Learning from Buffett and Burry

New (to me) insights from Warren Buffett and Michael Burry and those of us who would learn from them Warren Buffett got rich investing other people’s money and taking 50% of the profit
Stock picking played a part in his fortune, but he needed capital in the first place, says Monevator. To get it he worked first for Ben Graham as a highly paid analyst and then set up hedge funds (partnerships) with a fee structure that would make current hedge fund managers blush. He refunded losses and took no profit if his funds returned less than 4%. After that, though, Buffett took 50%. Investors got rich, he got rich. You don’t hear many complaints. Sometimes I take an envious look at UK Value Investor’s growing portfolio of Buffett inspired big strong company portfolio
It’s diversified. The companies, like Robert Wiseman Dairies (processes and delivers over 30% of our fresh milk every day), and Vodafone (world #1), exude class and permanence. You can’t imagine them going bust. But then I remind myself I champion the unheralded, undiscovered, small, smelly, and wretched. It’s a dirty job, but I reckon there’s more profit in it, the annual reports are a lot thinner, and the directors talk to you. A close reading of Michael Burry’s posts on Silicon Investor shows how his style developed from Ben Graham
Before Burry became famous for shorting sub-prime debt he was an old-fashioned value investor seeking bargains and Buffett style companies with strong competitive advantages at reasonable prices. In a post from 1998 dug up by Robert Pio Molloy, Burry says he found these companies by: Scanning the S&P MidCap 400 guide - eyeing the lower right hand page for high and consistent ROE. Then, moving up the page, comparing capital expenditures to cash flows, then moving up to equity and observing that its growth validates the ROE numbers. Then, still moving up the page, looking at the last 10 years of earnings consistency and growth - at least doubling in 10 years, without more than one down year. Then look for the low payout ratio and conservative debt.

Comments

I'm really, really going to have to read more on Burry.

He made a great call on Apple all those years ago, but I think he dumped it ages ago. Too bad, because it's had a pehnomenal - and I do mean phenomenal - run over the last decade. Taking a peak on Google, I see that Apple has a ROE of 44%, and ROA of 29%, which is monster, monster high. It's also on a PER of 15. David Einhorn was ringing its praises earlier on this year. Although it is now a very large (largest?) company, and Jobs is now no longer in charge, it looks like a reasonable bet.

The thing about Buffett is that the more you read about him, the more you realise that the media presents over-simplified descriptions of his investments. Maybe I need to read a good book about his investment operations by a knowledgeable investor. I hear The Snowball is about 1000 pages long - and I'm not looking for something that long.

What is interesting is Buffett (latterly) looks for moats. We of course all know that, but Buffett seems to have a knack of finding them in places you wouldn't expect. Take his purchase of BNSF (Burlington Northern Santa Fe), the railroad. The economics of the setup is that as oil prices increase, railroads become much more economical to transport goods. That unassailable advantage (given the likely future costs of energy) and the high barriers to entry give it a moat. What's interesting, too, is that BNSF could probably absorb a lot of capital in expansion; something which Berkshire spits out. I would never have thought of that myself.

Hi Blippy. Can’t help much with your reading I’m afraid. I’ve only read one book on Buffett, Buffett Beyond Value, which fits the bill in that its shorter than the Snowball (which I would like to read one day!), and it also focuses on the investing rather than man. I had mixed feelings though: http://blog.iii.co.uk/buffett-beyond-value/

Michael Lewis’ The Big Short is excellent on Burry the man and his subprime adventure: http://blog.iii.co.uk/the-big-short/ – but as far as I’m aware that’s about it except for scavenging his bulletin board posts written before he founded Scion. There are a few of his early letters on the Scion website: http://www.scioncapital.com/index__letters.html and some more recent interviews.

I agree with you about Buffett, but I think he presents over-simplified descriptions of his investments or rather he describes the ‘moats’ and I wonder how much they’re justifications for investing in the company people can understand (it’s a lot more interesting than saying I like it because the business earns free cash flow returns of 15% a year!) rather than insights that drive the investment decision.

Hi Richard. Thanks for the nod and I do share your love of the underdog companies. I still have a place in my heart for Titon and Mallett for some reason. And the annual reports are a LOT thinner!

And in reply to Blippy, Burry has Asperger's and Buffett sort of fits the profile. If you read accounts of these two you'll soon give up ever getting close to their ability to analyse things.

A little snip from The Big Short (about Burry):

"People with Asperger’s couldn’t control what they were interested in. It was a stroke of luck that his special interest was financial markets and not, say, collecting lawn-mower catalogues. When he thought of it that way, he realized that complex modern financial markets were as good as designed to reward a person with Asperger’s who took an interest in them. “Only someone who has Asperger’s would read a subprime-mortgage-bond prospectus,” he said."

Burry used to wash dollar bills and press them as a kid.

And from Snowball about Buffett aged around 10:

"By fifth grade he had immersed himself in the 1939 World Almanac, which quickly became his favorite book. He memorized the population of every city. He got a contest going with Stu over who could name the most world cities with populations over a million"

And there are lots of other tales of a 6 or 7 year old Buffett calculating the frequency of letters in the newspapers or the bible as well and the frequency of numbers in license plates of passing cars. In college Buffett virtually memorising the entire text of Security Analysis.

One other point of interest, Buffett is so non-visual that he apparently doesn't know what colour hair Alice Schroeder has... even though he's known her for years. Now that's a brain with an unusually strong abstract slant.

Basically these guys have immense powers and have been honing them all their lives, in Buffett's case the Snowball says he's spent most of the past 50 years in his office with the blinds down, reading, reading, reading.

So regarding the media's simplification of what Buffett does, it can't be any other way as there are only a few people on Earth who really understand what he does. In my case I have a naive grasp on his stock picking approach, but as the Magic Formula shows, that may be enough.

“Only someone who has Asperger’s would read a subprime-mortgage-bond prospectus,” he said.”

John, I do believe you're right ;) I tend to crave intellectual stimulation and novelty, so I dare say I wouldn't make it past the first paragraph. I work as computer programmer, which has more than its fair share of Aspergers. I'm not one for social skills, but I don't think I'm in the full-blown weirdo department.

Hi John, I no longer share the love for Mallett! I've ejected it from the portfolio :-) I like to think I'm agnostic about size, however whenever I see a big company, like Ryanair currently, in my screens I shy away. Can't help it. I'm worried it's a bias, a human fallibility that could diminish returns...

Interesting to read Geoff Gannon talking about the fact that he has Asperger's: http://www.gurufocus.com/news/144137/adapt-trial-and-error-investing

I don't know about Asperger's, but I find Gannon's thinking about investing compelling.

Blippy, I've read the Snowball and for those that are interested in Buffett, every page is a pleasure. What everyone here has captured is that Buffett was not only super intelligent, but ultra obsessive about money and investing, to the point that I'm sure he has some form of autism too (incidentally, so does Geoff Gannon - see latest blog). Ultimately, it cost him his marriage and family life. The guy would read Moody's manuals for fun when everyone else was reading comics. Buffett's problem was that he couldn't spend his money, because of his 'condition'. Even now, he has to get someone else to spend it for him (Bill & Melissa Gates Foundation). So you have to ask yourself - what was the point? He says it was just a game, the capital increase was a way of keeping score. For a more condensed version of his life, I would recommend Lowenstein's book. Alice Schroeder videos on You Tube are also insightful.

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.
41832