In his 2001 Scion Letter, Michael Burry discusses how to outsmart the market by avoiding ‘upgrading’ your portfolio. Here’s an excerpt from the letter:
Finally, I suspect that many who are actively upgrading their portfolios are doing so because they fear missing either a major market rally or the next bull market.
With stocks in general having come down fairly far, the feeling a bottom is near may be fairly pervasive. The optimal way to participate in a market rally, by definition, is to buy the better known stocks that either are in the major indices or are comparable to those that make up the indices.
However, doing so exposes one to the risk that one is wrong on the direction of the market. To my knowledge, such a hazard has proven notoriously difficult to avoid. In any case, the goal, always, of intelligent investing is not to mimic the market but rather to outmaneuver the market.
This is not to say that I am not a fan of larger, well-run businesses with fantastic economic characteristics and durable competitive advantage. I have a list of about eighty or so stocks that represent businesses with very decent and predictable long-term business characteristics. At the right price, I would like to include any one or more of these stocks in the Fund.
Of course, what I consider the right price seems ridiculously low given where most of these stocks have been priced in recent years. When these stocks come to my prices, then I will consider adding them to the Fund.
But only because they represent absolute value, and not because of any desire to “upgrade the portfolio” into either more palatable or more market-responsive stocks.
Also on this subject, I should note that recently, as many well-known companies saw their stocks fall drastically, a select few made it to my buy prices. Those that did were added to the portfolio on the sole criterion of absolute value.
The vast majority of popular stocks continue to be valued as popular stocks rather than as real businesses. Certainly, in the broader market, many stock prices overestimate the permanence of the underlying businesses.
You can read the letters here:
Michael Burry – Scion Capital Letters
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