How ‘Big Short’ investor Michael Burry picks winning stocks

Michael Burry, the central figure in the book and movie The Big Short, is probably best known for predicting the US housing crash that preceded the 2008 financial crisis.

But he is also one of the world’s best stock pickers. And recently, he laid out his strategy for choosing the best stocks and shares for the biggest returns.

Follow the masters

Burry follows the teachings of the father of value investing. “When I first read [Benjamin Graham’s] Security Analysis, I felt I was born to play the role of value investor,” Burry writes.

Benjamin Graham was Warren Buffett’s mentor. I learned the founding principles of stock picking for wealth from Graham’s two books, Security Analysis (1934) and The Intelligent Investor (1949). 

I’m also happy to learn from anyone who has made stonking amounts of money in the markets. Burry famously created $750m profit for his investors when he bet against subprime mortgage lending between 2007 and 2008. But his main portfolio is made up of standard stocks and shares.  

Michael Burry keeps it simple

It might surprise you that Burry’s advice recalls Warren Buffett’s best lines. “My strategy isn’t very complex. I try to buy shares of unpopular companies when they look like road kill, and sell them when they’ve been polished up a bit.”

All the money I’ve personally made in the market is from buying profitable companies when no-one was talking about them, then selling them on when they turn around and become headline news.

The key point here, for me, is that they were profitable. There’s more chance a share will do well long term when the underlying business is making money. But as Benjamin Graham says, Mr Market is a fickle investor who is ruled by his emotions. At one point he is feeling pessimistic, so he’ll mark down the price of a stock. The next day Mr Market is optimistic, and so the price of our cheap stock starts to rise.

Research, research, research

“My weapon of choice is research,” says Burry. “It’s critical for me to understand a company’s value before laying down a dime. I find out-of-favour industries a particularly fertile ground for best-of-breed shares at steep discounts.”

So for example: buying airline stocks when Covid-19 hit and no-one was flying anywhere? If I’d bought easyjet (LSE:EZJ) in the days after the first lockdown and held on until today? I’d have made 110% on my investment!

It’s crucial to look at the world now, find good companies that are out of favour, and buy and hold until the story turns around.

“How do I determine the discount?” Burry asks. “I usually focus on free cash flow. I prefer minimal debt.” Personally I use stock screeners like Koyfin (free) or Stockopedia (paid) and I find them incredibly useful tools. That means I don’t have to go digging around in company statements or get out my calculator. 

The first thing most new investors do is to re-invent the wheel. But it’s really not necessary. Stick to value, like Benjamin Graham, Warren Buffett, and Michael Burry, and you can’t go far wrong.