Chit Chat Stocks - Michael Burry: The Ultimate Deep Value Investor

Episode Date: February 12, 2025

On this episode of Chit Chat Stocks, we discuss Michael Burry. The deep value investor and famous Big Short character is more than just his housing short thesis. We discuss: (03:32) Michael Burry's Early Life and Career (07:25) Investment Strategy and Philosophy (13:26) Case Studies: Masaba Holdings (30:12) Case Studies: Industrious Pachoco (40:21) The Rise of Michael Burry (41:45) Understanding the Big Short Bet (45:29) Burry's Strategy and Risk Management (54:50) Investor Reactions and Burry's Communication (58:22) Burry's Performance and Market Comparison (01:01:55) Current Holdings and Investment Strategy (01:03:54) Key Takeaways from Michael Burry's Approach ***************************************************** JOIN OUR FREE CHAT COMMUNITY:https://chitchatstocks.substack.com/  ********************************************************************* Sign-up for a bond account atPublic.com/chitchatstocks  A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See ourFee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. Seehttps://public.com/disclosures/bond-account to learn more. ********************************************************************* FinChat.io is The Complete Stock Research Platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan:⁠finchat.io/chitchat  ********************************************************************* Sign up for YellowBrick Investing to track the best investing pitches across the internet:joinyellowbrick.com/chitchat ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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not formal advice or recommendation. Now please enjoy this episode. Welcome into the Chit Chat Stocks podcast. My name is Brett Schaefer, and as always, joined by Ryan Henderson. Today, on our Wednesday episode, we are doing another super investor overview, and we are covering Michael Burry, Burry, Burry, I think it's Burry, B-U-R-R-Y, of Scion Asset Management and Big Short Fame. This is, we haven't decided the title yet, but something along the lines of the ultimate

deep value investor, a traditional deep value investor, the art of deep value investing. We're going to be talking about his classical deep value investing style for buying stuff dirt cheap, regardless of business quality, how it worked for him. We're also going to discuss, without the full episode, his housing bet short that became famous, trying to dissect that and how that was also perhaps a value investment, just in a different form. All right, before we get started, Ryan's going to introduce who Michael Berry is, how he became a well known investor, I should say housekeeping items. First, if you want our show notes and a written analysis and a coverage on Michael Berry, but in all honesty, it's more important when we do our

stock research episodes, which will be coming out actually quite shortly here. Ryan's got a good one on Adobe upcoming. Just did one for myself on the Mexican airport operator OMAB. You should subscribe to our sub stack, which gives you a free newsletter to go along with each episode. And if you enjoy these podcasts, give us a review, hopefully five stars on Apple podcasts or Spotify. All right, Ryan, let's kick things off here. Any housekeeping items? And if not, who is Michael Burry and how did he become such a well-known investor? No housekeeping items for me. So let's dig right in a little bit about Michael Burry's early life because some people like to have a little bit of context around how these people got into investing,

how they became so well-known, all that good stuff. So he was born in 1971, grew up in San California. If you've watched The Big Short, you may have noticed that Christian Bale in the movie had a cosmetic eye. In this case, that was factually correct. Michael Burry had lost his eye to a rare form of cancer when he was two years old. I don't think that really makes a huge difference in his investing career, but just a little bit of, I guess, background information there. He was seemingly a very bright student from an early age. There isn't a whole lot about his childhood that I could find, but he attended UCLA where he studied economics and pre-med, then earned an MD degree from the Vanderbilt School of Medicine. And he started a residency

at the Stanford University Medical Center. However, he did not finish his residency because he ultimately ended up starting Scion Capital. So while he was a medical student and during his residency, he became enamored with the investment world. I can't remember where I heard this, but I believe the book that really caught his interest was Joel Greenblatt's You Can Be a Stock Market Genius. This was also around the time that the message boards and blogs were becoming very popular on the internet, and Burry was making a name for himself through those avenues. Now, most people that have heard the Michael Burry story know that he used to post on Value Investors Club. A lot of people think that's how he initially was identified. I don't

think that's totally true. So Burry had actually built a blog of his own. I believe it was called thevaluestocks.com where he had, that was really where he had made a name for himself. And his third year in his medical residency, he decided to drop out, start a hedge fund before he was inspired by Joel Greenblatt and Jack Byrne or anything like that. Like he was committed to doing this on his own. He had developed a bit of a following on these message boards. People were following his blog. He was making a lot of money with his picks. Initially, when he was starting Zion Capital, it was mostly going to be money from his family. However, right before he was planning to launch the fund, that's when he was approached by two different institutions that

decided to back him. One was Joel Greenblatt's Gotham Capital. Joel Greenblatt, he was one of the founders of Value Investors Club and Michael Burry had been doing a couple of write-ups, I believe, on VIC at the time. Not as many people seem to follow Joel Greenblatt today, but at this time, the turn of the century, he was a bit of a legend. Gotham Capital had put up record returns, really good numbers for a decade. He had started Value Investors Club, just a really well-known guy and someone that is very reputable to be backed by. And then the second company was White Mountain Insurance, which was a company run by Jack Byrne. If that name sounds at all familiar to you, it's likely because Buffett has mentioned

him a number of times at annual meetings and in various interviews. In fact, Warren once called him the Babe Ruth of insurance. He has really high praise for Jack Byrne and apparently Jack Byrne has had quite an investment track record himself. So after getting some backing from both of them getting some family money as well. Burry officially launched in October, well, November 1st of 2000. So for those that remember their dot-com history, that was basically near, there was kind of two peaks in the dot-com bubble. There was the initial peak, stocks collapsed a bunch, and then they rallied and there was kind of the second peak. It didn't hit quite as high, but that was basically the second rise. That second rise marked

the start of Scion Capital, which ended up being pretty fortuitous timing. And I would say actually helped out Burry a ton. We're going to get to this in a second, but Burry was a true deep value investor. And by owning, he owned a lot of oddball type stocks, maybe what I'll call them. By owning those, he was able to get a giant lead on the indices within the first 12 months of launching his fund. I've got a chart here showing the NASDAQ from basically November 2000 to January of 2002. It dropped 50% in that timeframe. And he was benchmarking himself more against the S&P, but really, if you don't own stuff that's correlated to the NASDAQ or the S&P, which is tough, probably more so today than it used to be. But if you don't own stuff that's correlated to

