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Stepan Lavrouk
Stepan Lavrouk
Articles (605) 

Michael Burry's Investment Strategy

Most people want to buy a dollar for $1.10

September 15, 2020 | About:

Michael Burry is best known as one of the few astute shortsellers that managed to profit from the 2008 financial crisis. His story is documented in Michael Lewis's 2010 book, "The Big Short," and he was portrayed by Christian Bale in the 2015 film of the same name. Burry, who is actually a licensed medical doctor, discovered his love for investing as a medical student, and went on to establish a hedge fund called Scion Capital in 2000, which was the vehicle through which he made his big credit default swap bet against the big banks.

But Burry is not just a short seller. In fact, at his core, he is a Benjamin Graham-style value investor who looks for a wide margin of safety in everything that he does. A 2001 letter to investors of Scion Capital provides a glimpse into his overall philosophy.

Volatility is your friend

In a similar vein to value investors like Seth Klarman (Trades, Portfolio) and Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) Warren Buffett (Trades, Portfolio), Burry aims to buy a dollar for 50 cents. Moreover, he likes to look for assets where the volatility is high enough that the 50 cent bargain ends up swinging between 40 cents and 60 cents, and tries to purchase it at as low a price as possible, a point that he articulated in his letter to investors:

"I certainly view volatility as my friend. This works out well because most in the market treasure the dollar bill that consistently sells for $1.10 or more - as long as it consistently does so. Volatility is on sale because 99%+ of institutions out there are doing their best to avoid it - under the mistaken, but Nobel Prize-winning impression that volatility and risk have some relation. Those of us who feel affection for volatility hold title to the most disabused, yet undervalued quality that the markets have to offer."

The idea that most market participants want to pay a dollar for $1.10 (as long as it consistently trades for $1.10) may seem absurd when taken at face value, but actually makes a lot of sense. How else does one explain the huge amount of money that has flooded into index funds that essentially buy the biggest and best-known businesses in the world?

Most investors seem to prefer the (illusory) certainty that their $1.10 investment will continue to be overvalued rather than taking a chance on a volatile but attractively priced value stock. Last year, Burry voiced his belief that there is a bubble in passive investing, and that sooner or later these $1.10 investments would come down to Earth. Let's see if he ends up being proven right.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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