Michael Burry, a renowned value investor made famous by The Big Short, is known for his unconventional yet highly effective investment strategy. His approach revolves around disciplined research, a focus on undervalued assets, and meticulous risk management. This document outlines Burry’s strategy, emphasizing his methods for stock selection, portfolio management, and risk mitigation, while highlighting the philosophy and tools he employs to achieve long-term success.
Summary of Michael Burry’s Approach
Michael Burry’s strategy can be summarized as a research-driven, value-oriented approach that seeks to capitalize on market inefficiencies. His philosophy centers on:
- Deep Research: Thoroughly understanding the intrinsic value of companies and seeking a “margin of safety.”
- Focus on Discounts: Targeting undervalued stocks, especially in out-of-favor industries, using metrics like free cash flow and enterprise value/EBITDA.
- Flexible Scope: Investing across all market caps and industries, without limiting opportunities.
- Portfolio Structure: Holding 12-18 diversified positions while managing risk through strict rules like cutting losses when support levels break.
- Risk Management: Balancing high conviction bets with a disciplined approach to selling and holding.
Strategy
Core Approach
- Simple Investment Philosophy: Buy shares of unpopular companies when they appear undervalued (“road kill”) and sell them once they recover.
- Focus on Portfolio Management: Equal emphasis on stock picking and overall portfolio management.
Weapon of Choice: Research
- Research is Critical: Understand a company’s value deeply before investing.
- Margin of Safety: Inspired by Benjamin Graham’s concept in Security Analysis. Use a modernized approach to minimize downside risk.
- Catalysts Are Optional: Seek outrageous value rather than relying on specific catalysts.
Investment Scope
- No Restrictions: Open to all types of stocks (large-cap, small-cap, micro-cap, tech, or non-tech).
- Opportunities in Unloved Industries: Favor out-of-favor industries for steep discounts.
- Useful Tool: Recommends MSN MoneyCentral’s Stock Screener for uncovering bargains.
Determining Discounts
- Key Metrics: Focus on free cash flow and enterprise value (market capitalization minus cash plus debt).
- Screening Process: Use enterprise value/EBITDA ratios for initial screening, then dive deeper into off-balance sheet items and true free cash flow.
- Avoid Overused Metrics: Ignore price-to-earnings ratios and prefer minimal debt.
- Rare Birds: Occasionally invest in assets selling below two-thirds of net value or companies with competitive advantages (e.g., technology firms).
Beyond Stock Picking
- Broader Portfolio Management: Success requires addressing:
- Optimum number of stocks.
- Timing for buying and selling.
- Attention to diversification across industries and cyclicals.
- Low Turnover Goal: A skill-based decision suited to the investor’s personality.
- Tax Implications: Minimally important; turnover of ~50% annually dilutes tax benefits.
Practical Trading Rules
- When to Buy: Prefer stocks within 10-15% of a 52-week low if they demonstrate support.
- Risk Management: Use technical analysis sparingly; sell if a stock breaks support.
- Focus on Value: Avoid large, singular losses through disciplined adherence to the rule.
Portfolio Structure
- Diversification: Hold 12-18 stocks across depressed industries, staying fully invested.
- Volatility Tolerance: Acceptable as long as sufficient room is left for the best ideas.
Burry’s approach is both methodical and contrarian, leveraging patience and research to uncover rare opportunities.
