Financial markets are rife with stories about big companies, banks and investment funds going bust or irredeemably going bankrupt, mind-boggling trades and hedge fund wizards making money from wild ideas. ‘The Big Short’, the film adaptation of Michael Lewis’s book, has reverted public attention to the subprime crisis and the strong conviction investing strategy. By watching this movie, not only did we, the Panda Agriculture & Water Fund team[1], rediscover the book, which we had read, it also prompted us to delve further into Dr. Burry’s investment philosophy. This document humbly seeks to be the most complete compilation of Dr. Michael J. Burry thoughts[2]. We hereby aim to reveal the ins and outs of a relatively unknown investment philosophy. This appeared as a necessity to us, in a hostile monetary environment in which central banks manipulate the value of money and create a strong ‘monetary illusion’ in financial assets, especially stocks, securities and commodities, among others. In this document we have assembled Dr. Burry’s hedge fund track record, numerous investment cases, invaluable statements about general investment issues and all his operations — buys, sells and shorts made before his time as a money manager.
Why is a compilation of Dr. Michael J. Burry’s investment philosophy necessary?
In science, knowledge is cumulative. In finance, however, it is cyclical, with market participants making the same mistakes over and over again[3]. One of our commitments to the financial industry is to keep already-learned lessons alive in long-term collective memory[4]. We want to contribute by making financial knowledge less cyclical and more anti-fragile[5]. We are also interested in promoting Dr. Burry’s unorthodox value investing approach. When asked about our investment approach we usually say that our philosophy is 50% value and 50% global macro. When it comes to analyzing companies, we focus on critical value points, paying special attention to cash flow generation (something Dr. Burry also does). As portfolio managers however, we also look at the global environment and macroeconomic trends. In fact, one of the reasons for starting Panda was our having identified agriculture as one of the strongest macroeconomic trends in the coming decades. Our intention is obviously not to take merit for other people’s work. Others have also made significant contributions to unravelling Dr. Burry’s investment philosophy. We want thank those people in advance, starting with Michael Lewis, the author of The Big Short[6], a book that we highly recommend not only for telling Dr. Burry’s story but also for its accurate description of the financial industry’s guts and plots. In a summary of Dr. Burry’s thoughts, Tren Griffin[7] sets down twelve simple points that capture his vision. We are also indebted to Tariq Ali, who runs the Street Capitalist blog where we found an extremely interesting article entitled Learning from Michael Burry[8], which inspired us to write this essay. Dr. Burry has a strictly traditional understanding of value. He has said more than once that his investment style is built upon Ben Graham and David Dood’s book “Security Analysis”:
“All my stock picking is 100% based on the concept of a margin of safety”.
But Burry is not an orthodox believer. He believes that had he been alive today, Graham himself would have used hedging, options and other financial innovations. Burry’s behavior suggests that he views value investment as a broader concept — he usually picks technological stocks, made a spectacular bet against mortgages’ ‘fake value’ and now also invests in water and agriculture. Good ideas, such as value investing, have value in themselves. Not acting upon new ideas however, only overexposes people to perpetuating past mistakes or using inaccurate approaches in an ever-changing world. Being an outsider to finance — as Dr. Burry was — helps people keep an open mind. He also is a contrarian investor through and through, always looking for unfashionable stocks and focusing on in-depth research and developing analytical skills. The Scion portfolio was highly concentrated, always with fewer than 25 stocks. The closer we look at what Dr. Michael Burry likes to do and the way he invests, the clearer it becomes that his abilities and approaches are like a shutting circle. His is definitely a unique style.
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[1] At the end of this essay you will find a short description of Panda Agriculture & Water fund and our contact details.
[2] First version, released in October 2016. We thank Gabriel Colominas (@GabrielCobi) for his help in preparing this document.
[3] López Díaz, S. Birthdays, Bulls and ‘Bonassus’. Exane BNP Paribas, Equities Banks Research, February 2016.
[4] In The Ascent of Money, Niall Ferguson describes about how investment bankers and Wall Street CEOs who have not experienced recent crashes (1987, 1998, 2001) tend to underestimate the possibility of a new crash, “Markets do not have too much memory”.)
[5] Taleb, N. N. Antifragile: Things that gain from disorder. Penguin Books, November 2012.
[6] Lewis, M. The Big Short: Inside the Doomsday Machine. W. W. Norton & Company, March 2010.
[7] Griffin, T. A Dozen Things I’ve Learned from Dr. Michael Burry about Investing.
[8] Ali, T. Learning from Michael Burry.