In his 2002 Scion Value Fund Letter, Michael Burry observed that while some individual stocks were undervalued, overall, most stocks continued to be priced relatively high despite recent price drops. This suggests that future returns on stocks might be lower than what investors currently expect, especially if there isn’t a new asset bubble to elevate prices.
Burry clarifies that these views on general market valuations are mainly in response to common queries and do not significantly influence his own investment strategy for the Fund, which focuses on selecting individual securities based on their value, independent of broader market trends.
Here’s an excerpt from the letter:
During a brief period of time this past September, I concluded — based on my evaluation of many individual issues rather than on aggregate statistics — that a number of stocks did find valuation levels that were too low.
However, by and large most remained at somewhat high valuations despite significant price declines. Therefore, in the absence of a new asset bubble, the current level of common stock valuations — and the eagerness with which the public grew to accept such valuations — appears to promise future returns well below those still expected by the investing public.
To return to the original point, I provide this opinion on general valuations only as a response to the natural question that I have been asked so frequently of late, However, I am not at all convinced that the opinions above bear significantly on the investment process that I employ on behalf of the Fund. That is, I will respond to the value of individual securities, regardless of current or expected market levels.
I should add that those investors who must own a diversified basket of stocks fared to more or less match the market are precisely those who should be most concerned with the stare of the economy and, more importantly, interest rate trends. As the Fund owns a more concentrated portfolio of deeply undervalued stocks affected by a variety of special situations, macro trends should naturally be much less of a concern.
You can find a copy of the letter here:
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