Michael Burry's Secret to Success: Concentrate on the Downside

"The Big Short" hero, Dr. Michael Burry, is one of the most underappreciated value investors of all time, in my opinion.

Burry was a traditional value investor and his determination to look for value, wherever it might be found, is what separates him from the rest of the crowd.

Burry started his hedge fund, Scion Capital, in 2001. In its first full year of trading, Scion returned 55.44% gross for its investors while the S&P 500, reeling after the bursting of the tech bubble, fell 11.88%. This performance really set the tone for the next few years. From inception through to closing during 2008, Scion returned 696.94% gross and 472.40% net for investors compared to the S&P 500, which returned 5.2% over the same period.

I have learned a lot from reading through Burry’s writings both before and during his time at Scion. His investing process is thorough and detailed. I believe few institutional investors use the same rigorous due diligence process as Burry on a regular basis and I’m certain that most institutional investors don’t approach each investment opportunity with the question, “how much can I lose” (if they did the mutual fund industry might have a better performance record).

Burry’s entire investment process can be summed up in his simple “ick investments” quote:

“Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ‘ick.’ I tend to become interested in stocks that by their very names or circumstances inspire unwillingness – and an ‘ick’ accompanied by a wrinkle of the nose on the part of most investors to delve any further.”

“Fully aware that wonderful businesses make wonderful investments only at wonderful prices, I will continue to seek out the bargains amid the refuse.” — Dr. Michael Burry

By itself, this quote does not mean much; it’s a standard contrarian value investor way of thinking. But if you look at one of Burry’s investment theses, you realize that when he says “seek out the bargains,” he is talking about digging as far as possible into a company’s financials.

A great example is Wellsford Real Properties (WRP).

Wellsford Real Properties(WRP) – $16.60 on Jun 1, 2001

"WRP is an opportunity to buy real estate at as little as 50 cents on the dollar (and at most 61 cents on the dollar), with a plan for value realization in place and virtually no downside. Wellsford Real Properties is a real estate operating company (REOC) and as such its value is in wealth creation rather than earnings distribution…The stock’s at $16.50. Book value is $26.93 and understates true net asset value…Here’s why..."

What followed this opening statement (you can read the whole post at the link above) was a detailed analysis of Wellsford’s business. He looked at every possible avenue and outlook for different parts of the business, its history and current shareholders. There’s no stone left unturned. Burry devotes the majority of the analysis to calculating the potential downside for each section of the Wellsford business. He assesses each business under the Wellsford Real Properties umbrella and computes the possible downside on a per-share basis. This is something Michael Burry specialized in, finally reaching the conclusion:

“Liquidation of real estate per plan with $200 million in properties being marketed for sale right now; possible sale of whole company; commitment to share buyback at deep discount to intrinsic value; dollar on sale for 50-60 cents with no significant downside; possible Russell 2000 inclusion on June 30th but is one of the few such candidates that hasn’t really moved yet.”

Wellsford isn’t the only example of Burry’s downside analysis in action, this theme runs through all of his analytical work. If you’re interested in reading more, a collection of his investment writeups can be found here.

Disclosure: The author does not own any share mentioned within this article.

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