Michael Burry is a legendary investor known for his bold contrarian bets and foresight. He famously predicted the 2008 housing market collapse and made millions by shorting subprime mortgages, a move brought to life by Christian Bale in The Big Short.
Burry is a deeply analytical thinker, often going against the grain, with a sharp focus on finding hidden opportunities and flaws in markets that others miss. His unorthodox, data-driven approach has earned him a reputation as one of the most influential investors of his generation.In 2000, he wrote an investment playbook. It remains relevant today, serving as a modern guide for value investors.As always, this isn’t investment advice—just some wisdom from a seasoned investor. Be sure to do your own homework before making any investment choices.
1. KEEP IT SIMPLE
My strategy isn't very complex. I try to buy shares of unpopular companies when they look like road kill, and sell them when they've been polished up a bit.
Management of my portfolio as a whole is just as important to me as stock picking, and if I can do both well, I know I'll be successful.
2. UNDERSTAND VALUE BEFORE LAYINGDOWN A DIME
My weapon of choice as a stock picker is research; it's critical for me to understand a company's value before laying down a dime. I really had no choice in this matter, for when I first happened upon the writings of Benjamin Graham, I felt as if I was born to play the role of value investor.
3. PROTECT YOUR DOWNSIDE: INVEST WITH A MARGIN OF SAFETY
All my stock picking is 100% based on the concept of a margin of safety, as introduced to the world in the book Security Analysis, which Graham co-authored with David Dodd. By now I have my own version of their techniques, but the net is that I want to protect my downside to prevent permanent loss of capital. Specific, known catalysts are not necessary. Sheer, outrageous value is enough.
4. FIND UNPOPULAR STOCKS: TARGETUNDERVALUED COMPANIES IN OUT-OF-FAVOUR INDUSTRIES
I care little about the level of the general market and put few restrictions on potential investments. They can be large-cap stocks, small cap, mid cap, micro cap, tech or non-tech. It doesn't matter. If I can find value in it, it becomes a candidate for the portfolio. It strikes me as ridiculous to put limits on my possibilities. I have found, however, that in general the market delights in throwing babies out with the bathwater. So I find out-of-favor industries a particularly fertile ground for best-of-breed shares at steep discounts.
5. USE ENTERPRISE VALUE/EBITDA RATIO TO FIND UNDERVALUED STOCKS
I usually focus on free cash flow and enterprise value (market capitalization less cash plus debt). I will screen through large numbers of companies by looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to vary with the industry and its position in the economic cycle. If a stock passes this loose screen, I'll then look harder to determine a more specific price and value for the company. When I do this I take into account off-balance sheet items and true free cash flow.
I tend to ignore price-earnings ratios. Return on equity is deceptive and dangerous. I prefer minimal debt, and am careful to adjust book value to a realistic number.
6. RARE BIRDS
I also invest in rare birds – asset plays and, to a lesser extent, arbitrage opportunities and companies selling at less than two-thirds of net value (net working capital less liabilities). I'll happily mix in the types of companies favored by Warren Buffett – those with a sustainable competitive advantage, as demonstrated by longstanding and stable high returns on invested capital – if they become available at good prices. These can include technology companies, if I can understand them. But again, all of these sorts of investments are rare birds. When found, they are deserving of longer holding periods.
7. FIND YOUR OWN APPROACH
Successful portfolio management transcends stock picking and requires the answer to several essential questions:
- What is the optimum number of stocks to hold?
- When to buy?
- When to sell?
- Should one pay attention to diversification among industries and cyclicals vs. non-cyclicals?
- How much should one let tax implications affect investment decision-making?
- Is low turnover a goal?
In large part this is a skill and personality issue, so there is no need to make excuses if one's choice differs from the general view of what is proper.
8. DIVERSIFY: HOLD 12-18 STOCKSACROSS DEPRESSED INDUSTRIES TO REDUCE RISK
I like to hold 12 to 18 stocks diversified among various depressed industries, and tend to be fully invested. This number seems to provide enough room for my best ideas while smoothing out volatility, not that I feel volatility in any way is related to risk. But you see, I have this heartburn problem and don't need the extra stress.
9. SELL EARLY: TAKE PROFITS WHENSTOCKS RISE 40-50%
Tax implications are not a primary concern of mine. I know my portfolio turnover will generally exceed 50% annually, and way back at 20% the long-term tax benefits of low-turnover pretty much disappear. Whether I'm at 50% or 100% or 200% matters little. So I am not afraid to sell when a stock has a quick 40% to 50% a pop.
10. CUT LOSSES QUICKLY: SELL WITHA 10%-15% MAX LOSS
I mix some barebones technical analysis into my strategy - a tool held over from my days as a commodities trader. Nothing fancy. But I prefer to buy within 10% to 15% of a 52-week low that has shown itself to offer some price support. That's the contrarian part of me. And if a stock – other than the rare birds discussed above – breaks to a new low, in most cases I cut the loss.
That's the practical part. I balance the fact that I am fundamentally turning my back on potentially greater value with the fact that since implementing this rule I haven't had a single misfortune blow up my entire portfolio.