the indices, and the indices dropped 20%, 25%, 50%, it is a recipe for potentially good outperformance. In fact, that's exactly what happened. So we're going to get really into the strategy, the investments that shaped his, I guess, career. But in his 2001 letter, this was his 2001 annual letter. So he had, I think this was his fourth, maybe fifth letter that he had written to investors. He was doing them quarterly at the time. Scion Capital was up 68% gross performance since inception, while the S&P 500 was down 18.5%. So he crushed the market within the first 12 months. That's really where he started to gain his notoriety. We're going to get into kind of his process, what type of investor he was and his 2006 housing bet,

which really popularized him more than anything else. But let's start here, Brett. How do you think the timing of the fund helped, if at all, with his deep value strategy and also kind of his name and notoriety in the investment community? I think it definitely helped. Unlike, and this isn't taking away, he's obviously a very good investor. We're going to go through that, but this is what makes the likes of Buffett or maybe even Druckenmiller some of the best out there. The ones that are even in a higher tier is that they can be flexible in different market environments. Because if we look at some of the investments that Burry has made today or even over the last decade or so, that was not a time where deep value

was as attractive. And yeah, I'm sure he is still done fine, but he seems to be very stringent in this strategy he knows it works and this was the uh the 2000 to 2002 period was from a factor perspective i think one of the best times to be looking at small cap deep value in all of market history or of the last 100 years or so so yeah i think the timing helped um definitely helped yeah let's get into him as an investor we've alluded to it small cap oddball deep value type stuff. How would you describe him as an investor and what did his process look like? Yeah. And before we get to that, maybe I should just give a quick table of contents for this episode. We're going to go through what his process is, how we invest, and then we're

going to go through various case studies that we think can help identify even further how we invest. And then we're going to look at his portfolio today and what we learned studying his investor or letters. Fortunately, we don't have full returns through today. Although I think Cyan asset management has been open, I think this entire time since 2000 through till today, we don't really have the returns, but we're going to try to estimate how well he's done to the best of our abilities. But yeah, maybe we can read from this. This is a one pager in his first paragraph, and it kind of sums up how, well, in reality, simple his strategy is. Quote, my strategy isn't very complex. I try to buy shares of unpopular companies when they look

like roadkill and sell them when they've been polished up a bit. Management of my portfolio as a whole is just as important to me as stock picking, and if I can do both well, I'll know I'll be successful. So he's essentially looking for things that are absolute value, true deep value, stuff that might be trading at 0.3 times book value, three times cash flow. And all he needs in this almost cigar butt approach is a few years of good cash flow. The business isn't as bad a shape as people are thinking. They're throwing the baby out with the bathwater. This is a dollar that's trading at 40 cents. I'll make some money on this, flip it, and then go do it again. And from reading Burry's letters and VIC write-ups,

which I should say he posted on VIC, I think until about 2005. So there's a lot of stuff on there. You can read his comments and things from existing picks. It's quite interesting. His handle is Michael99. But yeah, it looks like through and through and really focused, he is a classical deep value and contrarian investor. This is about the complete opposite of what we studied with David Gardner. I think that was the last investor we studied. And I think it's interesting to compare them back to back because we look at Gardner, almost would never do what Burry is doing. Burry would never do what Gardner is doing, but both strategies can work if you focus on the right things. And Burry faded a lot of the popular ideas of his day. The vast majority of people were

believers, and I guess still are today, that volatility is risk and they're in that camp. And around the turn of the century, this was extremely popular. Burry took this idea, faded it, and used it to help him make a lot of money. Here's a quote from his early 2001 letter. This performance was not without volatility. However, allow me to be quite stern on this subject. Volatility does not determine risk. I guide the fund to a net long position by investing in a concentrated manner

and by frequently taking relatively illiquid positions in undervalued situations. The goal here is long-term capital appreciation with the emphasis on the long-term. What's funny is each quarter he was just crushing the S&P. So there wasn't any concern about that, at least in the first few years. I know in the housing short, there was some stuff around that and the timing. But Burry constantly talks about finding a dollar, quote unquote, a dollar, something that's worth that. You know, if the stock's worth a dollar, that trades at a wildly differing price. and he wants to find it when it's at a discount and if it's in a liquid stock hey that's great

if someone is dumping this for a reason that has nothing to do with the company's intrinsic value fundamentals that's even better because he can get on the other side of that trade he doesn't care if it doesn't trade much he doesn't care that is it it is in a foreign country he simply wants to find the basic characteristics again cheap price to book three times cash flow two times ebitda that will find him to or excuse me will lead him to find cheap stocks people don't want to buy and we have some other stuff here but ryan maybe i'll let you interject any thoughts on his basic ideas seems very ben graham like yeah it was and it was he you're not gonna recognize a lot of the names that he invested in like if you go back and you read the write-ups and you you know you hear

oh he's this legendary investor so if i go back 20 years i bet i'm going to see some stock pitches that are you know have turned out to be great businesses that is not the case pretty much all of them i had never heard of the company name before studying him also he looks for companies oftentimes where there's some form of indiscriminate selling that like he's really kind of latched on to who's selling what's causing the stock to trade the way it is like he like he really does care a bit about why something is priced cheaply not just actually the the price itself um and so you see a lot of that in his writing and he tries to get to the when he says like i want to buy things that look like roadkill it's a lot of things that people have discarded

and you actually even saw that we're not going to talk about it today but he was pretty agnostic to the type of company it that he was invested in it he didn't care if it was we're going to talk about a poultry producer today or even an internet play at the sort of the after the dot com had era had kind of bombed out a lot of companies he ended up buying value click which was at the time discarded by a lot of people nobody wanted to touch internet companies so he didn't care he just wanted to know basically try to determine what it was worth and as you can imagine when all internet companies are selling off, there's probably some indiscriminate selling. People that wanted to polish up their books a bit, didn't want to be seen holding that.

