Michael Burry Explains How to Invest (5 Key Lessons)

We bought basically short 8.4 billion of credit default swaps um related to mortgages or financial companies. You must have been pretty confident that this thing was going to blow. We had a giant bet for us, and I was extremely confident in the outcome.

Were your investors as confident? Some of them thought you were crazy; some thought you probably thought you'd lost your mind. I think I know for sure that some of them thought I lost my mind. A lot of clients were just glad to be done with it at the end. Perhaps I had made the trade too big for the fund, and my confidence in the trade had uh ticked off some people, even though you made them rich.

Even it's remarkable there are investors who made tens of millions off this and uh we're still pretty upset.

So that man there is Michael Burry. He is one of the people that saw the global financial crisis coming. In fact, he saw it coming like a couple of years before it even happened, and he bet against America, against the American economy, against American housing, and he actually won. Subsequently, he is one of the major characters in Michael Lewis's book Big Short and was played by Christian Bale in the film adaptation of that book.

I really look up to Michael Burry as an investor because he's not someone that's feeding into whatever this year's hype or speculation is in the market. He's not one of those Wall Street types that’s just trying to keep up with everybody else or is pushing some sort of agenda. He's not like that at all. In fact, he relatively keeps to himself; like you won't find too many interviews of him out there.

He's just someone that kind of prides himself on doing the in-depth research himself, becoming educated on a topic, staying rational, and making bets based on his own conclusions. So in this video, I wanted to talk about five lessons that we can all learn from Michael Burry and the way he goes about his investing. Someone that is, you know, keen on doing all that research himself, and isn’t afraid to stand up and be confident in his decisions and go against the grain.

And kind of in that vein, the first key lesson that we can take away from Michael Burry is not to copy other investors. So of course we don't go out there and buy stocks based on what somebody else is talking about or recommending. But furthermore, don’t even feel the need to emulate another investor's strategy. Just stick to your own interests and your own strengths. To quote Michael Burry from Michael Lewis's book The Big Short, he said, "If you are going to be a great investor, you have to fit the style to who you are."

At one point, I recognized that Warren Buffett, though he had every advantage in learning from Benjamin Graham, did not copy Ben Graham, but rather set out on his own path and ran money his way by his own rules.

Now this is quite important because while another investor's strategy may work, chances are it won't work for you. For example, Warren Buffett has an amazing investing strategy and because of his investing strategy, he goes out there and invests in banks. For me, I don't know anything about banks. I'm not afraid to admit that. So for me, simply copying what he's doing with his investing wouldn't really work for me.

You know, Steve McKnight is a famous Australian real estate investor and his strategy is very solid, very sound, and it works for him. But it probably wouldn't work for me because I don't know that much about real estate. So of course you want to listen to what these people have to say, and for sure you can take investing philosophies from them, but you don’t want to try and be them.

Then moving on into the second big lesson that you can learn from Michael Burry is that if you want to be a good investor, you have to learn about it yourself. You're never going to be a great investor if you're simply just following instructions. It needs to be you that does the research and you need to write your own manual. Again, going back to The Big Short, Michael Burry says this: "I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it would be the most popular school in the world with an impossibly high tuition. So it must not be true; just doesn’t work like that."

At the end of the day, you need to write your own manual. You need to pull the hard yards and actually understand how to invest by yourself. Now that doesn’t mean that you can’t learn from other investors. In fact, quite the opposite. In fact, the best way to start to write your own investing manual is to research into these great investing names and find those common themes, those common investing philosophies that resonate with you.

For example, Warren Buffett says you should only invest within your circle of competence. Peter Lynch says you have to know what you own. Charlie Munger says you should never invest in a business that you can’t understand. Monish Pabrai and Guy Spier are always talking about finding investments where you’ve got an edge.

Now these investors are not copying each other; it's just that over time, through them writing their own manuals and learning how to invest themselves, they all come to very similar conclusions. And for us, we can notice that and go, you know what, that makes logical sense. I should understand businesses before I buy into them. Stick with what I understand, you know, that makes logical sense. I am going to put that as a rule in my own investing manual.

So overall, you need to learn it yourself. You need to write your own manual. You need to do what works for you.

Now moving on into the third lesson we can learn from Michael Burry—this is actually something that you can draw out of that first clip that I played at the top of the video—and the third lesson is that you need to have confidence in yourself. So have another listen to the clip: "You must have been pretty confident this thing was going to blow. We had a giant bet for us, and I was extremely confident in the outcome."

So listen to that; he was extremely confident in the outcome. And to be a really successful investor, you need to have that confidence behind you to actually stand up and stand behind the investments that you make and actually believe in them.

Now there are kind of two different types of confidence, I guess, in this aspect. The first one is the confidence that's almost like arrogance, where you kind of just stand up and you say, "What I think is true is definitely correct," and you have a differing opinion, therefore you must just be stupid.

And then there's the type of confidence where it's derived from actually working hard and researching in depth the issue that or the outcome that you're betting on, and almost having that self-belief from the effort that you've put in.

Now the first type of confidence—that arrogance, that I'm right, you're wrong—that's detrimental to investing. That will land you so many losses if you have that kind of confidence. However, the second kind of confidence is really critical if you are going to be a good investor. And as we're saying, it stems back to actually going and doing that research itself.

I imagine the top in the housing market would be marked by a mortgage in which home buyers of subprime quality were enticed to buy with teaser rate monthly payments near zero. Importantly, because subprime mortgages were being turned into securities, there were mandatory regulatory filings and this is how I educated myself on the sector. At times, I felt I was the only one reading these things.

