Saturday, April 18, 2015

Michael Burry's posts on Silicon Investor

Michael Burry is famous for predicting the 2006-08 housing bust and managing a hedge fund that profited from it. But Burry wasn't always a star fund manager: from 1996 to 2000, he was an individual investor and a prolific commenter on the Silicon Investor message boards.

Burry's posts on Silicon Investor offer a fascinating window into the past. They also offer a fascinating window into his evolution as an investor, giving the impression that he had a lot of innate talent.

That's easy to say in light of his subsequent success, but I think most people who read his posts contemporaneously would have agreed. Actually, some did: Joel Greenblatt was one of Burry's readers and seeded him when he started his fund in November 2000. And in 2003, Zeke Ashton wrote that "Dr. Burry... may be the finest money manager I know, and I have the privilege of knowing many outstanding professional money managers."

Burry's stock picks and the commentaries he wrote on those picks were good but common-sensical. In my mind, his posts stand out less for his discussion of individual companies that his versatility: he invested in net-nets, beaten-down cyclicals, and GARP stocks and made money in each category.

The posts also suggest that he had an uncommon willingness to change his mind. In 1996, he was bearish on gold and even started a new discussion board called Gold -- the eternal short? but in 1999 he turned bullish and bought gold near its generational low. He was initially bullish on Pre-Paid Legal because he thought it was pioneering a new industry, but he later became skeptical of the company's business model and shorted it. In late 1996 he worried that the stock market would crash and shorted an S&P 500 ETF as a hedge against his stocks, but that didn't stop him from making money over the next several years.

The Long Term Capital Management crisis in 1998 gave Burry his only major setback. He was completely out of the market at its July peak, but he got back in too early, and the stocks he bought-- mainly small caps and foreign stocks-- fell further than the market. After previously complaining about a lack of bargains, he wrote near the market's lows that "it takes less than five minutes to find a bargain, and just another five minutes to see it get cheaper." Around that time, he added money to his brokerage account and converted it from cash to margin, which helped him recover and finish the year flat.

Before joining Silicon Investor, Burry had traded futures using technical analysis:

In futures, I learned a lot about TA. The frustrating thing was it worked. You could actually predict the moves. But slippage ate away everything. I was up big at times, never down big. I left with 98% of my original capital.

As a value investor, he continued to use some technical concepts. In particular, he had a rule that called for getting out of stocks that made new lows. This gave him mixed results: for example, it got him out of Mattel and Alliance Semiconductor before they collapsed, but it also prompted him to sell Philip Morris and Tricon Global Restaurants in early 2000 right before they doubled. He bought Abercrombie and Fitch in 2000 at 11-12 and sold it at 10. The stock went down another 20% from there, but it quadrupled off that low in the following year. (It's possible that he got back into PM, Tricon, or A&F later on, after he'd started his fund and stopped commenting on Silicon Investor.)

Comments on individual stocks

Burry discussed dozens of individual stocks on Silicon Investor. Most of the discussion occurred on two boards called Buffettology and Value Investing, but he also commented on numerous stock-specific message boards. Below are a few of his most notable picks.

• Apple
He bought Apple in April 1999, and the stock tripled by the end of the year. His reasons for buying were:
1. It was statistically cheap and had a large net cash balance.
2. Wall Street was skeptical of the company because of its historical underperformance. ("You have all of Wall Street trained to think that Apple is the antithesis of good business thanks to case studies from the 80s.")
3. It had pricing power on its newest products and a strong consumer franchise. ("This is a consumer franchise, not a corporate one. And I think Buffett's point has always been that in the long run it is the consumer franchises that last.")

• and Borders
During 1999, he shorted and bought Borders, writing that "Online booksellers compete on price only. It's a commodity world. Borders competes on environment, location, timeliness, and has IMO the most comprehensive selection of any bookstore, if not music store."

This proved to be very wrong, but he actually made money shorting Amazon. (Amazon peaked in April 1999, almost a year before the NASDAQ Composite.) And many of his criticisms of internet retailing, while ultimately false for Amazon, were true of the sector in general: in the aggregate, the first wave of dotcom retailers gave investors terrible returns.

• Hyde Athletic
He bought a profitable net-net called Hyde Athletic, sold it for a ~50% gain, and then watched it triple from his sale price. The company later changed its name to Saucony, and its stock eventually fell back to net-net status.

General investing comments

Many of Burry's most insightful comments were about general issues rather than specific stocks. Although he was only in his twenties when he posted on Silicon Investor, he had already developed an impressive philosophy of investing by then.

• Bubble anecdotes
I overheard two conversations today. Both were about investing - one involved the med center librarian, the other a janitor. Moreover, the friend I describe with the half-mill is not the first overnight success story. As I might've mentioned before, my two best friends and my younger brother's two best friends all became multimillionaires this year. But you know, even though I'm here in Silly Valley, I'm on the fringe - that same guy who made half a mill went on a date with an HP IS employee who said it'd take 2 mill to buy her house. When informed of his goal of 3-5 million in a few years, she scoffed and said "That should last 2-3 years." Then she asked what doctors are making in the Valley. He said "$100 to $120k." She actually sniffed. 

