Michael Burry is one of those investors that is famous in certain circles, yet most people have never heard of him. He’s an unusual character, as a lot of great investors tend to be. His interest in investment started when he was studying Medicine at University and he put it into practice while he was working as an intern at a hospital. If you’ve ever watched Grey’s Anatomy, then I’m sure you are familiar with the long days interns work. But somehow, at the end of 15-hour shifts Michael Burry found time to write an online blog and actively invest during the Dotcom bubble – using a value investing philosophy. His incredible work ethic could have something to do with his Asperger’s Syndrome which tends to make people obsessive about certain things. Unfortunately for him it also meant he alienated investors and became almost hated by them.

Writing in the late 90’s, he shunned tech stocks, but still managed to get a lot of interest from readers as well as big time hedge fund managers like Joel Greenblatt. In fact Greenblatt was so impressed with him that as soon as Burry announced he’d quit medicine and was launching his own fund, Greenblatt bought a piece of his then $50k fund for $1million. Remarkable considering he was just an internet blogger (and the word blog didn’t even exist at the time). These early posts must have been something special and luckily you can read some of Michael Burry’s blog posts here, and his MSN money articles.

Greenblatt’s faith paid off, as over the next 5 years Burry was able to secure a return of almost 250% in a period the S&P was actually down and he grew his fund to $500m under management.

If that had been his only accomplishment we might still have never heard of this man. He is publicity shy and doesn’t even like to talk to people at all. So just how did he become a semi celebrity not just in the value investing community but in other investing circles?

Claim to fame

It all started with a phonecall Burry made to Goldman Sachs and other leading investment banks in 2005. He wanted to buy Credit Default Swaps for sub-prime US mortgage securities but at that time, as he knew, they did not exist. His calls were fruitless as he was told as much on the phone. But just a few months later, after much legal work between regulators, banks and even Burry’s lawyer at times, Credit Default Swaps (CDS) for sub-prime mortgages were on sale. Not soon after, they were a trillion dollar industry.

So why did Burry want to buy CDS’s? Because he wanted to go short sub-prime mortgage backed securities and was one of the first to really put this thesis into action. He was probably one of the only people in the world that actually read the prospectuses of sub-prime pools of mortgages and realised that the credit worthiness of them was quickly becoming garbage as early as 2005.

I wont explain what a CDS is, but it is in essence an insurance policy against these loans to sub prime lenders. Except that unlike a real insurance policy, you don’t actually need to own the asset you’re insuring, which allows you to effectively collect back the loan if it defaults while never having to make the loan in the first place. All you stand to lose is the annual cost of the CDS (which isn’t immaterial).

Bank’s were only too happy to write these contracts and book the sales as profits. People should appreciate just how much self-confidence this required from Burry. He was essentially one man, against the weight of opinion of all Wall Street who obviously thought they were getting a great deal from him, yet he was so sure of his own thesis and conclusions that he could ignore that and truly believe that everyone else was wrong (3 ratings agencies with hundreds of years experience between them included) and he was right. So convinced he was, that he bought $1billion of CDS on sub-prime mortgages (large considering his fund was only $500m AUM).

He was not only going against Wall Street, but his own investors, who started to turn on him when these bets didn’t quickly pay off. Even Joel Greenblatt eventually turned his back on Burry and demanded he close all his positions in CDS’s as they were costing the fund up to 20% a year. Their relationship turned sour after Burry refused. In the end, sub prime mortgages started to default en-masse when so called ‘teaser rates’ finished and borrowers suddenly couldn’t afford repayments. House prices had fallen so loan values couldn’t be recovered. Banks had so many of these assets on their books that many were bankrupted. Burry was vindicated and the bets paid off massively. Yet his investors still withdrew their money from Burry without an apology or simple ‘thank you’ after the crisis had averted. They still disliked him and treated him with contempt.

Sometimes investing is a thankless endeavour and it just goes to show how money managers become so short term oriented, it is because of the clients, it is not some big Wall St push. That’s why I enjoy investing my own money and have no interest in investing for others and the stress that comes along with it.

Nowadays Burry is a much happier man, investing with just his own money and no investors to manage. There have been constant rumours of him returning to the management field but they have always been denied by him. If he wasn’t on your radar of investors to follow, I hope I have convinced you that he should be.