions, revealing himself as a contrarian, as he does in the 2006 Q3 letter to investors:
MBL: “Never before have I been so optimistic about the portfolio for a reason that has nothing to do with stocks. This year the portfolio is down, but our performance so far is solely due to our credit default swap positions.”
In his 2005 Q3 letter to investors, Dr. Michael Burry explains in a few words why he follows a contrarian investing strategy with short positions on mortgage-backed securities.
MBL: “Sometimes, markets err big time. Markets erred when they gave America Online the currency to buy Time Warner. They erred when they bet against George Soros and for the British Pound. And they are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not exist. Opportunities are rare, and large opportunities on which one can put nearly unlimited capital to work at tremendous potential returns are even more rare. Selectively shorting the most problematic mortgage-backed securities in history today amounts to just such an opportunity.”
Contrarian investing is not incompatible with humility and being aware of one’s limitations. It is what Dr. Burry calls ‘scientific art’.
ID: “I might even make an error. Hey, I admit it. But I don’t let it kill my returns. I’m just not that stubborn. In the end, investing is neither science nor art – it is a scientific art. Over time, the road of empiric discovery toward interesting stock ideas will lead to rewards and profits that go beyond mere money-.”
Timing is what turns a strong conviction strategy into a contrarian one. In fact, the most important pillar of investing is the timeframe one works within. Indeed, other market participants need time to digest information and recognize value. This is why in October 2008, with world equity markets tumbling, Warren Buffet wrote a column in the New York Times entitled “Buy American. I am.”10 encouraging investors to buy American company stocks and bet on their long term wealth generation. Dr. Burry highlights how market participants’ timeframe can be key in his case study of the Pixar animation films company – incidentally founded by Steve Jobs:
ID: “Pixar Animation Studios is a stock sitting where no one can get it. Even if analysts or portfolio managers like the long-term story, the Wall Street Marketing Machine will not allow them to buy it.
The problem? Pixar’s next feature film will not be released until November 2001 — a full two years after the last, “Toy Story 2.” No matter that the first three releases — “A Bug’s Life,” “Toy Story,” and “Toy Story 2” — establish Pixar as a 1.000 batter later in the season than any other major studio before it. No matter that Pixar promises at least one theatrical release per year from 2001 on, and has beefed up its talent pool with the likes of animation guru Brad Bird. For Wall Street, this is a timeliness issue.”
But his investing style is a lot more than this. Dr. Michael Burry truly believes that independent researchers can achieve extraordinary results through their own methods:
MLB: “I have always believed that a single talented analyst, working very hard, can cover an amazing amount of investment landscape, and this belief remains unchallenged in my mind.”
As Tren Griffin said before we did, Dr. Burry’s investing style decidedly is a value one, especially centered on margin of safety. As you can read in an extension of the quote highlighted earlier:
ID: “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”.
The classic definition of “margin of safety” is investing in companies with a market price significantly below their intrinsic value. The point is to avoid overvaluation and big drag-downs by buying good businesses at low prices. Without wishing to delve deeply into the debate, we would like to point out the concept of ‘intrinsic value’. Markets and economic environments can change rapidly, industries can transform or disappear. Intrinsic factors are few, and value is not one of them. We can see margin of safety in companies with undiscovered or unlocked potential value, but there is nothing intrinsic there. Dr. Michael Burry also understands margin of safety as a way of hedging his portfolio, something we will look at further on. For now, we see no better tech stock than Amazon to introduce Dr. Burry’s unorthodox view of the concept of margin of safety.
SI 30-Jul-2000: “OK, so it’s contrarian, but it is also one of the most visible, over-analyzed stocks by pros and amateurs alike. Where’s my advantage in understanding Amazon.com? Quest for Value’s an interesting book, but I still don’t see the margin of safety in an option, at least as I define a margin of safety. More likely, a diversified portfolio of these sorts of companies may indeed provide the few rockets that offset or more than offset the ones that go to zero. So you then have a margin of safety in the portfolio. But I don’t see the margin of safety in an individual Z, precisely because you are projecting based on many assumptions that have no fundamental basis in past reality, and because you do not have infinite time for the security to come around – after all, it is an option in that regard. And in Amazon.com’s case, a debt-laden one at that.”
Dr. Michael Burry’s analysis ethos is based on nonconformism, and who better than himself to explain it:
ID: “I care little about the level of the general market and put few restrictions on potential investments. They can be large cap stocks, small cap, mid cap, micro cap, tech or non-tech. It doesn’t matter. If I can find value in it, it becomes a candidate for the portfolio. It strikes me as ridiculous to put limits on my possibilities. I have found, however, that in general the market delights in throwing babies out with the bathwater. So I find out-of-favor industries a particularly fertile ground for best-of-breed shares at steep discounts. MSN MoneyCentral’s Stock Screener is a great tool for uncovering such bargains.”
See the full PDF below.
 At the end of this essay you will find a short description of Panda Agriculture & Water fund and our contact details.
 López Díaz, S. Birthdays, Bulls and ‘Bonassus’. Exane BNP Paribas, Equities Banks Research, February 2016.
 In The Ascent of Money, Niall Ferguson describes about how investment bankers and Wall Street CEOs who have not experienced recent crashes (1987, 1998, 2001) tend to underestimate the possibility of a new crash, “Markets do not have too much memory”.)
 Taleb, N. N. Antifragile: Things that gain from disorder. Penguin Books, November 2012.
 Lewis, M. The Big Short: Inside the Doomsday Machine. W. W. Norton & Company, March 2010.