I saw absolutely no chance of home prices going sideways or stabilizing for any significant length of time. Once home price appreciation was no longer a given, these new types of mortgages would simply disappear. Home prices starved; a peak credit would fall and fall steeply as mortgage and refinancing options crumbled away.

The crisis, in my view, would start in 2007, by which time teaser rate periods on the vast majority of these new types of mortgages would expire or reset for a population of homeowners trapped in mortgages they can no longer afford.

He left no stone unturned. He took literally years to learn about mortgages and learn about mortgage-backed securities, learn about credit default swaps, and learning about the state of the housing market in America to actually be able to stand up with great confidence when everybody else was saying, "No, housing is strong, what are you doing?"

And who said actually this system is broken, and I have that confidence to make this bet because I've done the research, I've explored all the possible outcomes, and I understand that I am right.

And to follow on from that kind of vein of thinking, the fourth key lesson that you can learn from Michael Burry's investing approach is to not be afraid to be a contrarian. To do very well in investing, usually you have to go against the grain, and this is kind of building on that point that we're just talking about where it's all about confidence because you know it’s the confidence that you get from going in and doing that in-depth research yourself that enables you to stand up and be confident in going against the grain.

And again, that's what Michael Burry did. He saw that everyone in 2008 was saying, you know, housing is strong, mortgage bonds are great, there's no way these can fail, and he was not afraid to go against the grain and be a contrarian.

Because what you kind of realize after watching the stock market how it works and how Wall Street works—once you watch it for a fair while, like a couple of years—you realize there is a big herd mentality. People may not admit to that, but it really is the thing. Usually, you know, there’s a kind of way of thinking; maybe it's about a particular stock or a particular industry, and that kind of catches on and becomes the consensus.

A lot of people don't actually go in and do the research to figure out whether the consensus is right or wrong; they just follow the herd. They just say, you know what, I've heard five people on CNBC saying the same thing about this industry this week, so I kind of just believe that that's the general consensus and that's probably true.

Did you think it was strange when the tech bubble burst in 2001 and the housing market in San Jose, the tech capital of the world, went up? It's housing; housing is always stable, low risk, soft idea.

Yeah, so even in the realm of investing, a lot of people are just following the herd, and the problem with that is that occasionally the herd just walks straight into an abattoir. This is obviously exactly what happened in 2008. The herd was all saying housing is great, it's going to keep going up forever, there's nothing that can cause housing to fall, house prices to fall, and mortgage bonds to fail.

What do you know? Michael Burry didn’t go along with the herd. He had the confidence; he did the research to be the contrarian, and he profited. He profited very handsomely from the events that took place through 2008, 2009, and so on.

So that's definitely a fourth key lesson that we can learn from Michael Burry. And then to round it out, the fifth lesson that I've definitely learned from Michael Burry is don't be afraid to look for value wherever you can find it.

For example, Michael Burry has looked into, you know, obviously the housing market before, but he's also looked into U.S. tech stocks, he's looked at shares over in Japan and Korea, he's even looked into water as a commodity. And through his career, he's used investment vehicles such as obviously those credit default swaps; he's just used various forms of derivatives like options, he’s bought just regular old shares.

So the point here is that Michael Burry is not somebody that just sits and waits for that one stock that he's been watching to come on sale and then, you know, he might wait five years for that golden opportunity and then he just buys the shares and holds it for a long time.

He's always looking for value wherever he can find it, and then he figures out what is the best financial instrument I can use to profit as much as possible from this thesis. That's the thing with Michael Burry. He constructs what I feel like is an investing thesis. He's betting on some particular outcome to occur, and then after he's done that, then he figures out the best possible thing to buy to best exploit that, you know, that possibility, that potential hypothesis that he thinks is going to come to fruition.

And of course, I do have to say that while we talk about, you know, looking for value wherever you can find it, this definitely doesn't mean you want to go and reach outside your circle of confidence just to try and find something new. Like, maybe you are that person that you can only devote maybe an hour a week towards your investing, and you can really only keep up with the industry that you work in.

Maybe it's construction, so maybe there are only a select few companies that you feel competent in keeping up with. That's totally fine. But something that's very interesting that I've learned about Michael Burry is that is that whole notion of he just finds value. He starts with that investing thesis and then he figures out, okay, how am I best going to exploit? How am I best going to profit from this outcome that I predict is going to happen?

And he does his research and he really makes sure he understands the best way that he's going to be able to do that. You can remember back to that part in The Big Short, the movie, where he's the guy that wants to actually go to the investment banks and he wants them to make the credit default swap so he can buy it off of them.

So he's that kind of a thinker. But overall, guys, they are five different investing lessons that literally we can all learn from Michael Burry. He's an extremely successful investor; he's not your standard regulation, you know, I do this, this, this, this, and this kind of investor. But in that approach, we can actually learn a few things and apply that to our own investing.

So hope you enjoyed the video. Leave a like on it if you did and subscribe to the channel if you haven't done so already. Let me know, what do you think of Michael Burry's investing approach? What are some key takeaways you've taken out of his investing approach that maybe you do apply to your own investing? Let me know down in the comments section below.

Check out Profitful if you'd like to learn the way that I go about my investing; you can check out that down in the description below. That'll take you links in the description to take you over to Profitful; you can check out some courses that I've made over there. But apart from that, guys, thank you very much for watching. I'll see you guys in the next video.