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Hello friends Vagli investor you can love him or hate him but Michael Burry is definitely one of the best investors of the last 20 years and also among the most talked about and since his net worth is estimated at 1.2 billion dollars I think it is really interesting to understand in detail what his investment strategy is and luckily Michael comes to our aid with an article published several years ago on Msn Money I leave you the link in the description and in this article he explains exactly what his investment philosophy is how he does stock peaking and how he manages the portfolio and we discover it in this video let's start immediately with the strategy Michael says my strategy is not very complex I try to buy shares of unpopular companies when they practically seem like carcasses and then sell when they have been cleaned up a bit so it is not a buy and hold strategy like Buffett but the classic buy at rock bottom prices and sell as soon as you have a good profit in your hands like Benjamin Gram did Barry then says his favorite weapon as a stock pecker is research for me it is essential to understand the value of a company before investing even just a cent here comes Michael Burry Value investor if I have no idea how much a company is worth I don't even put a cent into it and then he goes on to say that as if he had no choice on this topic, that is, on whether or not to be a value investor because he says when I first fought for the members of Gram I felt as if I was born to be a value investor all my stock peaking is based 100% on the concept of margin of safety as presented in the book Security Analysis which Gram co-authored with David Dodd But now I have my own vision of their techniques so Michael has adapted the philosophy of Gram and Dod to his style but the point is that I want to protect my downside to avoid permanent capital losses So he tries to buy very undervalued stocks and to have a large margin of safety to avoid the risk of losing money and if we look at his portfolio we can realize that in the end this is the case there are many positions that seem very undervalued and whose downside at least on paper seems limited and for him it is not necessary to identify specific catalysts for the stock to rise it is enough that they are scandalously undervalued and this is a very interesting thing Why do I often hear many investors say Yes, it's true, this stock is very undervalued, but I don't see any recovery catalysts.
I can't understand how the stock can rise again. I say that it's normal because if the catalysts were evident, these stocks would no longer be so undervalued because the market would also see them and therefore they would be included in the share price. Then Burry continues by saying I worry little about the level of the general market and I place few restrictions on potential investments.
So he says even if the market is relatively expensive, I still buy if I find some opportunities and I do n't have a Mass Imum number of companies that I can buy or some type of stock. In fact, he says they can be large-cap, small- medium, micro-cap stocks, they can be technology or non-technology companies, it doesn't matter if I see value in them, it becomes a candidate for my portfolio.
It seems ridiculous to me to place limits on my possibilities, but he continues by saying I have discovered that in general the market enjoys throwing the babies out with the bathwater. I therefore believe that underserved sectors are a particularly fertile ground for the best companies at deep discounts.
So Michael says that sometimes there are entire categories of stocks that are snubbed by the market where the market makes a difference. He then says that MSN Money Central's stock screener is an excellent tool for discovering such opportunities. I don't know if he was paid to sell Microsoft. But this is what he says, and so we know that Burry uses stock screeners to find companies, so he starts from a quantitative analysis, part of the numbers, part of certain parameters to find potential opportunities.
Now let's see Michael. How does he evaluate companies? How do I understand if a company is at a discount? He says I usually focus on free cash flow and enterprise value, that is, market capitalization minus liquidity plus debt, so I examine a large number of companies by analyzing the Enterprise Value ratio, ibid., although the ratio I am willing to accept tends to vary depending on the sector and its position in the economic cycle.
So here he has given us his recipe for screening companies, that is, what parameters does he insert into the stock screener? If a stock passes this screening, I try to determine the value of the company and a purchase price more carefully, and when I do this more specific analysis, I take into consideration the off-balance sheet items and real free cash flow, the off-balance sheet items.
Balance sheet are potential assets or liabilities that you don't find in the balance sheet items such as letters of credit derivatives some leases you can find in the notes then he says I tend to ignore the price-to- earnings ratio I think he says This is because net profits can be easily manipulated then he says that the return on equity ROE is misleading and dangerous I think he says This is because it is an index that can be pumped up if there is a lot of debt In fact immediately after he says I prefer a minimum debt and I am careful to adjust the book value to a reasonable value So as you can see it is a very accounting job its a lot of quantitative analysis at the moment he has never talked about business model analysis competitive analysis or management then he says I also invest in rare birds i.e.
asset place therefore companies undervalued compared to their assets and to a lesser extent arbitrage opportunities and companies sold for less than 2/3 of the net value i.e. working capital minus liabilities So this is exactly Bangr's style And these are the opportunities he prefers however he says he willingly mixes this type of company even with the types of companies preferred by Buffett i.e.
those with a sustainable competitive advantage demonstrated by a stable ROI and high for a long time but only if they become available at affordable prices and they can also be technology companies if I can understand them So here comes back to the concept of circle of competence that is investing only in companies that we can understand then going beyond the stock pecking Barry says that in addition to good stock peaking you also need good portfolio management which requires answering several essential questions What is the optimal number of stocks to hold when to buy when to sell You should pay attention to diversification across cyclical and non-cyclical sectors how much you should let tax implications influence the investment decision-making process low turnover is a goal and Barry says that he likes to hold 12 to 18 stocks diversified across various depressed sectors and tends to be fully invested so he doesn't keep cash aside waiting for who knows what this number of stocks seems to provide enough room for my best ideas by dampening volatility not that I think volatility is in any way related to risk But you see I have this heartburn problem and I do n't need any more stress So you see he's also nice Michael and he also admits that although he is aware that volatility is not It's the risk So on paper it's useless to reduce it to him Every now and then he gives some emotional problems As for when to buy he says in my strategy I integrate some simple technical analysis a tool that I have kept since the days when I worked as a commodity trader nothing transcendental but I prefer to buy within 10-15 pers of the 52- week low which has proven to offer some support to prices This is the contrarian part of me he says That is to buy when others don't want and the price is depressed But if a stock that is not a rare bird reaches a new low in most cases I reduce the loss And this is not the contrarian part of him but in this case he prefers to reduce a potential larger loss than to have a higher Upside Let's say he agrees a little with the market in this case I don't think that fundamental analysis is infallible In fact he says rather I see it as a way to put the odds on my side and even if I don't recognize the efficiency of the market I don't believe that the market is completely inefficient either insiders leak information analysts distribute illegal news to a few elected and so Barry says something that is also a bit obvious that we can be wrong that the market is inefficient but not always sometimes it is right and there are information asymmetries of information that is not accessible to everyone and therefore we can lose money in this way So Burry's way of investing is not mine it is too active for my tastes as I have already said other times too much of a continuous buying and selling but in any case Barry was able to create a way of investing all his own mainly the basis is the Value investing of Gramma but also with a mentality a bit of a Trader of technical analyst and also a pinch of Buffett In any case there is no doubt that he is an extraordinary investor he did not become a billionaire by chance but Let me know your sub Barry in the comments but even better in the discord group of the Value Investor circle That is if you like these topics if apps pass you why not discuss it with many other investors who have the same passion as you and to join the group you just need to support the channel with a small donation on patreon and you will have access to the discord link in the description a like to the video if you like I liked it and see you next time. Bye from Davide.
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