Before he virtually disappeared after the financial crisis, Michael Burry was considered one of the foremost minds on value investing purely because of his comprehensive approach and ability to ignore what the rest of the market was telling him and concentrate on his ideas.
I think there is plenty investors can learn from Burry’s writings and advice over the years. While his approach may not suit everyone, his attitude to ignore the rest the market and focus on the most undervalued equities echoes that of Warren Buffett (Trades, Portfolio) -- albeit with less charisma.
Burry and technical analysis
Burry’s style is interesting because while he does concentrate on the market’s most undervalued equities, at the same time he is also willing to use other methods such as calculating a company’s underlying earnings power or even technical analysis.
Technical analysis is shunned by the value community because of its short-term nature. What’s more, technical analysis tells little about the underlying business’ fundamentals, all it says is what the stock price is doing. As any well-read value investor will tell you, investing in the stock price, not the business, is bound to end up with an unfortunate result (it can be argued that value investing is built on this concept).
So why does Burry like to make use of technical analysis when the rest of value community tends to stay away from it? It seems his affinity for charts started in his early investing career. When he first became involved with the markets, he brought and sold coffee futures, not value stocks. While this did not work out too well for him, it did help him build a solid understanding of technical analysis.
From Burry’s early Silicon Investor forum posts:
“I guess I still watch the charts a bit. After all, I cut my teeth trading coffee futures. About eight trading days ago it broke a significant downtrend on decent volume when it moved to the high 40s. At the point, I wished I had bought more in the low 40s. Today it just popped its 200-day after trending along it for a few days after trendline breakout. This all occurred in a setting in which the years-long stock chart tested a years-long uptrend and the support held. Maybe TA is only useful because others use it. I don’t know. But it’s interesting to watch, and I believe in it to the degree it reflects crowd psychology. Despite SLOT’s volatility, I’d be surprised if it goes back to sub-50 now.
And yes, I’m waiting for the 80s at least before I sell, no matter what the chart does. It’s as sure a bet as Apple (AAPL, Financial) at 34, Oracle (ORCL, Financial) at 23, American Power (APGI, Financial) at 27 (presplit)…
Re: coffee futures, let’s just say I got out with the shirt still on my back."
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But coffee trading did not turn out to be that much of a waste of time:
“In futures, I learned a lot about TA. The frustrating thing was it worked. You could actually predict the moves. But slippage ate away everything. I was up big at times, never down big. I left with 98% of my original capital as soon as I realized I would have to quit my day job to do it right. The friend that got me into it did quit his day job and is doing OK. There’s a way to win at everything. It just has to be found.”
Analysis of the charts helped him try to time the market:
“As I’ve brought up on this thread before, I was a growth/technical analysis investor for quite a while. I studied TA pretty extensively. Hence, when I felt the market getting toppy last December and became a student of value investing, I found it hard to leave TA completely behind. Mainly I use it only to avoid falling knives and to find buy points at very solid support. I try not to use it to sell stocksÂ
because my horizon remains long term. With the market this toppy though, I find it hard to ignore when TA says sell after a fast rise. It’s the old take the money and run. It has helped me tremendously, and I have been hurt when I ignore it completely. The four companies I hold now I’m not even charting, though I would do so if one or more gains 40-50% in a few weeks, as WHX has done.”
This is a very interesting insight from one of the best value investors of the past few decades.
Disclosure:Â The author owns no stock mentioned.
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