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Dr. Michael Burry and The Greatest Trade Ever

March 02, 2010
INVESTMENTU

Greenbackd

31 followers
Michael Burry is a value investor notable for being one of the first, if not the first, to short sub-prime mortgage bonds in his fund, Scion Capital. He figures prominently in the Gregory Zuckerman’s book, The Greatest Trade Ever, and also in The Big Short, Michael Lewis’s contribution to the sub-prime mortgage bond market crash canon. In Betting on the Blind Side, Lewis excerpts The Big Short, which describes Burry’s short position in some detail, how he figured out that the bonds were mispriced, and how he bet against them (no small effort because the derivatives to do so didn’t exist when he started looking for them. He had to “prod the big Wall Street firms to create them.”).

Here Lewis describes Burry’s entry into value investing:

Late one night in November 1996, while on a cardiology rotation at Saint Thomas Hospital, in Nashville, Tennessee, he logged on to a hospital computer and went to a message board called techstocks.com. There he created a thread called “value investing.” Having read everything there was to read about investing, he decided to learn a bit more about “investing in the real world.” A mania for Internet stocks gripped the market. A site for the Silicon Valley investor, circa 1996, was not a natural home for a sober-minded value investor. Still, many came, all with opinions. A few people grumbled about the very idea of a doctor having anything useful to say about investments, but over time he came to dominate the discussion. Dr. Mike Burry—as he always signed himself—sensed that other people on the thread were taking his advice and making money with it.

Once he figured out he had nothing more to learn from the crowd on his thread, he quit it to create what later would be called a blog but at the time was just a weird form of communication. He was working 16-hour shifts at the hospital, confining his blogging mainly to the hours between midnight and three in the morning. On his blog he posted his stock-market trades and his arguments for making the trades. People found him. As a money manager at a big Philadelphia value fund said, “The first thing I wondered was: When is he doing this? The guy was a medical intern. I only saw the nonmedical part of his day, and it was simply awesome. He’s showing people his trades. And people are following it in real time. He’s doing value investing—in the middle of the dot-com bubble. He’s buying value stocks, which is what we’re doing. But we’re losing money. We’re losing clients. All of a sudden he goes on this tear. He’s up 50 percent. It’s uncanny. He’s uncanny. And we’re not the only ones watching it.”

Mike Burry couldn’t see exactly who was following his financial moves, but he could tell which domains they came from. In the beginning his readers came from EarthLink and AOL. Just random individuals. Pretty soon, however, they weren’t. People were coming to his site from mutual funds like Fidelity and big Wall Street investment banks like Morgan Stanley. One day he lit into Vanguard’s index funds and almost instantly received a cease-and-desist letter from Vanguard’s attorneys. Burry suspected that serious investors might even be acting on his blog posts, but he had no clear idea who they might be. “The market found him,” says the Philadelphia mutual-fund manager. “He was recognizing patterns no one else was seeing.”

Lewis discusses Burry’s perspective on value investing:

“The late 90s almost forced me to identify myself as a value investor, because I thought what everybody else was doing was insane,” he said. Formalized as an approach to financial markets during the Great Depression by Benjamin Graham, “value investing” required a tireless search for companies so unfashionable or misunderstood that they could be bought for less than their liquidation value. In its simplest form, value investing was a formula, but it had morphed into other things—one of them was whatever Warren Buffett, Benjamin Graham’s student and the most famous value investor, happened to be doing with his money.

Burry did not think investing could be reduced to a formula or learned from any one role model. The more he studied Buffett, the less he thought Buffett could be copied. Indeed, the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual. “If you are going to be a great investor, you have to fit the style to who you are,” Burry said. “At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.… I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it’d be the most popular school in the world, with an impossibly high tuition. So it must not be true.”

