Michael Burry Some Old Posts From Silicon Investor

I finally got around to reading a good chunk of the Michael Burry archive that still resides on the old Silicon Investor forums. It’s a highly informative read that shows the evolution of Michael Burry from an enthusiast, to an investor with a unique style and philosophy. Here are a few interesting highlights that I came across.

Initially, Burry cut his teeth on traditional Ben Graham-type stocks that traded below book value. Below, he discusses the Tejon Ranch Company (TRC), a stock with strong downside protection due to the 270,000 acres that it owned.

Looks like TRC is fairly valued on an asset basis if these prices are the case. When reviewing these ads, note that Tehachapi area locations are similar in terrain to the Tejon ranch, but closer to Bakersfield.

The excitement comes from the fact that management has taken an interest in developing some of these 270,000 acres. As noted above, land in developed areas can go for $15k to $30k/acre. So not all of the Tejon Ranch needs to be developed. ANY development should justify the current price, and may lead to significant gains down the road.

What’s also remarkable, was that Burry was getting solicited by certain “high ranking” investors since early 1997.

As you say, I agree that “high-ranking” investors lurk here, since I get e-mail from them every so often

While it’s clear that Burry was aware of the mania (and indeed derided many investors expectations) for Dot-Com stocks, he saw Apple for what it was in 1999, a value stock with any future growth being essentially thrown in for free. He also scolds himself for selling it too soon after a 30% run-up. Most importantly though, it was with stocks like Apple that Burry began to appreciate the power of branding, marketing and management, the sort of intangible factors that Buffett is so perceptive in recognising.

I bought it as a Buffett pick. And then I sold it after a quick 25-30% run-up. Shame shame. But I make no excuses. The run-up to me seemed flimsy. It traded back to the low 20?s then jumped on its internet strategy announcement. I got out. But I sorely want back in. I would like to buy in the low 20?s again, and I will. But at the time I needed money to buy some other stocks that were becoming much more acutely undervalued (my AAPL, APCC, FIC) with IMO possibly better-positioned and better-managed businesses. So far this bet is paying off, but for it to really pay off on both ends I’d be able to buy MAT at 22 1/8 again. And Callaway Golf at 10 and change again, since I sold my Buffett soul and got out of that one too.

BTW, really, no one is crediting Apple, but to me it has the markings of a value stock and potential Buffett-like stock. A real cash machine of late, trading at a mid-single digit multiple of cash flow, with a great recovery in terms of operating efficiency. A great brand name with proprietary advantages and mindshare. Subtract out the cash and it was recently trading at about 10 times earnings. A good holding for an 8 year old. Buy her a blueberry iMac and give her some stock  I bought it as a long-term holding but it’s run up too. This problem of ultra-quick 30% gains despite Buffetesque intent is vexing, but not unpleasant.

Re: Apple, boy, everyone is living in the past on this one. Management is now great. The product is now very good, but even more importantly the marketing is now great. The “win rate” for new PC buyers here and especially Japan has gone through the roof. And there’s a future dividend that comes with that. It wasn’t $15 just a few months ago. In fact, now it has $15 in cash generated primarily from operations. It’s been bouncing between the mid 40?s and low 30?s for many months, and is now right where it’s been since 1988 (for a reason – every time it gets to this level people sell),except for the dip to the teens when everyone misjudged the power of the brand. This successful emergence from trial by fire is new information about the durability of the brand, and successful investors it seems to me should be able to absorb it quickly rather than belatedly.

In an early post, he chips in with some thoughts on an overvalued market with a quote that I love.

Buy and hold becomes mantra at the end of a bull market.
Buy and hold becomes anathema at the end of a bear market.
Thanks to the raging bull for those 10 years, everyone is preaching buy, hold, patience.
However, if you had invested in the market in 1969, you would be at a significant loss in 1983, especially given the high
inflation of the times and the down market. In the early 50?s, the common logic was that stocks simply don’t go up, thanks to the doldrums market from the mid 30?s to the mid 50?s. Why can’t this market conceivably crash from these levels and not recover for 20 years? I guess I am just a bit of a contrarian.

As for how Burry chooses stocks, he states it on this thread, also revealing that price is the key determinant in whether to invest, or not.

The screen that worked the best for me? Scanning the S&P MidCap 400 guide – eyeing the lower right hand page for high and consistent ROE.

Then, moving up the page, comparing capital expenditures to cash flows, then moving up to equity and observing that its growth validates the ROE numbers.

Then, still moving up the page, looking at the last 10 years of earnings consistency and growth – at least doubling in 10 years, without more than one down year.

Then look for the low payout ratio and conservative debt.

Then look at the current price and figure out your buy price and wait. You’ll hit a few.

If you do this with the 1997 S&P MidCap 400 Guide, two companies jump out at you – Dairy Queen and Flight Safety, both
Buffett buys.

I used this to find Medusa and BMC Industries, both of which I bought. Medusa was taken out by Southdown at a 50% premium to my price in just a few months. BMC had significant insider buying and now sits about 13% above my price. Of course, by virture of their businesses, neither meets all of Buffett’s criteria.

Re: his picks, I’ll have to take a closer look. Some of them have come up in my reviews over the last 6 months. I should say that I have gone through all the stocks covered by S&P in its three major guides, and the pickings are slim, and will remain so without a major correction.

I’ve said it before, and I’ll say it again – finding Buffett companies now isn’t so hard. Finding them at reasonable prices is dang near impossible.

Finally, here are a few book recommendations from Burry.

My bias is value investing, and I highly recommend Janet Lowe’s Value Investing Made Easy as a primer. I’d follow that book with Why Stocks Go Up (and Down) by William Pike. Other books have been discussed here i.e. Superstocks by Ken Fisher, etc. You can get any of these — even obscure ones –from www.amazon.com very easily and cheaply. When you think you’ve got it all figured out, try Sense and Nonsense in Corporate Finance.