Ironically, I talked about all the companies being basically irrelevant today that he invested in, at least from the write-ups that we looked at. ValueClick, I believe, had ownership in DoubleClick, which ended up being one of the most valuable enterprises in the world because it was the technology that google bought if i'm not mistaken that like powered their ads business it became valuable because it was at google yes yes but uh that's about the only one you'll recognize anyway it's just to say he'll look anywhere i don't think there was any pocket of the market he avoided and he just wants to find things that look disgusting to everyone else and sell them when they look slightly better.

Yeah, and another key is not just that a trade it's at a PE of three. It has to be a situation where he is comfortable that the balance sheet is not gonna implode and that bankruptcy is not gonna occur within the next few years. That is something you can find time and time again. He will look back and say,

okay, they've consistently been profitable. The balance sheet is in a total mess. And if they just remain, okay, maybe we're at the peak of a cycle here, but if they just remain profitable for the next few years, we're going to make a little bit of money. Now I'm going to go through some of these quotes from his shareholder letters. They might be a little bit long. I don't know if I'll read all of them, but you can read the full quotes that I'll toss out in the newsletter. But I think they're important because it gives context to what's popular in the fund management industry

and how he had to position himself. And he was kind of in a contrarian standpoint. So this is one from his shareholder letters. It's about a conference, an investment conference. And then it's also referring to this first gentleman here, a speaker that was very popular at a conference. I'm assuming another fund manager that has a lot more AUM than Burry. Quote, the very pleasant gentleman who spoke after me then proceeded to delineate how frequently his portfolio moved with a magnitude greater than 1% on a daily basis. I think the number was quite impressive for an institution that measures itself by such things somewhere around 25 days in the past two years or so. And this, he proclaimed, minimized volatility and thus risk. He seemed a decent

fellow. And if you wish me to provide his name and number, I would be happy to do so. He's quite sarcastic here too, Barry. Here's a quote that finishes, not that he necessarily needs the business. Perhaps it is not so surprising that your portfolio manager sat relatively alone at his lunch table while the second fellow was quite popular. By and large, the wealthiest of the wealthy and their representatives have accepted that most managers are average and the better ones are able to achieve average returns while exhibiting below average volatility. I'll finish up here by this logic. However, a dollar selling for 50 cents one day, 60 cents the next day, and 40 cents the next somehow becomes worth less than a dollar selling

for 50 cents all three days i would argue that the ability to buy at 40 cents presents opportunity not risk and that the dollar is still worth a dollar i think that sums up we can just stop recording and go home that sums up everything right just about i mean it's a good quote and he is you can detect pretty sarcastic tones throughout his letters and even some of his stock run-ups as well uh like he never outright says it but he's usually like just paints a picture of the counterparty being illogical in some way and this was a good example of that yeah and i'm not going to read this full quote for the next one here but essentially let me summarize the first part he's talking about and this is the post 9-11 investor letter that he

wrote he's talking about all this context with you know the terrorism event and stuff like that it was a crazy time, the markets reopened. And there was a stock they were looking at. And when the markets reopened, it totally collapsed. And he had no idea why. And it had nothing to do with the terrorist. It wasn't exposed to that, even though what I thought was hilarious is he said, we had a lot of exposure to hotels and airlines, and that really hurt our performance. But we're actually up for the quarter. I always thought that was funny, where he would say stuff like that. He's like, I just made this big mistake

investing in an airline, stupid me. But hey, the performance has been great. But he looked at this one and this is a company that he didn't disclose what it was. But it was an example. I actually, I'll stop you there, Brett. I know what it was

and that's going to be my case study for later in our discussion. Okay, good. That's a good find by you, Ryan. All right. Well, I'll tease it here and I'll finish off the quote from the article. And this is an example of averaging down and how he was okay with that in some situations when the absolute value was so good. Quote,

the future performance of this position will have absolutely no correlation with either the performance of the general market or further terrorist attacks. At the quarter end, however, the position sat at a low point, trading at a valuation of just three-fourths the free cash flow of the trailing 12 months. And unlike many businesses that have faded rapidly during 2001, This business achieved record free cash flow yet again during the first half of 2001. I will note that the prospects for recovery in this position during the fourth quarter are wholly in question. However, over the next year or two, and especially over the next five years, there is a very high probability of substantial gains as a result of this investment. Such gains would be largely irrespective of the status of any economic recovery or lack thereof.

A few takeaways from this, and Ryan's going to get into the specifics, which I'm excited about. First, Burry is trying to take advantage of indiscriminate selling, which became quite aggressive in this case. Second, he goes through that it has no relation to the terror events. So he's saying, OK, look, it's selling off for reasons and there's just not a connection to reality here. And third, he highlights that it now trades at less than one times annual free cash flow. And if things just go OK, it will be a home run.

And that is exactly what happened. And what's funny is in the fourth quarter, I'll have the full quote in the newsletter here. And what happens? The company gets acquired and it goes up 7x just in Q4? Yeah. All right. Well, my takeaway is that investing in deep value stocks, there's going to be some losers. Not everything's going to work.

