Street Capitalist: Event Driven Value Investments

Michael Lewis has a new book coming out called The Big Short: Inside the Doomsday Machine and like everything else Lewis writes, it is sure to be awesome. Vanity Fair has an excerpt of the book and I suggest you all read it whenever you get a chance. It is a great read about investor Michael Burry:

To his swelling audience, it didn’t seem to matter whether the stock market rose or fell; Mike Burry found places to invest money shrewdly. He used no leverage and avoided shorting stocks. He was doing nothing more promising than buying common stocks and nothing more complicated than sitting in a room reading financial statements. Scion Capital’s decision-making apparatus consisted of one guy in a room, with the door closed and the shades down, poring over publicly available information and data on 10-K Wizard. He went looking for court rulings, deal completions, and government regulatory changes—anything that might change the value of a company.

As often as not, he turned up what he called “ick” investments. In October 2001 he explained the concept in his letter to investors: “Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ‘ick.’” A court had accepted a plea from a software company called the Avanti Corporation. Avanti had been accused of stealing from a competitor the software code that was the whole foundation of Avanti’s business. The company had $100 million in cash in the bank, was still generating $100 million a year in free cash flow—and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avanti Corporation than any man on earth. He was able to see that even if the executives went to jail (as five of them did) and the fines were paid (as they were), Avanti would be worth a lot more than the market then assumed. To make money on Avanti’s stock, however, he’d probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

“That was a classic Mike Burry trade,” says one of his investors. “It goes up by 10 times, but first it goes down by half.” This isn’t the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn’t do this if he was at the mercy of very short-term market moves, and so he didn’t give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year.

Betting on the Blind Side (Vanity Fair)