We all know Warren Buffet and Michael Burry as savvy investors, and both of them have achieved extraordinary success. Their investing strategies have made them billions. Apparently, both Bury and Buffet focus on and follow Benjamin Graham’s method of value investing. But both of them have slightly different styles. Today we will delve into the investment strategies of these two investors and the key factors that have driven their success.
Contents
Warren Buffett: The Sage of Omaha
Warren Buffett, often called the “Oracle of Omaha,” is renowned for his disciplined approach to value investing. His strategy is deeply rooted in the teachings of Benjamin Graham, the father of value investing. Buffett’s method revolves around identifying undervalued companies with strong fundamentals, purchasing their stocks, and holding them for the long term. This approach involves many of his core principles.
Intrinsic Value
Buffett emphasises the importance of intrinsic value, which is the true worth of a company based on its fundamentals. He believes that the market often misprices stocks in the short term, but over the long term, prices tend to reflect the intrinsic value of a stock. For example, Buffett’s investment in Coca-Cola in the late 1980s was based on his assessment that the company’s brand strength and global reach were undervalued by the market. Over the years, Coca-Cola’s stock has provided substantial returns, proving his analysis right.
Economic Moats
One of Buffett’s key criteria for investment is the presence of an economic moat, a sustainable competitive advantage that protects a company from competitors. This could be in the form of brand strength, patents, network effects, or cost advantages. An example of this is Buffett’s investment in American Express. After the Salad Oil Scandal of the 1960s, American Express stock plummeted, but Buffett recognized the strength of its brand and customer loyalty as a moat that would ensure its recovery. His investment paid off handsomely as American Express regained its position as a financial services leader.
Long-Term Perspective
Buffett’s famous holding period is “forever.” He looks for businesses that have enduring qualities and can generate consistent earnings over the long term. His investment in Apple is a testament to this approach. Despite initial skepticism from some quarters, Buffett saw Apple’s strong brand, customer loyalty, and innovative capacity as long-term strengths. Since his initial purchase in 2016, Apple’s stock has surged, reflecting Apple’s continued success.
Management Quality
Buffet places significant emphasis on the quality of a company’s management. He looks for leaders who are capable, honest, and shareholder-oriented. His long-term investment in Berkshire Hathaway, his own company, exemplifies this belief. By acquiring well-managed companies like BNSF Railway and GEICO under the Berkshire umbrella, Buffett has ensured sustained growth driven by competent management.
Michael Burry’s approach.
Michael Burry, on the other hand, is known as a contrarian investor, and he is best known for predicting and profiting from the subprime mortgage crisis of 2007–2008. His story was popularized by the book and film “The Big Short.” Burry’s approach also follows Benjamin Graham and focuses on finding value where others see none. His contrarian approach involves intensive research and a deep understanding of market dynamics.
Contrarian Investing
Burry’s investment strategy is fundamentally contrarian. He looks for opportunities where the market consensus is wrong. His bet against the housing market in the mid-2000s is a prime example. While most investors believed in the continued rise of housing prices, Burry’s detailed analysis of mortgage-backed securities led him to bet against them by purchasing credit default swaps. This contrarian strategy resulted in massive profits when the housing market collapsed. If you want to know how exactly Burry made millions during the 2008 crisis, then check out this playlist on the channel.
Deep Research
Burry is known for his exhaustive research. He dives deeply into financial statements, market trends, and economic indicators to uncover hidden risks or opportunities. His early investment in GameStop, based on a thorough analysis of the company’s fundamentals and market position, showcases this aspect of his strategy. Burry saw potential in GameStop’s strong brand and significant short interest, which led to a highly profitable position when the stock surged in early 2021.
Risk Management
A critical component of Burry’s strategy is risk management. He used financial instruments such as credit default swaps during the 2008 crisis. This careful consideration of risk enabled him to make bold bets with a safety net in place. During the financial crisis, his use of credit default swaps to bet against subprime mortgages minimized potential losses while maximizing gains. We have explained everything about credit default swaps and how they work in this video. Make sure you watch it.
Focus on Specific Themes
Burry often focuses on specific investment themes based on macroeconomic trends. For instance, after the financial crisis, he invested heavily in water and agricultural land, anticipating future scarcity and rising demand. This approach allows him to capitalize on long-term trends that are not yet fully appreciated by the market. His investment in water rights and farmland reflects his approach to resource scarcity.
Similarities in Buffet and Burry’s Strategy
While Buffett and Burry have different approaches, both have achieved remarkable success. Comparing the main similarities in their strategies provides valuable insights for investors.
Time Horizon
Buffett’s strategy is inherently long-term, focusing on companies that can perform well over decades. Burry’s approach, while also long-term in its own way, often involves identifying and capitalizing on specific market inefficiencies that may not last as long. For Buffet, the time horizon is decades; for Burry, the time horizon is 5–6 years.
Research Intensity
Both investors emphasise the importance of research, but their methods differ. Buffett looks at the broader picture, focusing on a company’s business model, management, and competitive advantages. Burry also dives deeply into such details, but his focus is more on finding inefficiencies in the market or stock prices.
Market Perception
Buffett tends to invest in well-established companies with proven track records, often going against short-term market sentiment but aligning with long-term fundamentals. Burry, however, frequently takes positions that are highly contrarian, betting on significant market shifts that others do not foresee.
Risk Tolerance
Buffett’s investments are generally seen as more conservative, focusing on companies with stable earnings and strong competitive positions. Burry, while also careful about risk, often takes on higher-risk positions that can yield substantial returns if his strategy plays out.
Examples of Buffett’s long term investments.
Washington Post:
In 1973, Buffett bought shares of the Washington Post Company for about $11 million. He believed that the company was undervalued and that it had significant long-term potential. His investment grew more than 100 times over the years. The Washington Post Company eventually sold its newspaper division and transformed into Graham Holdings, with diverse business interests including education, television broadcasting, and cable television. The value of Buffett’s investment increased to over $1 billion.
Bank of America:
In 2011, during the aftermath of the financial crisis, Buffett made a bold investment in Bank of America. He invested $5 billion in preferred shares, which came with warrants to buy 700 million common shares at a price of $7.14 per share. When Bank of America’s stock recovered, Buffett exercised these warrants, and the value of Berkshire’s stake grew to over $30 billion, making it one of Buffett’s most lucrative investments.
Example of Burry’s smart investments.
MGM Resorts International
During the COVID-19 pandemic, Burry took a position in MGM Resorts International, betting on the recovery of the travel and leisure sector. He recognized that the pandemic-driven downturn created a buying opportunity in companies poised to rebound once normalcy returned. As the economy began to recover and travel restrictions eased, the value of MGM Resorts’ stock increased, validating Burry’s investment thesis. You can clearly see how Burry took advantage of short movements and panic in the market.
Burry has also invested in Facebook. During the pandemic dip we saw in 2020, Burry bet big when Facebook stock went down. He bought $192 million worth of calls on Facebook stock. Expecting its price to rise. Facebook stock took second place in Scion’s overall portfolio. As the move is later seen in FB stock, it can be said that Burry has booked a massive profit on FB stock.
Overall, Buffett’s value-oriented, long-term approach is grounded in patience, discipline, and a keen eye for quality. Burry’s contrarian, research-intensive strategy is driven by a willingness to go against the market with a deep understanding of market mechanics.
Both of them focus on the value of the stock that no one has realised in the market. The only lesson you should take from this video is to find undervalued stocks that have great potential to grow over the years. That is a sure-shot way to create wealth over time. We hope you liked this video, and if you want to learn more about Michael Burry and how he shorted the housing market in 2008, then subscribe and check out this playlist.
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