[ARCHIVES] Michael Burry – Don’t Be Seduced By Too-Good-To-Be-True High Yield

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One of the best investing resources are Michael Burry’s MSN 2000/2001 Strategy Lab articles where he provides some great insights into his investing strategy. Value investor Burry was the founder of the hedge fund Scion Capital, and he was one of the first investors to recognize and profit from the subprime mortgage crisis. The story of which was told in the 2015 movie – The Big Short.

Burry was a big believer in preserving capital and avoiding permanent loss saying, “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. The deleterious effect of permanent capital loss on portfolio returns cannot be overstated.”

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One Strategy Lab article which should be of particular interest to all investors is titled – Don’t Worry About Indexes. Worry About Your Stocks, in which he provides some warnings to investors on chasing yields and trying to guess the direction of markets. He also provides his thoughts on which stocks ought to do best regardless of the future. Here’s an excerpt from that article:

Pros And Cons Of Tail Risk Funds

tail risk fundsEditor’s note: This article is part of a series ValueWalk is doing on tail risk hedge funds. The series is based on over a month of research and discussions with over a dozen experts in the field. All the content will be first available to our premium subscribers and some will be released at a Read More


Brace for yet another new paradigm. Welcome to Round 7 of Strategy Lab. The strategy entry pieces together outtakes from the quarterly letters I write to Scion Capital’s investors.

The cumulative return of my picks over the previous two discontinuous rounds has been just over 23%. Over the same 14-month span, the S&P 500 ($INX) returned a cumulative -22%, and the Nasdaq ($COMPX) returned a cumulative -58%. While the relative performance looks respectable, I am not happy with the absolute performance.

It is not generally true that my portfolios correlate with the various indices anyway, and I know I could have done better with my stock picking here within Strategy Lab. Last round’s performance was particularly harmed by my special situation airline and hotel holdings. I will attempt to do better here this round.

The yield chase.

The need for yield has been apparent in the new issue bond markets of late. The Ford deal was doubled in size even as Ford made it clear that the company would be lending out at 0% that which it borrows. Stocks don’t pay dividends anymore, savings and money market accounts yield too little. The remaining option is bonds. To the degree the need for yield results in a mass panic for yield, however, the consequences will be dire.

While earnings yields on equities are commonly mispriced, bond yields are much less commonly mispriced. So what is my recommendation to those who approach me in search of higher yields? Caveat emptor. In other words, work hard not to be seduced when a too-good-to-be-true higher yield investment comes along.

Moreover, should deflation become a factor, the tremendous debt burden under which many U.S. companies and consumers operate will become much more of a burden, even as consumers hold off on consumption as they wait for lower prices.

Forecasting the direction of markets and which stocks ought to do well regardless of the future.

Paradigms are continually turned upon their heads. This is how the United States as a country progresses. We ought brace for yet another new paradigm — one that few if any pundits including me — can predict.

Regardless of what the future holds, intelligent investment in common stocks offer a solid route for a reasonable return on investment going forward. When I say this, I do not mean that the S&P 500, the Nasdaq Composite or the market broadly defined will necessarily do well. In fact, I leave the dogma on market direction to others. What I rather expect is that the out-of-favor and sometimes obscure common stock situations in which I choose to invest ought to do well. They will not generally track the market, but I view this as a favorable characteristic.

You can read all of Burry’s MSN 2000/2001 Strategy Lab articles here.

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”