But the winners you get, such as this one, can get you huge returns to make up for everything else. and he got a 7x return on this investment in just one quarter yeah and the other thing that i think is important to understand here is when look if you own apple or adobe today and there's some quote-unquote indiscriminate selling it's basically not noticeable if you own a large cap out of apple and no one even noticed stopping up if you own liquid stuff like that it's not really that noticeable. I mean, you see it sometimes when the lockup periods expire with companies that recently IPO'd and VCs or ownership start selling stakes, but even then it's not always obvious. When you own something that's really small cap illiquid, indiscriminate selling

can have a huge toll on the actual stock price because you might have one or two funds or something like that, that make up a huge chunk of the portfolio. And the bid ask spread is not as tight. So we've experienced this a bit with, and this is back in the day when they were pricing it in eighths of a share. It's not even like in the pennies that we have today. So sometimes they would have to, I assume, find sellers or they'd go through a broker and they would have to sell at prices that were significantly lower than what the market quote unquote market price was at the time. So when you get indiscriminate selling, especially in the cohort of stocks that Michael Burry was looking for, yeah, I would say volatility certainly is an opportunity as

opposed to risk. That is a good point. All right. This might be a little bit of a reiteration, but I wanted to include this because it is kind of funny that the term he used here becomes like a millennial and Gen Z slang term. And he's just a total nerd that I think maybe a Gen X or a boomer. But it highlights what he is looking for and how using the psychology of other people and the Mr. Market idea can help you make money. And he wants stocks that are out of favor and give people a quote unquote, ick. Here's the full quote. Another issue I have with this sort of thinking is probably best summarized by the word ick. Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ick. I tend to become interested in

stocks that by their very names or circumstances inspire an unwillingness and an ick accompanied by a wrinkle of the nose on the part of most investors to delve any further. In all probability, such stocks will provide fertile ground for the rare neglected deep value situations that can provide significant returns with minimal risk and minimal correlation with the broad market. occasionally well-known stocks fall into the it category and it is of those times that have become interested so he's saying like in rare cases like ryan mentioned the apples of the world they'll fall in this category but most of the time it's undiscovered unloved names stuff in places that people don't care about countries maybe people don't like that we're going to go

through with my case study here and i think what maybe a lesson for current day investors you can get reactions to this instantly on twitter and it can be quite helpful yeah 100 and it it's nice to be able to have a sense of the sentiment pretty quickly on most things today the other thing i wanted to mention here and i think it was in the same letter where he talks about the ick part he was not he talks about how a lot of investors after 9-11 took the opportunity because there's a big sell-off after 9-11 and i don't have it pulled up at the moment but a lot of investors took the opportunity to upgrade quote-unquote upgrade their portfolio in there he kind of like in passing mentions i i have no problem investing in great businesses

i have a list of like i think it was like 80 companies i have a list of 80 companies that i deem to be high quality large cap businesses they're just not at my price point so it was more not that he was like avoiding compounders necessarily but he was just super super strict in terms of price and his price valuation discipline so yeah it's interesting yeah because he would he would argue i think that he sees better risk reward in these deep value names but i think the compounder camp the david gardner camp a lot of other people out there that that we know it's a very popular strategy now would argue that he's undervaluing a 10 to 20-year time horizon and how you can get a hundred beggar, but you can make money both ways.

As we looked at, David Gardner has had a fantastic track record and good returns. Michael Berry, as we're going to talk about later, not too shabby either. All right, listeners, we've got a new sponsor here at Chit Chat Stocks, and their name is Blue Chippers Club. Blue Chippers Club was recently started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. Inside this community, everyone gets to share and break down their portfolios, pitch stocks, receive feedback, and participate in weekly calls. We truly love this idea, and it's why we're promoting it here on the show.

In fact, we are in this community ourselves and enjoy just how much value we get by collaborating with other investors. If you're interested in joining, head on over to bluechippersclub.com and hit apply. Right now, it is completely free to join. The link is in the description. Okay. Let's look into some case studies, some investments he made. Now, like I said, these are probably not going to be very recognizable names unless you've been in the deep value investing world for the last 25 years. But the one I'm going to talk about today is Masaba Holdings. Brett alluded to the company earlier, but in August of 2001, so keep in mind that time, August 2001, a month before a very important incident in American history, Burry started buying Masaba Holdings. In his investment journal, I think this was the value stocks.com. There's a place online that has these kind of archived and you can go through some of his notes. He wrote, hoping for a Masaba takeoff by 1000 shares of Masaba holdings at 880 limit. Good until canceled.

He says, Masaba is a regional airline that was recently dumped at the altar by Northwest, which is also a minority shareholder in Masaba. Masaba's primary business is to be an operator in the Northwest Airlink system. Masaba is the cheapest domestic airline. It gets paid by the capacity it makes available rather than the number of passengers it carries. It also has a favorable long-term fuel contract that buffers it from fuel cost fluctuations. Currently, one of its largest cost centers is the training of pilots. That will become less of an issue when Masada opens its new domestic pilot training center inside of a year from now.

This is a good – so this was a regional airline that he bought in August of 2001. And he actually made it his largest position in the fund. And a month later, 9-11 hit and crushed the stock. Something that I take away here is as you go through his journal, this was – so he had a super analytical approach. Very analytical focused, like you really needed to know accounting deeply in order to implement this sort of a strategy. However, he understood the businesses to a really deep degree that he was investing in as well. So he describes – he goes on for a little bit about the regional airlines and the benefits versus being a sort of a major carrier. And in his Q3 letter, let me find the part that I want to talk about because I don't want to read the whole quote. Well, I think this one I just – I think I just read this one.

Yeah, I'll kind of just reiterate some parts of it. But basically, he had been buying and made this his largest position going into 9-11. And as you might be unsurprised by, the stock got destroyed after 9-11. People were worried that a lot of – like the world just wasn't going to – U.S. wasn't going to fly again for a long time. And it says at quarter end, however, the position sat at a low point, trading at a valuation of just three quarters the free cash flow of the trailing 12 months. he does say something here that's important he says cash flow in the fourth quarter might be rough which i don't think so much of a surprise considering that people did stop flying for a little bit after these incidents in the q4 letter however he also said something that was prescient

and i i think it maybe i'm overestimating how hard this would have been to do but i think it took some pretty solid foresight to be able to say, fourth quarter is going to be rough. Not a lot of people are going to feel like flying this quarter, but in a year or two, everything's going to be back to normal. It was kind of like COVID. I think a lot of people dumped the airlines during COVID for the same thing. It basically played out as he said. But so let's fast forward a quarter. And Brett already alluded to this again, but I'm going to read the whole quote here. It says, the fund continued to purchase the security during the first days of October, while the security remained downtrodden. As it turns out, we did not have to

