• Choose a category
• All
• Classic-Fiction

By Root 352 0

not be fully aware of. "I wasn't searching for a news report of a scam or fraud per se," he said. "That would have been too backward-looking, and I was looking to get in front of something. I was looking for something happening in the courts that might lead to an investment thesis. An argument being accepted, a plea being accepted, a settlement being accepted by the court." A court had accepted a plea from a software company called the Avant! Corporation. Avant! had been accused of stealing from a competitor the software code that was the whole foundation of Avant!'s business. The company had $100 million in cash in the bank, was still generating $100 million a year of free cash flow--and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avant! Corporation than any man on earth. He was able to see that even if the executives went to jail (as they did) and the fines were paid (as they were), Avant! would be worth a lot more than the market then assumed. Most of its engineers were Chinese nationals on work visas, and thus trapped--there was no risk that anyone would quit before the lights were out. To make money on Avant!'s stock, however, he'd probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

Burry bought his first shares of Avant! in June 2001 at $12 a share. Avant!'s management then appeared on the cover of an issue of Business Week under the headline "Does Crime Pay?" The stock plunged; Burry bought more. Avant!'s management went to jail. The stock fell some more. Mike Burry kept on buying it--all the way down to $2 a share. He became Avant!'s single largest shareholder; he pressed management for changes. "With [the former CEO's] criminal aura no longer a part of operating management," he wrote to the new bosses, "Avant! has a chance to demonstrate its concern for shareholders." In August, in another e-mail, he wrote, "Avant! still makes me feel I'm sleeping with the village slut. No matter how well my needs are met, I doubt I'll ever brag about it. The 'creep' factor is off the charts. I half think that if I pushed Avant! too hard I'd end up being terrorized by the Chinese mafia." Four months later, Avant! got taken over for $22 a share. "That was a classic Mike Burry trade," says one of his investors. "It goes up by ten times but first it goes down by half."

This isn't the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn't do this if he was at the mercy of very short-term market moves, and so he didn't give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year. Burry also designed his fund to attract people who wanted to be long the stock market--who wanted to bet on stocks going up rather than stocks going down. "I am not a short at heart," he said. "I don't dig into companies looking to short them, generally. I want the upside to be much more than the downside, fundamentally." He also didn't like the idea of taking the risk of selling a stock short, as the risk was, theoretically, unlimited. It could only fall to zero, but it could rise to infinity.

Investing well was all about being paid the right price for risk. Increasingly, Burry felt that he wasn't. The problem wasn't confined to individual stocks. The Internet bubble had burst, and yet house prices in San Jose, the bubble's epicenter, were still rising. He investigated the stocks of home builders, and then the stocks of companies that insured home mortgages, like PMI. To one of his friends--a big-time East Coast professional investor--he wrote in May 2003 that the real estate bubble was being driven ever higher by the irrational behavior of mortgage lenders who were extending easy credit. "You just have to watch for the level at which even nearly unlimited or unprecedented credit can no longer drive the