Dr.Michael Burry(The Big Short) strategy explained

News about financial crisis 2008

According to wikipedia Dr Michael Burry is an American physician, investor, and hedge fund manager.

He was the founder of the hedge fund Scion Capital, which he ran from 2000 until 2008, and then closed to focus on his own personal investments.

Burry was one of the first investors to recognize and profit from the impending subprime mortgage crisis.

Many of you can remember him from the film The Big short.

Dr. Michael Burry’s investment strategy can be described as follows:

Invest with a margin of safety

Michael Burry’s main goal is to protect his downside so that he can prevent a permanent loss of capital. Consequently, known catalysts are not necessary; sheer, outrageous value is enough.

Perform bottoms-up, fundamental research

Michael Burry doesn’t care about the level of the stock market, and he has no restriction on potential investments: they can be large cap stocks, small cap, mid cap, micro cap, tech or non-tech.

It doesn’t matter, as long as Burry can find value in it.

That being said, Burry has found that out-of-favor industries provide great opportunities to buy shares of best-of-breed companies at steep discounts.

EV/EBITDA ratio

Screen through large numbers of companies by looking at the EV/EBITDA ratio.

Acceptable ratios vary with the industry and its current position in the economic cycle.

Free cash flow

Intrinsic value is determined by free cash flow.

If a stock passes this screen, Burry then looks harder to determine a more specific price and value for the company.

This involves looking at true free cash flow and taking into account off-balance sheet items.

Burry tends to ignore price-earnings ratios and thinks that return on equity is both deceptive and dangerous.

Burry prefers minimal debt.

Rare Birds

Michael Burry also invests in “rare birds” – mostly asset plays, but also arbitrage opportunities and companies selling at less than two-thirds of net value (net working capital less liabilities, i.e. Ben Graham’s net-net stocks, or companies that are selling for less than their liquidation value).

Competitive advantage

Burry also mixes in the types of companies favored by Warren Buffett – companies with a sustainable competitive advantage, as demonstrated by longstanding and stable high returns on invested capital – if they become available at good prices.

These can include technology companies, if Burry is able to understand them. Burry also classifies these types of Buffett-style investments as rare birds, and – when found – believes they are deserving of longer holding periods.

Michael Burry believes that portfolio management is just as important as stock picking:

Number of stocks to hold

Burry likes to hold 12-18 stocks diversified among various depress industries.

This allows him to focus on his best ides while smoothing out volatility (not to reduce risk, but to reduce personal stress).

When to buy

Burry uses some rudimentary technical analysis to determine when to buy a stock – specifically he prefers to buy within 10-15% of a 52-week low that has shown itself to offer some price support.

When to sell

Burry’s turnover generally exceeds 50% annually.

He’s not afraid to sell if a stock has had a quick 40% or 50% pop.

Burry will also sell a stock if it hits a new low.

While he acknowledges potentially turning his back on greater value, Burry says this prevents any on stock from blowing up his portfolio.

Conclusion

Investing is neither science nor art… it’s a scientific art.

Finally, Michael Burry says that fundamental analysis isn’t a sure-fire way of succeeding in the stock market – but it does at least put the odds on your side.

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