wait five years or even a year or two. The stock tripled off its quarter end lows by late October. Moreover, during early December, a competitor agreed to buy all of the stock of the company at a price that amounts to nearly seven times its price as of September 30th, 2001. I find this bet really impressive. It is the largest company in your portfolio, the largest holding. 9-11 happens. And I think it would take some serious conviction in the business to double down during that period. when you i mean a because the incidents that happened but also having it be your largest holding like i think it would have been easy to get shaken out yeah i agree it doesn't come without risk i did a quick google search of masaba buyouts and it looks like they've filed bankruptcy multiple times since then so he's not a compounder buy and hold never sell but i think the way he was

looking at it, and I'm curious if it was a price to free cash flow or an enterprise value to free cash flow, whether it was trading at such a discount there, because that can make a difference, I guess. But he was saying, look, things are going to be fine for at least the next year or so. We're going to have the cash coming in. Maybe he doesn't know exactly what management's going to do with that cash. But what turns out is other people saw that opportunity and said, hey, look, we think this thing is worth about five six seven times what it's trading at and we're going to buy them out and that can work does it feel ironic though ryan that we've tried a similar investment and lost money so far yeah i was thinking about that a lot when i was actually reading through

this i was like man i'm just like burry except uh the returns are starkly different the yeah But so far, hey, it's not over yet, but it didn't materialize within a 12-month period. He also says somewhere in his letters – I think it's the same letter where he talks about Misawa Holdings being his largest position. He says, now, something along the lines of, now I know no one should be investing in airlines. And he even says, like, I'm not someone that's a major proponent of airlines because they were super competitive. But basically, this is too cheap to ignore. Absolute value. Yeah.

And that can work. And that leads me to the second case study I have here. And it is Industrious Pachoco. I'm not going to try to pronounce that with a bad Spanish accent. But in October of 2002, Burry wrote up this company, which the ticker was IBA. And honestly, I had a hard time finding the ticker today. I don't know exactly what happened. I tried to do some digging, but it's not too relative to what happened to the story 20 years ago, almost 25 now.

He wrote it up on Value Investors Club. His handle is Michael99, and you can still go find that there. And the write-up can be chalked up to, again, a very classic deep value camp. Essentially, he outlines that it's a leading producer in a fine but not great industry, and it trades at about three times earnings. First quote from the write-up, Industrious Pachoco is the $1 billion sales leading poultry producer in Mexico, where chicken is the number one meat.

I think that's kind of a weird way to say that. I don't know why. Just the way that he described that is funny. IBA is a New York Stock Exchange listed ADR that is as cheap as ever. Pachoco is the giant in ultra fragmented industry. and he just lays out that at the time it's trading at PE of 3.2 EBITDA EBITDA of 1.6 price to book value of 0.5 has good cash flow conversion and a fine history of consistent positive profitability that's it that was about the whole pitch does he care about the weird governance issues that they

had that we don't need to get into today no does he care that the sector is not that exciting it is a little bit cyclical no the stock is dirt cheap and is a reliable earner and if things swing his way just a bit, they will become a home run investment. And like I mentioned here in 2025, I can't find much on them or at least on the stock, which might not be a good thing, but they still have a website and they say they have a stock listed. Honestly, I couldn't find it on FinChat. It seems like they're still a producer and they've been acquiring companies. They're still an operating business. But again, I found a thread that says back in 2002, after he wrote it up, after he bought it, the stock went up 260% in five years and had a 32%

annual total return if we include dividends. So pretty good performance. I don't think the industry was that exciting. It's just the fact that he bought something at essentially a price that was saying it was going to go out of business within a few years, and it didn't. Yeah, I'm trying to find any data on it. No, it's not there. Trust me. It's tough. It says it has a 96.

No, no, the data's wrong. Yeah. Maybe it's trading at an extreme discount now, but something happened. The IBA listed shares, that one's gone. I couldn't figure out what exactly they did, and to be honest, for this research, I didn't want to go translating Spanish stuff.

Yeah, it's so – I was – it was disappointing because I was going through all of his VIC write-ups and every single one. I was like, let's see what the company turned out to be. And it's so situational and the holding periods are so short that it's hard to know how he was making money other than his firm's returns, which were doing extremely well. yeah and the down that's the downside of this strategy is you have to recycle or not recycle you have to find new ideas and what was i gonna say here the fact that and he put this in this uh write-up for industrious pachoco the fact that it was hard to find information on the company the fact that people were worried about that it was in mexico and i was an adr it's a foreign country and the fact that they had these governance issues were keeping people away that was when he said i want to lean in here and maybe there's an opportunity because everyone is

just discarding this for no reason okay let's shift gears a bit to his 2006 bet to provide a little bit of context he was performing really well for the i think through sort of the first 18 months of the fund he was constantly raising the amount of capital required to be a new investor in the firm so i think by the end a lot of people probably adding money yeah yeah by 2001 it basically said like unless you're investing five hundred thousand dollars we're not accepting you um which is big for like sort of an emerging manager but obviously by 2008 he was very well known and that was because of one of his famous bets which i gotta say way more complicated shout out to the movie for making it seem a little simpler because man it was a bit of a complex

trade do you want to get into some of the details and i guess maybe the timeline on what all occurred here yeah we're going to talk about how and you can find his letter outlining the the bet online We're going to talk about how he strangely simplifies every other investment he makes for his investors. But then in this one, he made it as detailed and as complicated as possible when he was writing it. I don't know what psychological game he was trying to play or prove, or maybe he was being as facetious, the right word. Or maybe he was mad at his investors, given that, you know, people probably watched the movie and understood that there was a bit of conflict there. But yeah, let's dive into it. Burry's bet against the housing market and subprime mortgage bonds is now famous, and it's

probably the reason why we are studying him today. It was popularized by the movie and the book of the same name, The Big Short, which I think Ryan and I have each watched 10 times. I think most listeners of this podcast will know the broad strokes of the bet. Burry believed lenders got too loose giving out home loans. He believed that foreclosures would soar starting in 2007, and he found a way to bet on this happening. But exactly how he did it is very complicated. So let's try to dive into some of the mechanics behind the bet, at least in simple enough terms for audio,

and why this was such a hard trade to make and maintain. As a disclosure here, I am not an expert on fixed income, and I'm not an expert on derivatives. So if anyone with experience here in this subject, cut me some slack if something is wrong. I'm trying to simplify it without really any numbers. And I'd probably get something wrong if we went into more detail. So if we go back in history, kind of start the timeline in about 2004 to 2005,

