Michael Burry was once considered one of the best value investors around. Before he rose to fame shorting the subprime housing bubble, he made a name for himself picking undervalued stocks and publishing his findings on online forums.
As well as stock ideas, Burry also published his thoughts on the general market environment. As he wrote the majority of these diary entries around the time of the dot-com bubble, his writing provides some fascinating insight into his thought process at the time.
On chasing yield
Here’s an interesting snippet on Burry’s thoughts regarding investors’ hunt for yield in an overvalued market:
“The need for yield has been apparent in the new issue bond markets of late. The Ford (F, Financial) deal was doubled in size even as Ford made it clear that the company would be lending out at 0% that which is borrows. Stocks don’t pay dividends anymore, savings and money market accounts yield too little. The remaining option is bonds. To the degree the need for yield results in a mass panic for yield, however, the consequences will be dire. While earnings yield on equities are commonly mispriced. So what is my recommendation to those who approach me in search of higher yields? Caveat emptor. In other words, work hard not to be seduced when a too-good-to-be-true higher yield investment comes along.”
“Moreover, should deflation become a factor, the tremendous debt burden under which many U.S. companies and consumers operate will become much more of a burden, even as consumers hold off on consumption as they wait for lower prices.”
Despite the drive for yield at the time, Burry remained convinced stocks were the best way for investors to generate a steady return, although trying to predict the rate of return is not an exact science:
“Paradigms are continually turned upon their heads. This is how the United States as a country progresses. We ought to brace for yet another new paradigm -- one that few, if any, pundits, including me, can predict. Regardless of what the future holds. Intelligent investment in common stocks offers a solid route for a reasonable return on investment going forward. When I say this, I do not mean the S&P 500, the Nasdaq Composite or the market broadly defined will necessarily do well. In fact, I leave the dogma on market direction to others. What I rather expect is that the out-of-favor and sometimes obscure common stock situations in which I choose to invest ought to do well. They will not generally track the market, but I view this as a favorable characteristic.”
As noted above, Burry liked “out-of-favor and sometimes obscure common stock situations” and believed the rest of the market was, at the time, relatively overvalued. What did he mean by this? It was overvaluation in the most common sense. Burry considered intangible factors in his assessment of the market’s value.
“When I speak of overvaluation, I do not refer to aggregate price-to-earnings ratios. Rather, I survey common stocks across all market capitalization ranges and find that the market continues to find ignorance bliss. That is, off-balance sheet and off-income statement items are ignored even as complex pro forma accounting obscures on-balance sheet and on-income statement items. Insider related-party dealings, despicable corporate governance and other such issues continue to take a back seat to an intense focus on growth rates. Greed continues to conquer fear.”
This looks a lot like the market environment we find ourselves in today.
And finally, a word from Burry on the topic of holding cash:
“Cash seems quite conservative, quite boring. Yet the typical professional investor finds cash a little too hot to handle, and therefore high cash balances become the too-frequent prelude to forced investments and poor results.”
Source: CS Investing
Disclosure: The author owns no stocks mentioned.
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