Picture this: it's 2005, and a little-known hedge fund manager named Michael Burry is poring over spreadsheets and financial reports. While the rest of the world is caught up in the euphoria of the housing boom, Burry sees something else entirely — a house of cards ready to collapse. Armed with his analysis, he places a massive bet against the subprime mortgage market, and the rest, as they say, is cinematic history.
Burry's story, immortalized in Michael Lewis's book "The Big Short" and subsequent film adaptation (where he's portrayed by Christian Bale), has become a touchstone for contrarian investors. But what can we learn from Burry's approach? Let's dive in and find out.
Investing Like Michael Burry
At the heart of Burry's strategy is a 1-page investment philosophy that guided his firm, Scion Capital. The key tenets:
Ignore the noise: Burry pays little attention to the overall market, instead focusing on individual opportunities. As he puts it:
I care little about the level of the general market and put few restrictions on potential investments.
Hunt for value in unloved places: Out-of-favor industries are fertile ground for finding "best of breed" companies trading at steep discounts. Think of it like thrift shopping for stocks — the best deals are often hidden among the racks of out-of-style duds.
Embrace concentration: Burry typically holds a concentrated portfolio of 12-18 high-conviction positions. In a world where many investors preach diversification, this is a contrarian approach.
As Warren Buffett famously quipped:
Wide diversification is only required when investors do not understand what they are doing.
Focus on free cash flow: When evaluating companies, Burry zooms in on free cash flow and enterprise value. Specifically, he looks at the EV/EBITDA ratio, with the acceptable range varying by industry and economic cycle. It's a nuanced approach that goes beyond surface-level metrics.
Be patient: Burry is willing to bide his time for the right opportunity. Once he finds it, he aims for a 30-50% gain over 12-18 months. In a world obsessed with quarterly results, this longer-term perspective is refreshing.
The Art of Execution
Of course, even the best investment thesis is only as good as its execution. And this is where many investors struggle. It's one thing to identify an undervalued company; it's another entirely to navigate the psychological minefield of actually buying and selling shares.
This is where Burry's approach really shines. He employs a disciplined, systematic process for entering and exiting positions. Some key tactics:
Scale in gradually: Rather than going all-in on a position at once, Burry scales in gradually, often in 1% increments. This allows him to take advantage of short-term price fluctuations and manage risk.
Use technical analysis selectively: While fundamentals are the bedrock of Burry's approach, he's not averse to using technical indicators to inform his entry and exit points. For example, he looks to buy within 10-15% of 52-week lows, and when the RSI is in the 30s — levels that often correspond with oversold conditions.
Be willing to adapt: While Burry has a clear framework, he's also willing to adapt to changing circumstances. As he puts it:
An investor cannot consistently predict the future. Changes in the investment landscape shift the pockets of opportunity.
Conclusion
Investing like Michael Burry isn't about blindly copying his every move. Rather, it's about embracing the foundational principles that guided his success: a focus on value, a contrarian mindset, and a disciplined approach to execution.
Of course, this is easier said than done. It takes a special kind of temperament to bet against the crowd and stick to your guns in the face of market volatility. But for those willing to put in the work, the rewards can be substantial.
So the next time you find yourself caught up in the latest market frenzy, take a step back and ask yourself: What would Michael Burry do? The answer might just lead you to your own "big short" moment.