3.17.2010

Michael Burry of Scion Capital: The Next Berkshire Hathaway CIO?

Last week, we wrote a quick post on Michael Burry of Scion Capital. Because of that post I received about 50 requests to share any information I had on Dr. Burry. A few years ago, a friend told me about Michael Burry's archive on Silicon Investor. To all those interested, you can find the various threads and messages here (Michael Burry's Archive). It is amazing to me that he wrote 3304 posts in the span of 5 years. Over the next few months, I will try to add some commentary here and there from what I've learned from Dr. Burry. In the meantime though, I'd like to speak of two quotes I found from his archives that I think are particular provoking. (As an aside, I have no idea if Dr. Burry would agree with his own commentary 12 or so years after he wrote these in the last 90s).

"Wow, this is getting really interesting. People (read: more than one) are taking time out of their day to come the value investing thread and tell us how irrelevant value investing is. At about the same time, friends and acquaintances are losing all patience with my talk about value but perk up when someone says "this one will double by December." These are the same ones that say, "I'm making 40%" and expect it to continue. Recently two people approached me about helping them do commodities for even bigger gains - 30-40% in stocks isn't enough. One of them thinks commodities aren't enough, he wants options on S&P futures.

As I run a value investing web site, I can also tell you that I approach 200 hits/day when the market shakes out like in October and January, but am down to 60-70 hits/day now. People don't need ideas - they know to just pile into the stocks everyone talks about, a strategy that has worked well the last 15 years.
I tell my editor that Dell at 140 is an albatross that has just been shot, and he says no way, the money flow is just too strong. That money flow brought it to around 122 pre-split within a few days.

Certainly is interesting...last year I was bearish on valuation, but never before have I had so many people slap me in the face with their impatience with value investing."
Now - I need to give this a little context - Mike Burry used to run a value investing website. I know this from reading the aforementioned thread. As a disclaimer, I have never spoken with or met Dr. Burry. I did email him but never heard back. The only thing I know about him is from reading some of his investor letters, a few of his old MSN articles, Michael Lewis' new book, and a few articles like this one.

(Quick Tangent: In his 2007 Annual Letter to shareholders, Warren Buffett wrote:
Last year I told you that we would also promptly complete a succession plan for the investment job at Berkshire, and we have indeed now identified four candidates who could succeed me in managing investments. All manage substantial sums currently, and all have indicated a strong interest in coming to Berkshire if called. The board knows the strengths of the four and would expect to hire one or more if the need arises. The candidates are young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation.
I would wager that Michael Burry is one of those four people. Think about it - his relationship with White Mountain, his ability to write, his investing style, the timing of him winding down Scion versus the aforementioned WEB announcement, the age/wealth/background profile...it all makes perfect sense.)

So back to the quote - One of the most difficult things about value investing is the propensity of the market to overshoot. You could of been very correct in 2005/2006/early 2007 stating that finding compelling opportunities was becoming more and more difficult - but the market then went up in your face. And because you may not be invested, but your peers are, your relative performance begins to lag - and then you lose clients/capital/etc.

Unfortunately, people think in terms of short term incentives and only few understand the concept deep down that a long string up 15% annualized returns followed by one or two years of down 30%-40% returns doesn't really make for a good track record. Having faith in your convictions about intrinsic value, valuation, and being fearful when the crowd is greedy (and vis-a-versa) is the testament to a strong investor.

David Einhorn once said: "Our investment strategy has always reflected time arbitrage in that we position ourselves to benefit from having a significantly longer-term horizon than other market participants.” This is exactly what Michael Burry was talking about.

Now for one of my favorite quotes of the archive.
"IMO, the biggest impediment to investing in the spirit of Buffett is the idea that somehow we can be a 100% imitator of him and see the same success. That anyone could be a perfect imitator of his approach strikes me as ridiculous. Try compounding the 10% difference between even your best imitator and Buffett over 30 years.

