Meet Michael Burry

Daring to be different

If you don’t do anything else today, watch this clip:

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Michael Lewis is a former trader and author of a string of best sellers including the classic Wall Street expose Liar’s Poker, and Moneyball. Moneyball is about Baseball, and how a failed baseball player, Billy Beane, revolutionised management by chucking out conventional theories about what made players good and took the unfancied Oakland Athletics to the edge of greatness with a bunch of relatively lowly paid, gangly, overweight drop-outs.

Michael Burry is the Billy Beane of the subprime crisis. the man who saw through the fog of conventional wisdom, and bought credit default swaps, insurance policies on the worst of all the debt, before anyone else. In fact, he created the market, pestering the big investment backs to manufacture CDSs, which had hitherto been available on corporate debt, but not mortgage backed securities. Should the residential property market melt down, and homebuyers default on subprime mortgages, the sellers of the swaps would have to pay out vast sums of money to the buyers, like Burry.

Lewis tells the story of the subprime crisis through the eyes of the man who saw it coming rather brilliantly in this extract from his new book, The Big Short, published on Monday.

The story of the subprime prime meltdown and the trade that took advantage of it is extraordinary enough. Burry was convinced that homeowners taking out trashy mortgages at very low interest rates in 2005 would default in 2007 when they moved on to variable rates. He’d trawled through the annual reports of mortgage backed securities to find the very worst, and then approached the investment banks. At first they were incredulous, then they were keen to sell him the insurance, then, in 2007 as the defaults started they went into shock, quite literally, claiming ‘systems failure’, and ‘power outages’, and finally they scrambled to buy the insurance they had previously sold.

But what an extraordinary person Burry is. An obsessive loner, a self-taught hedge fund manager with Asperger’s Syndrome and a glass eye. He’d bailed out of his medical career because practicing medicine disgusted him, and he "wanted to help people – but not really". Instead he turned to his obsession, the stockmarket, which he’d hitherto been indulging between shifts at the hospital on the financial bulletin boards during the dot.com era.

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He’d made his name on the Internet, blogging about shares before blogging was invented. We get the impression he was more comfortable alone in his study, dealing with people through the silicon divide.

The “insanity” of the dot.com years had turned him into a value investor, albeit one with a very independent streak:

At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules… I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it’d be the most popular school in the world, with an impossibly high tuition. So it must not be true.

He quit medicine to set up his own fund, Scion Capital, with a few tens of thousands of dollars in 2000. But he’d attracted an illustrious following on the Internet, including Joel Greenblatt, a money manager who had made his fortune investing in special situations and deep value (now famous among investors for popularising his value investing formula, The Magic Formula). He offered Burry $1m for a quarter of the fund before it even opened for business.

Judging by his early letters to shareholders archived on the fund’s website he was still a value investor, picking “ick” companies and writing to his shareholders:

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.

The problem with “ick” investments, companies like Avanti, a software company that had stolen code from a rival, was that, in the short-term they often lost money, lots of it, because they were so unpopular. That didn’t bother Burry, but it would bother his investors, of which he had plenty by 2005 as his fund had been outstandingly successful.

To protect Scion from its clients, new investors were tied in for a year. They couldn’t withdraw their money, however horrible they thought the investments were. While it allowed Burry to be his contrarian self, it bought him into conflict with investors as the size of his bet on subprime debt was growing towards $8.4bn.

Investors who had originally backed Burry’s stock picking skill found themselves trapped in a huge gamble on the future of the housing market. Not sharing his confidence, all they could do was question him:

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Though he made investors $725m in 2007, in the first six months of 2008 they withdrew $730m. In the PBS interview Burry says:

A lot of clients were glad to be done with it in the end… Perhaps I’d made the trade too big… It’s remarkable. There are investors that made tens of millions of dollars out of this, and they’re still pretty upset.

Maybe the disenchantment is mutual. Now the fund is closed and Scion’s website says:

Thank you for visiting. Dr. Michael Burry has liquidated Scion Capital, LLC and is currently focusing on his private investments. Dr. Burry is not accepting outside investors.

Burry is alone again.

I can’t help thinking that’s where he’s happiest.

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