Dr. Michael Burry, the founder of Scion Capital and one of the key figures in “The Big Short,” is renowned for his unique and successful approach to stock picking. He first garnered fame by successfully predicting and profiting from the subprime mortgage crisis of 2007-2008. His strategy combines rigorous research, contrarian thinking, and a focus on intrinsic value. In this article we will be delving into Michael Burry’s stock picking strategy
Intrinsic Value and Deep Value Investing
At the heart of Burry’s strategy lies the concept of intrinsic value, a cornerstone principle of value investing. Intrinsic value refers to the perceived or calculated value of a company, stock, or product determined through fundamental analysis without reference to its market value.
Burry is a disciple of deep value investing, which involves investing in stocks that appear underpriced by some forms of fundamental analysis. His modus operandi is to seek out and invest in such underpriced securities that trade for less than their intrinsic values. The approach requires rigorous and detailed analysis to identify the potential value others may have missed.
For example, Burry was one of the first investors to recognize the value in tech stocks after the dot-com bubble burst. When most investors were avoiding tech stocks, Burry saw the intrinsic value in companies like Google and, as a result, earned hefty returns.
Burry often adopts a contrarian stance, making investments that are out of favor with the mainstream. He firmly believes in betting against consensus when his analysis indicates that the consensus could be wrong.
The real-world example that stands out the most is Burry’s bet against the US housing market before the 2007-2008 financial crisis. Burry analyzed mortgage lending practices and realized that the market was unsustainable, leading him to short, or bet against, subprime mortgage bonds. This contrarian stance led to enormous profits for Scion Capital during the crisis.
Focus on Research and Understanding
Burry is known for his thorough research and his drive to understand his investments deeply. He dives into balance sheets, income statements, and the fine print of company reports to understand their financial health thoroughly.
A good example of this is when he took a large position in GameStop (GME) in 2019, when it was viewed by many as a dying brick-and-mortar retailer. Burry saw the potential for a turnaround due to the company’s strong balance sheet and the upcoming cycle of new gaming consoles, which he believed would boost the company’s profits. This is an illustration of how Burry’s diligent research and understanding of a company can uncover value where others see none.
Patience and Long-Term View
Patience is another significant aspect of Burry’s investment strategy. After he identifies a stock’s intrinsic value and invests, he is willing to wait for the market to recognize the value he sees. He focuses on the long-term potential of his investments rather than looking for quick profits.
For instance, Burry held onto his short positions against the housing market for a couple of years before his prediction came true. Despite facing criticism and pressure from his investors, he remained patient, and his long-term view paid off.
In conclusion, Michael Burry’s stock picking strategy is a blend of intrinsic value, contrarian investing, meticulous research, and long-term patience. His success serves as a potent reminder of the power of deep analysis, independent thinking, and conviction in the world of investment.