Bernie was analyzing the mortgage-backed securities market. An MBS, mortgage-backed security, is an investment vehicle that pulls together a bunch of mortgage loans. So think, I have a loan on a house, a mortgage. Ryan has a loan on a house. 10,000 other people around the country have loans on a house. you pull them together, and it's a single investment vehicle. If you buy the MBS, you have the rights, or excuse me, maybe not buy, but if you invest in the MBS, you have the rights to the cash flow from these loans. Of course, the people who took out the mortgages need to have the

cash to pay back these loans or else you don't get the money, which is exactly what Burry wanted to bet against. You might remember this if, like us, you've watched this movie 10 times or read the book, but investment banks will take the MBS and divide them into tranches based on risk. These are then sold to investors. So again, a bank, a regular bank originates the loans, sell them to the investment bank. The investment bank makes the mortgage-backed security, divides into these tranches and sells them to investors. Could be a pension, whoever. In general, you know, you'll have the AAA rated MBS loans will have lower returns, but lower risk. You know, no one's going to buy that at a huge discount, or there's going to be

a lot of demand for those because seemingly there's lower risk for these things. And then the lower level loans with say someone with riskier credit history or groups of people with riskier credit history, they'll have higher risk, but potentially higher returns if they work out. Again, this is a simplification, but the key here is that when you divide them up in these tranches, the higher levels get paid first. So if there are foreclosures default, if the cashflow isn't coming in, these riskier bottom levels start taking on water and then you get totally wiped out. And Burry rightly believed that these loans were, if you want to call them overvalued, misvalued, if they were not written correctly, you know, there's the stuff about the rating

agencies. It's still a debate to this day whose fault truly was. But he saw that for whatever reason, they were overvalued due to the adjustable rate mortgages, loose lending standards occurring during the housing bubble. And he wanted to bet against these mortgage-backed securities because he saw them as wildly overvalued. And he thought it was almost certain that foreclosures were going to rise and they were going to default. Yeah. If I can chime in here a little bit too, if you're thinking, well, why would a lender just write a bad loan? Yeah. They are not taking on the risk, right? Brett just mentioned it. They're selling it on to the investment banks who securitize it and eventually it gets put in the hands of some

investor. So all they want, I assume it's some sort of a kickback or a fee for writing the loan. If you're a loan originator, you just want people buying these homes. You want to be approving as much loans as you possibly can. And so what do you do? You give them teaser rates. And that was a lot of the, I guess, really bad loans was they'd have a low rate for, I think it's like the first 18 months or something like that. And then the rates would skyrocket. It would be unaffordable, But that wasn't the lender's problem. That wasn't the loan originator's problem. They were able to pass on the bag to someone else. So it was really a deferring of responsibility all the way up the chain. And yeah, there's probably a lot of different parties you can put the blame on. Yeah, I think, honestly, people try to put, I think, whatever camp you fall in, it kind of even gets political. I put the blame on everyone.

For one, you should maybe understand your own financial situation and know whether you can afford a house or not and be able to understand what an adjustable rate mortgage is. It's not that difficult. Second, like, don't originate loans for people that can't pay them back. You should be honest about the credit underwriting. And then the bank should also be honest because you understand what's happening. But yeah, when Ryan mentions teaser rates, it's the same thing as adjustable rate mortgage. That's what was happening here. Those were the key part of it.

And there were some other things. Just Burry was, he obtained extremely high conviction that these mortgage-backed securities were worthless. Finchat.io is the complete stock research terminal for fundamental investors. They have robust financial data on more than 100,000 stocks globally. That includes more than 10 years of income statements, balance sheet, cash flow, and even company-specific segment and KPI data. Want to see Amazon's advertising revenue? FinChat tracks it. Like to track NVIDIA's data center business? They've got that too. The breadth of FinChat's

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$10,000 when you transfer your old portfolio. That's public.com slash chitchat stocks paid for by public investing. Full disclosures in the podcast description. And that they were going to default. And when he understood that, he wanted to bet against them. And remember when in that movie, I think it's Ryan Gosling, his character is yelling about the FICO scores that are below 550 when they're these AAA rated bonds. That's probably an exaggeration, but just think of how bad a 550 FICO score is. And these things are supposedly low risk securities. So let's get back to Burry. What did he do? He went to the banks, the investment banks, and had them create what is called a credit default swap for these bond-like instruments. A CDS or credit default

swap is almost like insurance against an instrument. If the investment vehicle, in this case, the mortgage-backed security ends up defaulting or metaphorically catching on fire, like in the insurance aspect here, your insurance in the form of a CDS pays you back. Essentially, that's what happens. But unlike insurance, you don't actually have to be the owner of the underlying instrument. So it's almost like insuring someone else's car. It's a bit weird, but hey, it's finance. So Burry essentially used a CDS as a derivative to short the mortgage-backed security vehicles. Again, I might be using the wrong terms here, but essentially this is what happened. And he consistently paid his premiums on the insurance until they did. And the banks

did this because essentially they're saying, let's use an analogy like a house. They're saying that we have this quote-unquote single house that has low risk of say it's not a flood zone or fire zone or earthquake zone it's extremely unlikely that this house or group of houses we're going to have catastrophe insurance and we're selling this guy catastrophe insurance with very high premiums burry's looking at the other on the other hand and saying no i know that there's going to be a fire so that's where the that's where he was that's where the opportunity lied yeah and the other part that's kind of interesting here and i'm not sure if you're about to touch on it but the he once again had the foresight to not only just first of all there wasn't really a market

