Value Investor Daily #45

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A one-pager featuring Michael Burry’s investing strategy is making the rounds on X:

He wrote it in 2000, and it still reads like a modern playbook for value investors today.

Here are some gems from it:

“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.”

“All my stock picking is 100% based on the concept of a margin of safety, as introduced to the world in the book "Security Analysis," which Graham co-authored with David Dodd.”

“Specific, known catalysts are not necessary. Sheer, outrageous value is enough.”

“I care little about the level of the general market and put few restrictions on potential investments. They can be large-cap stocks, small cap, mid cap, micro cap, tech or non-tech. It doesn't matter. If I can find value in it, it becomes a candidate for the portfolio.”

“I have found, however, that in general the market delights in throwing babies out with the bathwater. So I find out-of-favor industries a particularly fertile ground for best-of-breed shares at steep discounts.”

“I will screen through large numbers of companies by looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to vary with the industry and its position in the economic cycle.”

“I tend to ignore price-earnings ratios. Return on equity is deceptive and dangerous. I prefer minimal debt”

“I prefer to buy within 10% to 15% of a 52-week low that has shown itself to offer some price support. That's the contrarian part of me. And if a stock - other than the rare birds discussed above - breaks to a new low, in most cases I cut the loss. That's the practical part. I balance the fact that I am fundamentally turning my back on potentially greater value with the fact that since implementing this rule I haven't had a single misfortune blow up my entire portfolio.”

Here are the biggest takeaways we had:

- 📉 Find Unpopular Stocks: Look for companies in industries that are out of favor and undervalued.

- 💰 Focus on Free Cash Flow: Prioritize free cash flow and enterprise value over traditional metrics like P/E ratios.

- 🎯 No Need for Catalysts: Outrageous value is enough; don’t wait for a specific event to invest.

- 🛡️ Protect Your Downside: Invest with a margin of safety to avoid permanent capital loss.

- 🏗️ Diversify Strategically: Hold 12-18 stocks across depressed industries to reduce risk.

- 🕒 Sell Early: Don’t hesitate to sell if a stock quickly gains 40-50%.

- 📊 Use Basic Technicals: Buy within 10-15% of 52-week lows showing support.

- 📦 No Size Limits: Invest in companies of all sizes—large-cap, small-cap, micro-cap, etc.

⚙️ Focus on Enterprise Value/EBITDA: Use this ratio, adjusted by industry, to screen for undervalued stocks.

- 🔄 High Turnover is OK: Portfolio turnover above 50% is acceptable. Don’t overthink taxes, just pay them.

- 🧮 Don’t Trust ROE: Return on equity (ROE) can be misleading—stick to more reliable metrics like cash flow.

- 💼 Minimal Debt Preferred: Stick with companies with easily managed debt loads.

- 🦅 Seek Rare Birds: Occasionally, you’ll find unique opportunities like arbitrage or asset plays.

- 📈 Don’t Fear Volatility: Volatility doesn’t equal risk, so don’t stress over short-term price swings.

- 🧘 Stay Fully Invested: Keep your money working even in tough market conditions.

- ❌ Cut Losses Quickly: Don’t let a bad stock drag down the portfolio—sell when it hits new lows.

And perhaps the biggest takeaway of all is that he cuts losses at a maximum of 10-15% and takes profit at 40-50%.

That’s a clear and straightforward 4-to-1 risk-to-reward ratio. 

He can be wrong three times out of four and still come out ahead, all while mitigating the risk of blowing up his account.

Stick to simple disciplines, and let the odds play out.

You can read the entire article, plus 46 pages of commentary and case studies, here.

It’s worth the read!

As you can see from his portfolio, Burry is using the exact same strategy he detailed over 20 years ago today.

45% of his portfolio is in just three Chinese tech stocks—Alibaba (BABA), Baidu (BIDU), and JD.com (JD).

Until recently, they were beaten down and forgotten names, but as we covered last week, China has unleashed stimulus, and with it, the tide is likely turning for those stocks.

Burry’s strategy is paying off, with those names up 21-54% since he entered.

Thank you for reading today!

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