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Michael Burry, Farmland and Water

Scion founder's farmland investments look a lot like value investing

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Aug 28, 2018
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Dr. Michael Burry is an infamous name in the world of investing. Before the financial crisis, he was virtually unheard of. His blogs had attracted some attention online, and his hedge fund, Scion Capital did draw some interest, but it wasn't until he started shorting the supposedly "safe" housing market that people started to pay attention to this small-time fund manager.

Of course, Burry turned out to be correct on housing. His bets against the subprime market made millions for his investors, and he himself was immortalized in the book (and later film) "The Big Short." Here's Burry describing his housing bets in his 2006 letter to investors:

"The Funds currently carry credit default swaps on subprime mortgage-backed securities amounting to $1.687 billion in notional value. As I selected these, I was not looking to set up a diversified portfolio of shorts. Our shorts will have common characteristics that I deemed to be predictive of foreclosure, and therefore they should be highly correlated with each other in terms of both the timing and the degree of ultimate performance. Again, ultimate performance matters much more than the valuation marks accorded us by our counterparties in the interim. In the worst case, I expect our mortgage short will fully amortize to nil value over the next three years, corresponding to an average annual cost of carry over that time of roughly six percent of current assets under management. Calibrating the more positive outcomes will become easier as 2007 progresses."

After unwinding his positions, Burry shut down Scion Capital. The amount of criticism he'd received from his investors while betting against the housing market was too much to handle. He wanted out. So, Burry closed Scion and left the market for a while.

Burry has since returned to investing. Rather than moving back into value, he's now concentrating his efforts on a different set of assets: water and farmland.

Here's Burry describing his new investment strategy in an interview with Bloomberg in 2010:

"I believe that agriculture land - productive agricultural land with water on site - will be very valuable in the future...I've put a good amount of money into that."

He went on to explain that he is seeking out farmland assets because he believes they are not correlated to other asset classes, particularly stocks:

"I'm interested in finding investments that aren't just simply going to float up and down with the market...The incredible correlation that we're experiencing - we've been experiencing for a number of years - is problematic."

Burry made these comments back in 2010, and ever since, I think it's reasonable to say that correlation across asset classes has only increased.

The fascination with farmland reminds me of Burry's goal of looking for so-called "ick" investments -- investments that the rest of the market does not want to be involved in but that have the potential to achieve outsized returns.

"Another issue I have with this sort of thinking is probably best summarized by the word 'Ick.' 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 an unwillingness – and an 'ck' accompanied by a wrinkle of the nose – on the part of most investors to delve any further. In all probability, such stocks will prove fertile ground for the rare neglected deep value situations that could provide significant returns with minimal risk, and minimal correlation with the broad market. Occasionally, well-known stocks fall into the 'ick' category, and it is at those times that I become interested." -- Dr. Michael Burry, 2001 letter to investors.

Of course, there are several critical differences between farmland-water investing and value investing. Nonetheless, the relationship between the two is fascinating. Value investing and owning a farm aren't really that different.

One of

Warren Buffett (Trades, Portfolio)'s first investments was farmland because he understood the power of cash flows that can be produced from the land, as well as the benefit of capital appreciation. In other words, you could argue Burry remains a value investor; he's just switched his focus to a different sector.

Disclosure: The author owns no share mentioned.

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