Investing was something you had to learn how to do on your own, in your own peculiar way. Burry had no real money to invest, but he nevertheless dragged his obsession along with him through high school, college, and medical school. He’d reached Stanford Hospital without ever taking a class in finance or accounting, let alone working for any Wall Street firm. He had maybe $40,000 in cash, against $145,000 in student loans. He had spent the previous four years working medical-student hours. Nevertheless, he had found time to make himself a financial expert of sorts. “Time is a variable continuum,” he wrote to one of his e-mail friends one Sunday morning in 1999: “An afternoon can fly by or it can take 5 hours. Like you probably do, I productively fill the gaps that most people leave as dead time. My drive to be productive probably cost me my first marriage and a few days ago almost cost me my fiancée. Before I went to college the military had this ‘we do more before 9am than most people do all day’ and I used to think I do more than the military. As you know there are some select people that just find a drive in certain activities that supersedes everything else.” Thinking himself different, he didn’t find what happened to him when he collided with Wall Street nearly as bizarre as it was.

And I love this story about his fund:

In Dr. Mike Burry’s first year in business, he grappled briefly with the social dimension of running money. “Generally you don’t raise any money unless you have a good meeting with people,” he said, “and generally I don’t want to be around people. And people who are with me generally figure that out.” When he spoke to people in the flesh, he could never tell what had put them off, his message or his person. Buffett had had trouble with people, too, in his youth. He’d used a Dale Carnegie course to learn how to interact more profitably with his fellow human beings. Mike Burry came of age in a different money culture. The Internet had displaced Dale Carnegie. He didn’t need to meet people. He could explain himself online and wait for investors to find him. He could write up his elaborate thoughts and wait for people to read them and wire him their money to handle. “Buffett was too popular for me,” said Burry. “I won’t ever be a kindly grandfather figure.”

This method of attracting funds suited Mike Burry. More to the point, it worked. He’d started Scion Capital with a bit more than a million dollars—the money from his mother and brothers and his own million, after tax. Right from the start, Scion Capital was madly, almost comically successful. In his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away. “If he’d run his fund to maximize the amount he had under management, he’d have been running many, many billions of dollars,” says a New York hedge-fund manager who watched Burry’s performance with growing incredulity. “He designed Scion so it was bad for business but good for investing.”

Thus when Mike Burry went into business he disapproved of the typical hedge-fund manager’s deal. Taking 2 percent of assets off the top, as most did, meant the hedge-fund manager got paid simply for amassing vast amounts of other people’s money. Scion Capital charged investors only its actual expenses—which typically ran well below 1 percent of the assets. To make the first nickel for himself, he had to make investors’ money grow. “Think about the genesis of Scion,” says one of his early investors. “The guy has no money and he chooses to forgo a fee that any other hedge fund takes for granted. It was unheard of.”

Hat tip Bo.

Greenbackd

http://greenbackd.com/


Rating: 4.3/5 (37 votes)

Comments

turdbrgr
Turdbrgr - 4 years ago
he farted and shit his pants. That is a great man!
billspetrino
Billspetrino - 4 years ago
Enjoyed the story.

Investing is 50% art and 50% science

Thats why a Guy like Siegel couldnt do it with Wisdom tree
billspetrino
Billspetrino - 4 years ago
Enjoyed the story.

Investing is 50% art and 50% science

Thats why a Guy like Siegel couldnt do it with Wisdom tree
Michael Crosby
Michael Crosby - 4 years ago
Not to dis the other commenters, but geesh, you have one of the greatest investor stories of all time, and these are the comments.
DaveinHackensack
DaveinHackensack - 4 years ago
Burry did not think investing could be reduced to a formula or learned from any one role model. The more he studied Buffett, the less he thought Buffett could be copied. Indeed, the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual. That should be made a sticky here.

Thats why a Guy like Siegel couldnt do it with Wisdom tree

Do what? Wisdom Tree wasn't set up as an active money management company, but as a better alternative to indexing for passive investors (indexing according to fundamental metrics such as dividend yields, P/E, etc. instead of just by market weight).

sabonis
Sabonis premium member - 4 years ago


Does anyone have any literature of Burry doing an actual analysis of a stock/company? All I have seen are his quarterly letters which dont really do much but give his overall philosophy.

I actually found the Burry story in Lewis' book discouraging in some ways.

I took his personal story to be that you have to lock yourself in a room and have such a single minded focus on making money in stocks that you completely cut yourself off from the outside world.

