Tuesday, 22 December 2015

Dr. Michael Burry, The Big Short, and How Much Research is Enough?

I've taken a little bit of a vacation from posting, partly due to travel, partly due to work, and partly due to nothing much to say.  I haven't been finding much to buy in my long term accounts.

Going into xmas week, there's a Hollywoodized interpretation of Michael Lewis' The Big Short on tap for big screen release.  I've now read the book twice.  If you want to really get into the guts of what the 07-09 crisis was all about, do yourself a favour and read The Big Short.  The characters are fascinating.

One of the characters profiled is Dr. Michael Burry, who left practice in medicine to become a full time investor.  I won't bore anyone with the details, his history is pretty well documented in Lewis' book.

Prior to Burry capitalizing on credit default swaps, he was an aspiring value investor.

Here's a link to a post on Burry written by John Huber of Saber Capital Management.  If anyone is interested, Huber's blog is here and it's a fascinating read.

I've borrowed the attached from Huber's blog on Burry:

The following quote is emblematic of Burry's approach:

"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"

I managed to stumble across a number of case studies written by Burry circa 2000/2001, outlining his thoughts on investment candidates at the time.  The link is here, and the read is fascinating.  If anyone is really interested in learning about how to do proper, outside the box thinking research, this is as good a place to start as any.  I promise, you will not find one mention of S&P IQ consensus ratings or arbitrary DDM calc's used to justify a valuation in here.

Here's a brief example of how Burry analyzed a spun-off REIT, Senior Housing Properties (apologies for the spacing):

Key Takeaways From the Analysis

  • At the time (2000/2001), Senior Housing Properties was a recent spin-off from parentco, HRP Properties.  Insiders had indicated they were intent on disposing a 49.3% stake in SNP.  This would have kept pressure on the stock.
  • The stock was selling at a total market cap of $220M.  Not large enough to matter to any significant institutional particpants
  • The cost (not the fair value) of the investment properties less debt (mortgages) was $500M vs. a market cap of $220M.  This is equivalent to a 56% margin of safety.  You'd be buying $.56 $1's as long as the revenue stream carried
  • Two of the largest tenants, accounting for 48% of lease revenues, had filed for bankruptcy in the past year.  There must have been a pall of uncertainty hanging over expectations surrounding future operations.  I suppose there must have been rampant fear that 48% of the lease revenue was going to disappear. Burry reasons out how even through bankruptcy, these lessees would have generated sufficient cash flow from their operations to make good on their leases
  • Burry took solace in the recent sale of a portfolio of properties in order to repay debt as an indication of management alignment with shareholder interest

Brilliant analysis, in my opinion.  I probably would have stopped at buying $500M of assets for $220M as long as I could determine that the leases were covered, but the above is what makes investing so difficult to succeed at.  Every day, you're up against brilliant thinkers, like Mike Burry, and unfortunately, gathering S&P IQ consensus opinion coupled with a quick DDM and cursory look at a few ratios won't likely translate into longevity or consistent success.

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