for like betting against these things so he had to basically like strike he had to create these deals with the banks kind of handshake type agreements and he wanted to make sure that they had solvency and this is kind of one of the parts in the movie where he's like i need to have some guarantees of solvency or like it might be an exaggeration i don't know he wrote this actually say that but well he wrote in the maybe he didn't say it to the banks but he wrote it in his letters basically i want to deal with the highest credit worthy uh banks because i i'm worried that they're not going to be solvent which is you know kind of a crazy thing to say at the time but yeah i mean incredible foresight that a lot of this this would ultimately impact them in a huge way

and there is the risk that they he might potentially not be paid back even if things go the way he wants yeah it is a bit convoluted because the same bank theoretically i know there's a bunch of different banks interchanging here. The same bank that sold him the CDS could be the actual owner of the mortgage-backed security, right? So it's essentially like the owner of a car selling you insurance on their car, and they're levered 20 to 1 against this car. so if they start seeing default rates on that their balance sheet could implode yeah so you can see why you could be worried here and the interesting tidbit again ryan talked about this a bit but i want to reiterate is that the investment banks are the ones selling this

thing but they're the ones setting the price so even though they were the ones on the other side of this trade they were the ones that were telling him whether it was working or not it wasn't a third-party broker they were pricing it and this is what caused a lot of drama in the story but once the mortgage-backed securities started defaulting and going down in value, people wanted to pay a higher price for credit default swaps for this insurance on these loans, which is how Burry made a fortune. If you know the famous scene where he calls the broker, again, it's exaggerated, it's dramatized for the movie, but essentially these went up in value. The CDS went up in value because people wanted insurance on these products because the risk that they were

going under was getting realized and then that's when he made a quick profit well maybe not a quick profit but that's when the value of these started going up a ton in 2007 2008 period i'll close out here before we kind of go into our discussion questions and his portfolio today with a quote from a blog let me put the name of this person here i honestly think this might have been like a grad school write-up or something, but his name is Paolo Parboni. The blog is, what is it called? FSG Journal. I'm going to link to it in the sub stack, but it helped me understand this quite a bit and simplify it. Here's the quote. Burry was competing against the clock. If the credit event didn't take place soon enough, he would run out of money due to the premiums. Eventually, homeowners

became unable to meet their mortgage payments, meaning that their MBS would no longer provide cash flows to investors. This was the credit event that made the swaps that Burry held a lot more valuable. The swaps provided protection against mortgage defaults, so demand for them increased when people stopped paying their loans. This means they could either be sold to MBS owners who would need the settlement payments or be held to receive the claim as in the insurance payout. So Burry and a lot of these people, if you look in the movie again, the movie is dramatized, so i'm not sure exactly how accurate it is but the the steve carell character kept holding on to it right but there was the risk that the banks were actually going to go under so burry he sold

it back to the banks because they wanted that insurance but they did it back it's almost like shorting and saying hey look this thing is worth worthless now i'm gonna make about 10x on this and all along people investors are worried about what he's doing in scion capital they're like you know i thought you were just a stock investor i thought you were you know finding undiscovered gems that you know could polish up a bit or not gems but undiscovered roadkill that could be polished up a bit uh and so you're making this huge shift like why are you the one that's gonna know that the entire housing market's gonna collapse and why are you making this super complicated bet and that's when he writes this letter in 2006 to

all his investors which if you want to feel discouraged as an investor i encourage you to read that because that is one of the definitely over complicates it unnecessarily probably why though why do you think he does out of spite yeah maybe they're freaking out on him yeah i think people were probably kind of treating it like you don't really know what you're doing here and he goes into just extreme depth on the bet that he's making and there's also this kind of fantasy scene where the guy that's meant to be joel greenblatt is like give me my money back the other part that's important to mention is joel greenblatt's getting calls from investors i want my money back so he has these institutions that are invested in his fund

and those institutions are get those institutions are getting withdrawals they need money so they're going to bury saying i i want my money back and bury has to keep it in there or else the bet's not going to pay off and he's done all this work and he's been totally right um and ultimately it does pay off there's all these questions he's like all right frequently asked questions at the end of this 2006 letter and it's like what if you're wrong you know what if the banks screw you all this stuff and he's like this just seems like an improbability all this stuff and he was dead right i mean he was he was totally right on it and i guess this kind of leads to the next part that we should talk about but his returns are not public today he wrote on the board after and i

don't know how if this is like factually correct or what but he wrote plus 489 cyan value if we assume that that was his total return after the housing bet since inception in cyan gross net whatever. Sounds reasonable, I'd say, given his returns up to 2002 and then the housing bet profits. Yeah, I would think so too. He was up 489% over eight years. That same time period, the S&P 500 was up basically, it was basically flat. So he crushed the market during this time period. And now I know a lot of people say, what's he done lately? What's he gotten right? Truth is, we don't know. We don't know what the returns look like. But the total returns from the S&P 500 from when Michael Burry started his fund in November of 2000 to today, and we're recording this on Thursday, February 6th, 2025, have been up, I think, around 590%. So if we assume that Scion Value, the Scion Capital Fund, was flat for the last nearly 20 years, which seems very unlikely, he's still almost beaten the S&P.

Return is likely strong, I think, is the summation. He likely outperformed the market over the last 25 years would be my suspicion. Here's my other discussion question. Yes, that's good data for the listeners. Would you have freaked out, you think, as a Scion investor? Yeah, for sure. Especially after I read the letter that he wrote where I'm like, it made me even more confused and just put my brain in a pretzel. Honestly, if I didn't have the ability to watch the big short, I would have been so lost at this point in time.

Yeah, it's much easier to say you'd have confidence in hindsight. I think maybe where he got discouraged is the fact that this wasn't his first year running the fund. He has a decently long track record, and he got absolutely zero trust from these people. And maybe the story changes it. I know sometimes Michael Lewis has been known to exaggerate things now, given kind of what's been exposed with his stories. But I would hopefully just have a lot of questions and not try to freak out, because I would maybe want to understand what's going on. You know, but it could have gone down that way and not have been as confrontational. I guess we don't really know.