I have heard stories similar to those of Coltrane in jazz where this is the "price of genius", but I think I would take smaller returns and actually enjoy my life.

I also thought Greenblatt got a bad rap in the book. I am sure Greenblatt's side of the story would be different. Dealing with someone with Aspergers is probably hard enough but throw in a million dollars and the problems probably multiply.
kbodawala
Kbodawala - 4 years ago
There are many parallels to this investor and other successful ones. The most important being that they are devoid of social contact. They spend their time obsessing over a particular subject. They then become experts in the subject and profit hansomely from it. The price these guys pay is a broken family and no real friends. They have admirers to be sure but no real friends.

To be a super investor you need to focus just on the facts (financial statements)and leave emotions out of the way. Not many people can do that but those who can are richly rewarded.

I have often argued with many of my analyst friends that I could train modestly intelligent prisoners with no college education in financial analysis and give them specific industries to cover and they would outperform any wall street analyst over time. The basis of my argument revolves around time. Prisoners have all the time in the world and they have no worries about the rigors of everyday life. The distractions that often take us away from accomplishing our goals. We are all too busy with our families building relationships, maintaining relationships and often mending them if they are broken, all this is time consuming and often not at all productive as measured by dollars and cents, but very productive if measured in non monetary terms(and that is why we do it). If taken out of general population and given the right resources, with the proper motivation prisoners can outperform all of wall street. Living in society we are constantly bombarded by sales men pretending to be analyst who want to sell us on the newest financial instrument or ideas, who are often pounding the table on their views only to be countered by others pounding the table imposing their own. It is not easy to resist these charlatans because they are often charismatic and portray such confidence that it is easier to believe them then to do the hard work to uncover the truth. The work isn't so hard its just the time involved is too precious to be wasted. Prisoners are not subject to such manipulation as they can be removed from it by being silenced from CNBC. I strongly believe their exist an inverse relationship between an investors returns and his proximity to wall street. The further you are from wall street the more critical your thinking becomes. You are also less likely to be influenced by your contemporaries. I can think of no place more remote from wall street then prison. I also believe that company visits are a waste of time. Visiting a company can only lead you to investing in it as management of those companies are often great sales men and have convincing presentations that are based on their views not on actual facts. Ben Graham and Monish Pabrai have completely avoided them and just concentrated on the financials and it has worked out well for them. Prisoners too can base their investment ideas just on facts obtained from regulatory filings, company newswires, and industry information. While this may seem like alot of hyperbole it is actually something I strongly believe can be implemented successfully. Great investors often become prisoners by design to concentrate on their theories, so there is no difference in that sense.

seshnath
Seshnath - 4 years ago
I agree with kbodawalla in everything except one - that "

I can think of no place more remote from wall street then prison." These days you are more likely to run into wall street types more there than anywhere else.

fk
Fk - 4 years ago
These days you are more likely to run into wall street types more there [in prison] than anywhere else.





We can only wish. Are the countrywide financial execs in prison? Execs at Fanny and Freddie who took bribes from Mozilo? How about Howie Hubert (?) who lost 9B$ on the wrong side of the CDS bet for Morgan Stanley(?), yet still collected 10's of millions in bonuses before being forced out of his job? All the big bank and wall street guys gambling with 0% interest rate loans from the gov't, if they win their bets they collect big bonuses, if they lose their bets, the taxpayer gets the bill. Are those guys in jail? Other than some high profile prosecutions like Kenneth Lay at Enron, most of the accomplices not only remain free but are snatched up by competing wall st. firms eager to employ their talents at trading, cooking the books, creating wholly owned entities and other "financial innovations" that all lead to mark to market profits where both of the sides of the trade show profit, resulting in promotions, higher bonuses, and supposed quarterly earnings growth at shareholder expense. Goldman Sachs and Greece? Any of those guys in jail?
fk
Fk - 4 years ago
The "edit" post feature is having problems.

In my post above, the first line is quoted text meant to appear in the blue box.
fk
Fk - 4 years ago
Buffett famously said something like, "Other guys read playboy. I read 10k's."

