Out of Michael Lewis brilliant book, Michael Burry emerges as one of the most compelling characters. He is an under-dog who bets $8 billion dollars of US money and uses it to be against the US housing market.
But behind all the big bets, in an investor with a pretty old school value approach. I have read some of his letter and have come up with a few characteristic traits of Burry’s investing style…
Margin of Safety
Margin of Safety is a famous concept outlined by value investor Ben Graham. Margin of safety according to Graham meant investing in a way that prevented the permanent loss of capital.
Burry said if you focus on intrinsic value, then there is no need to worry about events de-railing your investment…
Burry says an investors first weapon is market research. If everyone is reading the same materials, he thinks you need to find another advantage. One advantage is finding neglected companies and researching them yourself!
Burry has been known to ring up these companies and ask for information himself…
What is the optimum number of stocks to hold?
“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.”
When should you buy a stock?
“As for when to buy, 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.“
When should you sell a stock?
“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.”
“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.”
In The Big Short, Lewis goes through the enormous trade Burry made against the US property market in 2008 and essentially Middle America. It’s probably one of my favourite books!!!