• Warren Buffett
Buffett's buy-and-hold philosophy is his third incarnation, which comes of necessity due to the size requirement on his investments. And his absolute best years - the ten years of his partnership- were not of the buy-and-hold type. He was very successful flipping small caps for rather quick gains when he was able. I'm sure he would love to now if it would make any difference to him. Then again, with the REITs, maybe he did.

Could it be that by investing as Buffett does now, despite our tiny size, we are giving up the inherent advantage of being an individual, small investor?

To try to emulate Buffett perfectly without his full complement of skills and advantages (which I do not have, but any of you here might for all I know) seems foolhardy. So I take something else from Buffett - the willingness to improvise new investment parameters as fits my situation.

Every year the [Berkshire Hathaway annual] report becomes more a marketing tool. Never more than this year. 

• Buybacks
I wish to evaluate companies in the midst of proven buybacks. Small marginal companies have taken to using buyback announcements as a publicity stunt to support their stock. More often
than not, the buybacks do not materialize. When they do, they end up not retiring the stock and placing it in the corporate treasury, which is of marginal use to shareholders. Everyone should
be aware of this trick. 

• Buying and holding
Buy and hold becomes mantra at the end of a bull market. Buy and hold becomes anathema at the end of a bear market. Thanks to the raging bull for those 10 years, everyone is preaching buy, hold, patience. However, if you had invested in the market in 1969, you would be at a significant loss in 1983, especially given the high inflation of the times and the down market. In the early 50's, the common logic was that stocks simply don't go up, thanks to the doldrums market from the mid 30's to the mid 50's.

• Insider buying
My own pick based primarily on insider trades was BMC. So now it's 1/2 the price of the "significant" insider buys. I'm sure the information can be helpful, but I'm not sure the conventional ways of analyzing it are necessarily correct. I'm thinking my mistake was putting too much emphasis on the insider trading, even to the point it allowed me to overlook fundamental flaws and warning signs. 

On the subject of insider buying, I spent some time looking at this, and it turns out it is not too hard to find stocks in which insiders made buys at significantly higher prices than current ones. So either they misjudged the market or their fundamentals.

• The Internet
It's been noted here before, but one of the biggest traps that novice value investors can fall into is that of the "growth at a value price" when in fact the market already is just showing that it knows that the barriers to entry simply splinter in the face of fresh capital. 

What really gets me about the internets is not so much the valuations, but that so much of it is indefensible. For instance, Exodus Communications is borrowing $1 billion at 10% to build data centers round the world. Intel could do the same thing, with greater brand name, and would hardly have to borrow to do it. And if it did, it could borrow at much less than 10%, and provide much of its own hardware.

• Net-nets
I believe Graham bought a huge basket (100's) of them. Additionally, the market was depressed so a higher percentage of the NN's were just misunderstood. In this market, a net-net would carry more risk, I would think, because it is less likely to be overlooked and more likely to be really in trouble. Also, I can't find hundreds to diversify and lessen my risk.

When looking at net nets as individual picks in a concentrated portfolio in a frothy market, we're not following Graham's method very well anyway. So I insist on extra corroborating value analysis/evidence to help me when I add my one or two or three net nets to a portfolio. Tweedy Browne has done some proprietary research on this which which is mentioned here and there in various investing texts. Their feeling is that the net nets that actually did well when purchased as part of a broad diversified portfolio of them were the ones that had horribly negative earnings rather than positive earnings, and that had business models that didn't seem viable. This makes sense, because net net is really a proxy for a form of liquidating value, and becomes least relevant in an operating company that is expected to continue to run forever.

If one does subtract out operating lease burden, then retailers become doubly suspect as net nets - their inventories are already as suspect as they come.

• Sentiment
Can the market possibly take a major hit if everyone is planning on it? Why not? The last five years everyone planned for the market to go up. 

• Short selling
For the last week I've been carrying "The Art of Short Selling" around with me just about everywhere...

If there's one thing that keeps hitting me in the head about that book and its cases is that there's a lot of time to short and still come out ahead. The problem with net stocks is that they appear as if they require constant capital infusions, which makes them good shorts. But they're getting these infusions at will. That makes now now a good time. When the capital spicket is turned off, the stocks will react downward, but won't fully account for how bad the news is then. They'll be terminally wounded but the price won't reflect it. That's when IMO you'll be able to grab a lot of the net stocks on their way to zero. But before that, a lot of smaller companies will pitch themselves to larger companies. So the wild card is that they get taken over by a bigger, stupider, more capital-rich, company.


  1. great post! thanks for summing up all the points!

  2. This is really great work!

  3. Awesome especially at the end and what i think is going on in private equity startup markets.


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