Point being while most people would view Buffett and Burry with their reclusive lifestyles lacking in joy, from their perspective they enjoy what they're doing and don't perceive it as a sacrifice. We don't all have the same criteria for pleasure and happiness. To each their own, so long as it causes no harm to others.

I have to say one thing that really disappointed me about Michael Burry in "The Big Short" is that unlike the 3 protagonists at Cornwall Capital who attempted to convince the SEC that there was a serious fraud and problem with the CDO's, Burry just acted like a cold blooded killer in talking Goldman Sachs and Deutche Bank into creating and selling him the CDS's to bet against the CDO's. On the one hand I have a great deal of respect for the kind of focus and smarts it takes to pull off the trades that he did, on the other hand I'm really disappointed that people that brilliant do not harness their enormous talents for the greater good of the world.

roiguy
Roiguy - 4 years ago
fk

That's a really great point you make there but I'm forced to ask the question: would anyone have listened to Michael Burry and would it have made a difference? When he made the investments betting against CDSs, the crash had already been set in motion.
fk
Fk - 4 years ago
roiguy,

I may be in the minority, but I tend to judge people more by their intentions and process rather than outcome. The Cornwall capital guys were able to meet with reps with the SEC to attempt to convince them of the severity of the problem (with CDO's, leverage, possibility of financial collapse etc ). The SEC failed to understand the problem or do anything about it, but in my book the Cornwall guys get huge positive karma points for acting with a social conscience and looking out for the good of society instead of just their own self interests. In fairness to Burry, I don't know for sure if he explored the idea or possibility of helping society with his intimate knowledge of how CDO's worked, but at least the book "The Big Short" did not give any indication of that.

fk
Fk - 4 years ago
roiguy,

In answer to your questions of "would they have listened to Burry and would it make any difference in the end?" I believe the answer in the short term is "No", but for the long term, "yes". Many attempts to do good are going to fail, but if society recognizes the importance on intention, process, the development of ethics and social conscience, eventually it will result in more positive seeds being sowed and some of those seeds will bear fruit.
qualia8
Qualia8 - 4 years ago
Read his NYTimes editorial piece. He openly wrote about his strategy, and talked to anyone who would listen. This was not a secret he was trying to keep; quite the opposite, especially once his bet was laid.
Max7777
Max7777 premium member - 4 years ago


People with Asperger try very hard to follow rules and therefore to do "the right thing" however they have a very hard time conveying their concept in person or on the phone. Burry tried very hard to warn whoever he could, and also remember that once he placed his CDO bets it was to his advantage that people would understand the risk soon as he had to keep putting more money up as the bull continued against his position. The CDO's had such a huge leverage that if he could even get a small reaction it would have profited him immensely.

Interestingly, in the book "the biggest trade ever" Greenblatt attempts to close Burry's positions and his constant pressure on him by phone calls and emails to force him to get out of the bearish positions is described the same way as here, both authors did do a lot of research so I assume there must be some truth to it. Greenblatt with all is experience and amazing ROI, this time panicked and could not see the true situation.
DaveinHackensack
DaveinHackensack - 4 years ago
I found the Cornwall Capital guys to be a more interesting success story than Burry. They banked huge coin, but didn't seem to punish themselves as much as Burry did, or bury themselves in as much tedious prospectus reading. Instead, they would figure out an angle, and then hire an expert to fill in the gaps for them.

Also interesting that they didn't use any outside money, if memory serves. One of them had a six figure Schwab account, and they turned that into tens of millions of dollars eventually, purely due to their investment returns.
M1 supply
M1 supply - 4 years ago
"I have often argued with many of my analyst friends that I could train modestly intelligent prisoners with no college education in financial analysis and give them specific industries to cover and they would outperform any wall street analyst over time" Kbodawala says on Apr 04, 2010 at 6:50 AM:

I would seriously take this bet on.

This is the same mindset that everything can be plugged in into a model. Good luck with that.

But yea, I agree with everything else Kbodawala.
kbodawala
Kbodawala - 4 years ago
To M1 Supply,

I am glad you feel compelled to take this bet on. And I accept. However, how can we pull this off?

Give me some time and maybe in the future I will have the capacity to put my theory to work.

I am very confident in my theory.

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