Michael Burry on Buybacks

In this Silicon Investor post from 1997, Michael Burry warns about companies using buybacks for publicity purposes:

Precisely why I wish to evaluate companies
in the midst of proven buybacks. Small
marginal companies have taken to using
buyback announcements as a publicity
stunt to support their stock. More often
than not, the buybacks do not materialize.

When they do, they end up not retiring
the stock and placing it in the
corporate treasury, which is of marginal
use to shareholders. Everyone should
be aware of this trick, as you point
out.

Spin-offs show demergers are staging comeback

Keep your eye on spin-offs. FT with the details:

In a still nervous economic environment, companies in a demerger have the advantage of tending to perform well regardless of which way the overall market is moving, UBS and Deloitte research shows.

Nevertheless, the spin-off part of the business often performs better than the larger parent, according to research from Thomas Kirchmaier of the London School of Economics. One reason for this is the demerger throws light upon parts of the business that were hidden to investors beforehand.

Companies that take longer than nine months to plan their demerger generate at least two times more value than those that take less time, achieving an average 20 per cent increase in their share price, according to Deloitte.

Neil Sutton, head of corporate finance at PwC in the UK, says the logic of a successful demerger must be that the valuation of the “sum of parts will be more clearly seen by the various different investor groups than as a conglomerate”.

Demergers have also tended to be more successful where the split in businesses is clearer cut and better thought out.

Michael Burry on Buffett’s Strategy

Michael Burry, in this post from Silicon Investor, discusses how the small-time investor can tweak Warren Buffett’s approach to investing to increase the chances of success.

If there’s one thing I’ve learned from Buffett, it’s that styles can be tweaked for the better. Lord knows I don’t generally invest like him.

Let me explain something about the “new lows” though. Buffett talks to management. He knows the companies intimately, and he knows the competition intimately before he makes a decision. He is an excellent judge of character in CEO’s. When a factor in the company’s success turns south, don’t you think that he finds out about it through these contacts?

I don’t have any of that. I have the 10K. I don’t sit on any boards. I can’t buy enough shares to influence the board’s or the executive decisions. What I do have is the knowledge that when a stock makes new lows, the people that do have that knowledge for some reason have decided not to provide buying support at a place where in the past they have provided solid buying support.

To try to emulate Buffett perfectly without his full complement of skills and advantages (which I do not have, but any of you here might for all I know) seems foolhardy. So I take something else from Buffett – the willingness to improvise new investment parameters as fits my situation.

Michael Burry on Shorting

In this post from Silicon Investor, Michael Burry offers his insight into shorting and short hedging.

The traditional argument is that only those with enough capital to short for the long term can consistently make money. Ok, but if so, then what is the actual return on the at-risk TOTAL capital. If one must have “enough capital” to tolerate a 300% loss on a short position without hurting too much – and being able to maintain the position- then the 100% maximum profit on that position won’t amount to much more than an incremental percentage return on actual available capital even if it does occur.

Where is that excess capital (the capital that allows you to maintain a long-term short position) best deployed to maximize the total return on capital? IMO, assuming that none of us can time markets well (an assumption that I feel is very valid), the best place for that capital is in long positions. At least then you’re hedged with the odds of your own good fundamental analysis with you on both sides.

Interestingly, I’ve found that even a small short hedge (I’ve been up to 10%) position against a long portfolio can be amazingly effective during a general downturn – along with an obligatory gold position and a solid oil position.

Michael Burry on Profit-Taking

In this post from Silicon Investor, Michael Burry explains his philosophy on profit-taking.

My general rule is to hold for 50%, then reduce my position back to its original size if it is still worth holding, or sell all if the position is no longer competitive with other potential positions.

But what I do with quick 30-40% gains is an art, not a science. I take into account the technical characteristics of the run-up as well as potential fundamental reasons to get a picture of the durability and quality.

I’m perfectly willing to buy and hold, but if there is a 30-40% run in a short time that I consider a trading gain, I’ll take it. If I just bought a stock, chances are it was competing with other stocks for entry into the portfolio just two weeks ago. If it has now run 40% in two weeks, and the other potentials haven’t, well then I definitely will take into account the new relative value disparity.

And if a stock hits new lows, I’ll usually sell it unless the dividend is particularly outsized or the valuation particularly outrageous.

Michael Burry’s Three Investment Principles

We’re still working our way through Michael Burry’s Silicon Investor archive. In this post, Burry comments on the increasing difficulty of implementing a pure Warren Buffett-type strategy and states the investment principles that have worked for him.

My feeling is that the market has already figured out Buffett’s ways. They’ve been analyzed to death. And the obvious Buffett companies have been accorded to the proper valuation. It will be difficult for Buffett, indeed…But then, it is this multiple expansion in Buffett companies that got him his return to date.

Being contrarian above all else has been my number one most successful principle. The second principle is knowing when to fold on a contrarian play. The third is not being afraid of tech stocks.

In another post, Burry comments on the benefits of diversification and technical analysis.

My pitch for diversification to 15-20 value stocks: something will be moving up for you on average.

I have a rule that I sell when a new low is hit. But I also have a rule to either add more or sell the position when I’m off 33% since initiation. No waffling. When a stock trickles to a new low, despite the fundamentals I’m going to exit. The reason being it can turn into a New Holland, Deswell, Fruit of the Loom or Champion, and a screaming bottom might be in the works later. But when a stock falls 40% through its old lows in one day on 35X average volume with 8 broker downgrades, a technician would be paralyzed and sell. A value investor would find it an opportune place to buy if the original fundamental story is intact. This is just my pitch for how a minimal degree of technical analysis doesn’t hurt and can help.

Michael Burry on Stock Screening

In a Silicon Investor post from 1999, Michael Burry writes about the limitations of stock screening.

“A word about the notion that one may “screen” for great stocks. Screening is a great tool, but realize that everyone has it. When I say everyone, I mean that whatever great screening package you have, the professionals on Wall Street have a better one. And, unlike your package, the fundamental data is up-to-date and deadly accurate. This is not to say that there are no good screening packages for the individual investor. There are. But individuals must take extra care to confirm that the data is accurate, to devise screens that Wall Street doesn’t use, and to limit expectations. The great failure in screens boils down to failed expectations.

For the most part, screening for low price/earnings ratios and high growth rates is being done everywhere on a wide scale. And when you find a company with a low PE and sky-high growth rate, then there’s usually more to the story than meets the eye. The lone exceptions will typically be ultra micro-caps, under $50 million in market capitalization. Value investors have it good, though. We know a lot about fundamental analysis, and can devise screens that are unusual but effective. We also can use the screen as merely a starting point for intensive research – confirming the data, searching SEC Edgar, etc…