But I think what's interesting is he almost saw it. And when you look at the context today, obviously it worked out, right? You know, it wasn't guaranteed to work out. But he almost saw the defaults and the cash that was not going to come in. And the fact that these CDS ones were deep value. like he saw that as almost the same as what was it called mariba holdings masaba holdings i think he saw those very similarly where he goes there's a low likelihood we don't win yeah i think you're right because when you understand the the the actual credit um

underwriting that was going on here it was pretty much a guarantee that these things go bust But it's much harder to articulate to investors. And I think this was my suspicion because Michael Burry has kind of gotten back into the scene or investment realm, I guess. He started a Twitter account like a couple of years back. You know the meme of saying like that person and then something random that they're known for with that one guy on that podcast? It's like Michael Burry, the Fox News tweeter. Yeah. Yeah. Yes. I would imagine this was a very formative event in his life. And I wouldn't be surprised if he got a little resentful after this and losing trust from a lot of investors.

And the banking system. Yeah, and the banking system. And I have heard that Scion values mostly all his money at this point. So he's basically running the fund as just his own personal holdings, no outside investors, which if I went through this experience, I would want just my own money probably too. Don't want to have to deal with the communications. We ran a fund with fantastic investors that never, ever pestered us and we're grateful for that. And even with that, it can be a pain. And I just would think like, if you had bad investors, it would just be such a pain and it's so much easier just to invest for yourself. okay let's talk about his current holdings now typically this is the point in the show where we can go around and talk about you know all the different stocks and whether they're promising but his turnover is so quick with a lot of positions and he also has options exposure i think is sort of maybe some sort of embedded hedge not really sure national guy too he's not afraid to go international i wouldn't be surprised if he was a korea and japan guy right now

yes honestly so his 13 f's mean very little but from what we do see he has a large alibaba stake and a large and a large jd.com stake so he's investing in china which i guess if you believe that the cash can be returned to you on face face multiples there is some deep value there sure but these are also the only holdings we see like it's true it might be a smaller position yeah he does have it hedged which is strange and again it's just very difficult one that i think is a little bit interesting shift four yes he owns shift four payments the thing is this whole thing his could be like a fraction of his actual wealth so it's hard to know like whether or not this is

just like a flyer or what he's doing with it so and he could have sold these already because it's what we're recording this on february 6th 13 f's come out february 15th right i'm not sure and i think it's something around that so then these holdings are from october and giving his propensity to trade i mean if we look at shift four it's probably done quite well for him i wouldn't be surprised if he sold. All right. What are our takeaways from studying Michael Burry? Lessons, if we have any. Yeah. I see you wrote down some here. I was trying to go my conclusions from the episode. I think first is do not be afraid to invest even if 90% of people tell you you're dumb or that's not you're dumb, that the idea is dumb.

In fact, that should maybe indicate it's a good opportunity. You should come to your conclusions on your own. And if you think value is there, the reason value is there is because a lot of people don't see it. And I think you saw that time and time again throughout this episode, throughout his investments. And second, margin of safety can be high if you buy something at two times cash flow and one half times book value. Yeah. Yeah, I like that lesson of do your own research.

Trust your own. If you've done your own research and come to a certain conclusion and you're quite confident in that conclusion, trust it. we have trustings harder don't be shaken out by someone who hasn't done as much research and writes it off and because if everyone's writing it off and they don't know it very well that is probably an opportunity that means they've gotten the ick by it and yeah it's the potential for returns for you my takeaways so i already mentioned this but one interesting thing you figure out studying his investments is that very rarely do you recognize the name of the company that he was actually investing in. And if you are able to find a stock chart,

they typically don't look great over a long timeframe. However, for the few companies where I was able to find a chart, the stocks typically performed pretty well immediately after his purchase or around the time of his purchase. And it didn't last very long. I guess my takeaway here is that a, that means he followed his ethos. These were not great businesses. They weren't long-term investments, but they were so cheap. The market couldn't ignore them. And he would typically get some multiple expansion, but the two lessons were, and this is, this is not something I'm really internalizing. Like this might not be something that I apply to my own life, but following him, it was buy it. Don't marry it. Burry never really seemed to get overly attached

to individual companies as new information or new investor sentiment, new valuations presented themselves, he would move on. The second one, I think to be a true deep value investor, you have to be quite active. You can't just be buy and hold because for him, he was not only buying the roadkill, but he was selling it once it was polished up. So you had to get the selling right. I don't know if I necessarily love that for myself, nor do I think I can do it very well. But if you are a deep value investor, and this is the strategy you want to implement, you got to have an idea of what it's – you have to have a really solid idea of what it's worth and not just that it's worth more in the future. have an idea of this is where it's too cheap and this is where it's too expensive. And I'd rather have other opportunities than that because you got to get the buying and the selling right. Yeah, exactly. That's the downside of the strategy, the tax implications,

and the fact that you have to consistently come up with new ideas. But I think a general takeaway for listeners is you don't have to invest like Burry. I know a ton of people out there, and maybe that's just the circles we run in, that just despise this type of investing. That could be the sign of the market bubble. But I wouldn't say I can never invest like David Gardner, and I wouldn't say I can never invest like Michael Burry. I think you should try to build that tool set and learn like we're trying to do here from both of them, because there might be some times where this deep valley strategy looks attractive you look at some stuff that might not be that great okay you know it's it's not the best business but it seems

pretty good it's trading at five times earnings or this is not a good business at all but it's trading at its neck it's trading at one times cash flow yeah that's very highlighted with that one write-up when the absolute value is there sometimes there can be that opportunity i like But I wouldn't just shy away from it just because you are a little uncomfortable with it or that's not the style you were brought up in. Yeah, I like that takeaway. Try to get – if I had one thing to pull away and kind of implement into my own tool set as an investor, try to get a gauge on what people think of the business. The worse the sentiment, the more you should keep digging would be my kind of takeaway here. All right.

That's a good way to end it. Thank you to our sponsors for this episode, public.com, FinChat, go check them out. Use our link, Blue Chippers, Blue Chippers Club, all good stuff. Speaking about Modern Value Investors Club, Blue Chippers can help with that as well. All right, let's hit the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are any podcast guests, may hold securities discussed in this podcast, may

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