I don't have it down yet. But in terms of investing in the spirit of Buffett (rather than in his mirror image), neither does anyone else here that I can see. I'm young. I'm reading a lot and continuously reviewing and updating my approach as new revelations occur. Remember I said "Buffett-like stock for me," not you. If it was that easy for you to see, I'd be disappointed. I'm certainly glad I can't find anyone to agree with me on this. If anything, it indicates I'm headed in the right direction."
None of us are Warren Buffett, Seth Klarman, David Einhorn, Bruce Berkowitz, David Tepper, Ben Graham, Walter Schloss, etc. Each of these people have their own tempermant and hard-wiring and expertise that will make their investing style unique and different. Yes, there may be common themes (value), but intricacies of style are unique to us individually. And we learn about those through trial and error.

If one wants to see a model of Dedicated Practice in investing and stock picking, one only has to look at the example of Michael Burry. I mean he did it. If you read his thread you get the sense that he read as many books as he could get his hands on investing, he developed his own style by taking what he had learned from his coaches (see: gurus he read about) and applying it to his knowledge/temperament, he bounced his ideas of people in the Silicon Investor forum, and he questioned his process on a daily basis to make it better. But most importantly in my opinion: He constantly was analyzing stocks and businesses. Repetition after repetition after repetition. What does Warren Buffett do all day? He reads annual reports. Repetition after repetition after repetition. If there was any magic bullet, that would be it.

Over the coming months, we will try to add more to discussion on Dr. Michael Burry of Scion Capital. Now back to the annual reports...

8 comments:

Anonymous,  3/18/2010  

Buffett said all of his choices lost significant money in the 07-08 period, which would strike Burry off the list. Interesting stuff, though!

Anonymous,  3/18/2010  

an interesting theory. However, I think WTM and Burry had a falling out (due to Burry's move away from regular stock picking and into mortgage markets). Additionally, Burry closed his fund very early in order to maximize his performance potential (polar opposite of constraints he would face at BRK). Finally, I saw Michael Lewis on Charlie Rose last night, and Lewis said that Burry had lost all interest in the business of money management b/c of how his relationships with his clients deteriorated.

Anonymous,  3/18/2010  

loving this Burry stuff. amazing how many investors are out there knocking it out of the park that nobody has ever heard of.

The Myth from harvard and sports handicapping picks lover 3/19/2010  

ever thought of Klarman as a possible successor to Charlie and WEB?

persistentone 3/19/2010  

If you study the history of his hedge fund, he changed from being a pure value fund to instead running a speculative short on prime mortgage. Regardless of whether he was right or wrong about the bet (he was right in a historic way!), that change of focus really pissed off his investors, who did not sign up to speculate on real estate via what were essentially long dated put options (e.g., CDS contracts on subprime bond trenches).

My impression about Dr Burry is that he is very very smart, but he obsessively pursues what is a) true, b) interesting to him. Truth was a more important objective than maintaining the focus of his fund.

Anonymous,  3/19/2010  

it's kind of funny everyone is acting like Michael Lewis discovered this guy, since he was profiled at length in "the greatest trade ever" (which was a fantastic book). Not saying that's what Hunter claims, just making an observation.
Based on "the greatest trade ever", I can agree with persistentone. Clear style drift, which understandably made his investors nervous.

PlanMaestro 3/21/2010  

Is not everyday that you can hear/read real time what a great investor in the making thought and how he reacted.

Myself, and at least one other blogger, was also preparing a series of posts based on these discovery. I was particularly surprissed that he was not a pure value investor and he had his own set of rules to limit losses. Another biggie was his stubbornness to short Amazon and being long Borders in 1999. He had this missionary personality that scared me a little but I for sure learned a lot.

However as you say, his thoughts may have changed.Hope we do not saturate the "series of tubes".

Plan

Alex,  3/23/2010  

I skimmed the first page of the 1-star reviews on Amazon, and most of the critiques focused upon Michael Lewis' defense of derivatives market orthodoxy. But I don't read a Michael Lewis book for nuanced, brilliant thoughts; I read him for frequently incisive, and well written, observations.


As a previous commentator noted, Burry probably is not on the short list of Berkshire managers. He put a non-negligible amount of his fund into a derivatives play where a lot of funky things could have happened. What if the market continued to rise for a few more years? Or if the post-default auctions were manipulated by CDS writers? Looking at Berkshire's short-term financing for Burlington Northern, and the desire to retain $20 billion in cash, you can see that Buffett doesn't like to rely on the capital markets. Burry might be a bit too cowboy for Berkshire.

Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.