Michael Burry: A Profile in Courage

If you want to understand the perils of being right but much too early, then there is no better place to start than Michael Burry. His story inspires me and warrants constant re-reading. I can't do justice to his tale but here's my best attempt:

THE CINDERELLA MOMENT

The son of a former Marine, Michael Burry lost his left eye to cancer at the age of two. The loss affected his depth perception and invited derision from classmates in grade school. It is little wonder that he had few friends growing up.

One day, Burry noticed the stock quotations section in the newspaper. He asked his father what did it mean. His father, no fan of the stock market, explained that the quotes would go up and down. Fortunes were made and lost as the numbers went up and down. It occurred to Burry that one could make money in the market. He saved his money, invested in a mutual fund, and promptly saw the funds drop sharply. "I told you so, I told you," his father said. "They're going to take all your money." Gregory Zuckerman, The Greatest Trade Ever, page 75.

As a UCLA premed student, Burry returned to his obsession with the market. He was drawn to the objective criteria for success. If you produced good returns for the year, no one cared that you did not enjoy parties. It wouldn't matter if your social graces were below par. You just had to produce. He opened up a brokerage account with his summer earnings and began to focus on his portfolio more than his studies. His father died unexpectedly. Burry used the inheritance to make more investments. I imagine that Burry found profitable investing soothing and relaxing.

Headstrong in his views and with profits to back up his opinions, Burry took to the internet. He would discuss stocks and post essays several times a week. Readers were drawn to his analysis. He had insight. He had passion. He had profits to show for his efforts.

During the 1999 stock market bubble, Burry would see his fellow doctors cheerleading various high tech stocks. In the evenings, he would argue that all of these stocks were overpriced. "This isn't going to end well. Sell! Sell!" Sell!" Zuckerman at page 78. When the market did bust in 2000, Burry saw in real time how markets could go to extremes. He continued to post essays in the evenings after work.

When his residency ended, Burry decided it was time to leave medicine and pursue his passion for the market and investing. Burry didn't have personal connections in the world of hedge funds. But he knew that Warren Buffet had created a partnership for investment. Burry pulled together small amounts of money from family members. His wife contributed her retirement account. And Burry set up shop for investment on a professional basis.

Now, this is my favorite Cinderella part of the story....

"Two weeks later, a New York investor named Joel Greenblatt called Burry..."

"Michael, I've been reading your work for a while, and I read that you're leaving medicine," Greenblatt said. It tuned out that Greenblatt had been monitoring Burry's web site. "You're a really talented analyst. My firm would like to make money from your ideas." Zuckerman at page 79.

This is the moment that all budding entrepreneurs dream of. You are doing your thing, you are consistently right, and you are discovered by the universe (or at least, Joel Greenblatt/smile).

Greenblatt offered Burry a million dollars "after tax" in exchange for a 22.5 percent interest in Burry's Fund. And that is how Scion Capital was born.

THE MORGAN FREEMAN MOMENT

Burry wasn't worth a damn as a gladhander. But it didn't matter--he produced consistent results.

"In his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again--his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away." Michael Lewis, The Big Short, page 42.

While strolling through a bookstore one day, Burry decided to thumb through a massive book on Credit Derivatives & Synthetic Structures: A Guide to Instruments and Applications. It all seemed very complex but it seemed like a nice hedge against future troubles. He made a mental note. (In my opinion, the best investors and traders are never off the clock. They are always thinking about the big picture and trying to fit pieces of the puzzle together. Bruce Kovner has talked about this inner drive. So has Jim Rogers.)

A while later, Burry got the thought that housing seemed headed for a fall. This was the year 2003. Curious as always, he researched the historical patterns of cycles in housing. The more he thought he about it, the more he came to the realization that storm clouds were ahead. I call this moment the Morgan Freeman Moment, the point of realization that the unthinkable lies away. No one else sees it yet. But you do. The realization is stunning. It reminds me of the moment in the movie The Sum of All Fears when Morgan Freeman realizes that the unthinkable, denotation of a nuclear device at the Super Bowl in Baltimore, is moments away. Jim Rogers has talked about his moment of realization when the fundamentals have changed and the trend will be changing. He is often early but he is often right.


Burry began to sound the alert but he was early, too early. It was still the middle of 2003. The Bull Market in housing was raging. The psychology was wildly bullish. But Burry stuck to his guns. He put two and two together and decided that those complex credit derivatives might be a good way to profit from the future crash in housing prices. The ability to take two unrelated pieces of the puzzle and put them together in a profitable way is a sign of gifted investor and trader, in my humble opinion.

Burry called his broker and said that whenever Deutesche Bank started to sell credit derivatives on housing mortgages and securities he wanted a call right away. "It's going to be huge." Zuckerman at page 84.

[Note: In a later posting, I will conclude the story of Michael Burry: A Profile in Courage.]

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