With the release of the biographical drama “The Big Short” in 2015, the masses have learned about Michael Burry, who was the unknown legend of the 2007 financial crisis. Burry was one of the first to recognize that the subprime mortgage crisis was about to start and bet against the mortgage bond market in a move that later earned him personally $100 million and another $700 million for his investors. Prior to the movie, the world knew about Burry from Michael Lewis’ book that the movie was based on, but other than that the information about him was relatively scarce.
However, as a contrarian investor, Burry also scored big during the Internet bubble burst. Burry, who is a proponent of fundamental value of investing, saw that Internet stocks were overvalued as they didn’t generate enough revenue or profits and started shorting them. His fund, Scion Capital, was founded in 2000 and was up by 55% the following year, while the S&P 500 lost almost 12%. In the following year, the Index lost 22%, while Burry was 16% in the green. Even as the market turned around and advanced by 29% in 2003, Burry still managed to beat it by posting gains of 50%.
After the success of the early 2000s, Burry switched to another industry, subprime financing, where he also noticed some irregularities and unsustainability. He quickly figured out that many borrowers wouldn’t be able to pay back their mortgages if interest rates would increase, but the industry was valued as if all the mortgages would be paid. So, he went to Goldman Sachs and bought from them credit default swaps.
He also told his investors about his findings, but they didn’t want to hear his theory, mainly because their other bets were made based on a safe subprime mortgage market. Moreover, investors assumed that Burry is wrong and demanded their money back, although he had already put the money into some illiquid bets against the market and couldn’t sell them, so he just ignored the demands of his investors. Investors had their reasons to be worried, as the short bets made in 2005 were losing money for Scion, which lost 17% in 2006, mainly due to its credit derivative positions.
However, in 2007, the market started to turn around with the fall of Bear Stearns and Lehman Brothers and other investors also saw the dangers of the system. Burry was one of the few that managed to collect solid profits from the collapse of the subprime mortgage market. Another fund that also bet against the subprime mortgages were John Paulson’s Paulson & Co, which set up two new funds specifically to bet on the housing bubble burst.
However, despite the big gains registered by Scion in the financial crisis, other investors didn’t want to work with him anymore. After he hadn’t been able to raise funds for his fund, he shut it down in 2008 to focus on managing his own investments.
Read more details about Michael Burry, including his net worth, strategy, and investments on the next page.
Michael Burry wasn’t always planning to be an investor. In fact he is a physician, having earned his M.D. from the Vanderbilt University School of Medicine. Before founding Scion, he was doing his residency in neurology at Stanford Hospital and Clinics and investing was more of a hobby he was doing at night. He was regularly posting on message boards on the stock discussion site Silicon Investors since 1996 and his successful stock picks attracted the attention of the future investors of Scion Capital, which included Vanguard and Joel Greenblatt of Gotham Asset Management .
Due to his to successful bets (at least those that we know of), Michael Burry’s net worth is estimated at around $250 million. Unfortunately not much is known about him, or his investments, since he rarely talks to the media and is known for a rather awkward and anti-social behavior. It was even reported that he has self-diagnosed with Asperger’s disease. His anti-social behavior is believed to be one of the reasons why he couldn’t raise more funds for Scion Capital in 2008.
In an article on MSN Money in 2000, Michael Burry outlined his investment strategy. He is a value investor, following the principles of Ben Graham. He said that he picks upopular companies when “they look like road kill” and sells them when they have been “polished up a bit”. He focuses on research, which, in his own words, is his weapon of choice. Burry looks to understand the company’s value before investing in it and his stock picking is 100% based on the concept of the “margin of safety” introduced by Ben Graham and David Dodd in “Security Analysis.”
Bury is not picky when it comes to the size of the company, or the industry it operates in, although he likes out-of-favor industries, because they are the best at providing good stocks at big discounts. He focuses on free cash flow and enterprise value to determine whether a stock is worth the attention and looks at other items such as off-balance sheet items. Burry ignores price-earnings ratios and considers return of equity to be deceptive. In addition to value investing, Burry also sometimes invests in asset plays and arbitrage opportunities.
In addition to focusing on fundamentals, Burry also likes to mix in some technical analysis in his stock picking process. In his old posts on Silicon Investors, he mentioned using technical analysis in trading coffee futures and some stocks, such as Apple Inc (NASDAQ:AAPL) and Oracle Corporation (NASDAQ:ORCL). In his article on MSN Money he said that he prefers to buy within 10% to 15% of a 52-week low and usually sells the stock if it breaks to a new low.
On the next page, we will take a look at some of Michael Burry’s investments, including his bet on water.
As mentioned earlier, Michael Burry is a rather secretive investor. After having shut down Scion Capital in 2008 to focus on his own portfolio, Burry came back in 2013 to raise money for a new fund, Scion Asset Management. Loyal to his investing principles, Burry didn’t have many positions in Scion’s equity portfolio after the comeback, with the first 13F filing from Scion Asset Management showing 14 holdings in companies like Apple Inc (NASDAQ:AAPL), Bank of America Corp (NYSE:BAC), and Theravance Biopharma Inc (NASDAQ:TBPH).
However, right out of the gate, Burry’s new fund started liquidating its positions. The last 13F filing that was disclosed by Scion Asset Management showed just four holdings. It held 550,000 shares of Coty Inc (NYSE:COTY), 15,000 shares of Alphabet Inc (NASDAQ:GOOG), 100,000 shares of HCA Healthcare Inc (NYSE:HCA), and 300,000 shares of Hostess Brands, Inc. (NASDAQ:TWNK), with Coty Inc (NYSE:COTY) and Hostess Brands, Inc. (NASDAQ:TWNK) representing new positions initiated during the third quarter of 2016. The fact that Scion Asset Management started to reduce its exposure to stocks sounded some alarms in the media that Burry might be seeing another market crash.
Another investment of Michael Burry is water. The last line of “The Big Short” movie reads: “Michael Burry is focusing all of his trading on one commodity: Water.” In a 2010 interview with the New York Magazine, Burry explained that he had been looking at investments in water for a long time, but instead of buying water rights, he chose to invest in food. He believes that a sustainable way to redistribute water is through growing food in water-rich areas and transport it to water-poor areas. In an interview with Bloomberg conducted the same year, Burry said that had been buying agricultural land with water on site, which he believes will be valuable in the future. Other reports said that Burry was in fact buying almond farms with irrigation in California, because almonds are the most water-consuming products, which require one gallon of water per almond. This makes sense now, because California has been struck by serious droughts lately and the state is responsible for around 80% of the world’s almond supply. Now, Michael Burry can capitalize on his investment, as his farmland that has the best access to water can benefit from the demand of almonds, while other farmers run out of water.