The Unlikely Success Story Of Michael J. Burry

The Unlikely Success Story Of Michael J. Burry
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Article by Vintage Value Investing

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Dr. Michael J. Burry is one of the little known investors that foresaw the 2008 financial crises and profited handsomely from it. However, his story was not always one of unmitigated success. It had many ups and downs that were chronicled in the famous Michael Lewis book (and movie), The Big Short. His story is an unlikely one that ends with fabulous wealth but a strange result.

From Doctor to Investor

Michael J. Burry was born and raised in San Jose, California. He did pre-med studies at UCLA and got his medical degree at Vanderbilt. After coming home to California to do his residency at Stanford, he got bit by the investing bug and left school to start his own hedge fund, which he called Scion Capital.

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Michael Burry was always awkward and anti-social. In fact, he has self-diagnosed with Asperger’s disease. While he was brilliant, Burry had few friends and was not well known in investment circles when he started his career.

Michael J. Burry vs. The Internet

Burry is a contrarian by nature and is willing to look at companies and society differently than other people. In fact, Burry is a follower of Benjamin Graham’s fundamental value of investing (which is also practiced by Warren Buffett).

For that reason, he was early on the call that the internet had way overvalued companies with little to no revenue or profitability. He began shorting those stocks immediately and his hedge fund went up like a rocket ship. In the first year, Michael J. Burry returned 55% even though the S&P 500 fell 12%. The market continued to fall dramatically the next two years yet Burry’s fund returned 16% and 50%, making him one of the most successful investors in the industry.

Michael Burry’s small group of initial investors including Vanguard, White Mountains Insurance Group, and prominent investor Joel Greenblatt had seen their funds rise dramatically and the overall assets under management reached $600 million. Burry was overwhelmed and was turning investors away in 2004.

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Burry and The Big Short

However, Mike Burry was soon onto a new idea as he began to analyze the subprime financing market and bank balance sheets. He noticed great irregularities and unsustainability in this market.

Michael Burry saw the riskiness of the subprime market as millions of borrowers with low income and few assets bought homes and cars with tremendous leverage. Some borrowers made very low or in many cases no down payments for mortgages that the couldn’t possibly pay back if interest rates rose. However, the banking system was valued as if these mortgages would all be paid. Burry realized that this could not possibly continue over the long-term.

At the same time, Burry began to tell his investors of the enormous risks to the system. His investors were mostly institutions that did not want to hear his theory. Their other investments were all built upon the concept of a sound system with no subprime mortgage risk. Investors began to get nervous and demand their money back.

Unfortunately, it was too late as Burry had already gotten into several long-term, illiquid bets against the market using derivatives to bet the price of mortgages would fall. If he got out of the trades, he would suffer a huge loss – so Burry simply refused the investors’ requests.

All of a sudden in 2007 the market started to turn in his direction as more and more people understood the risks to the system. Then the dominoes began to fall, first with Bear Stearns, then with Lehman Brothers, AIG, and the rest of the financial system. Burry’s investments paid off handsomely and he made $100 million for himself and $700 million for his investors.

Michael J. Burry: Brilliant but Flawed

Interestingly, the relationship had become so tainted that his investors refused to work with him again. Despite all of his success, Burry could not succeed in fundraising again for his fund and he liquidated the assets. While Michael J. Burry is an extremely wealthy man, his anti-social behavior and poor relationship with investors eventually ended his career as a manager for public funds.

So what is Dr. Michael J. Burry investing in now? The answer is simple. Burry’s putting all of his money into just one commodity: water.

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
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