Lessons learned from Burry and Mai/Ledley and my mistakes – August 2017

I have learned some big lessons for my recent 10 months investment, and here they are, 

  1. Bad investment in SDRL calls, wishing for oil market to come back and ignoring the debt mountain of SDRL. Also, trust too much on P/B ratio and free cash flow, and put too much weight on Valueline recommendation. I should complete my homework before invest. Also, I need to fully estimate the downside. I thought I could make a killing, but in the end, I got crushed because I never estimate the downside risk. It is a surprise to know that another guy did the same strategy in SDRL and made 33X profit. Maybe his timing is much better and he was very lucky!!
  2. So-so investment in VRX, also ignoring the debt mountain.
  3. Michael Burry’s investment strategies (MB_investment_strategies and Michael-Burry-Case-StudiesLearning from Michael Burry74831871-Burry-Writeups):
    1. Firstly, Burry looked for value by focusing on free cash flow and enterprise value. To find prospective investments, Michael Burry would screen the market looking specifically at the enterprise value/EBITDA ratio.
    2. Minimal debt, a low P/B ratio (adjusted to reflect realistic asset values), strong free cash flow and low EV/EBITDA ratio were the four traits Michael Burry looked for in an investment.
    3. Secondly, Michael Burry looked for what he called ‘rare birds’, or asset plays in other words and to a lesser extent, arbitrage opportunities and companies selling
      at less than two-­‐thirds of net value (net working capital less liabilities).
    4. Thirdly, Burry looked for value in the type of company favored by Buffett. (Those with a sustainable competitive advantage as demonstrated by longstanding and stable high returns on invested capital, although only at a reasonable price.)
    5. Lastly, Michael Burry liked to buy what he called “ick” investments. One such example is given Michael Lewis’ book: The Big Short:
      “He went looking for court rulings, deal completions, or government regulatory changes — anything that might change the value of the company…The alarmingly named Avant! Corporation was a good example. He found it searching for the word ‘accepted’ in news stories…’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.’
  4. Jamie Mai and Charlie Ledley’s investment strategies
    1. would not merely search for market inefficiency but search for it globally, in every market: stocks, bonds, currencies, commodities.
    2. Their 1st big opportunity, a credit card company called Capital One Financial, they studied the business, reports, news of scandal (still the company has consistent impressive cash flow), interview all sorts of people including company VP, then bought two year LEAPS at $40 with $3 (stock price was $30 by that time), they invested $26,000 (about 23.6% of their total portfolio) in the LEAPS, and soon, Capital One is vindicated by the regulators, their investment of $26,000 became $526,000.
    3. 2nd opportunity: distressed United Pan-European Cable, they bought $500,000 LEAPS, struck at a price far from the market, when UPC rallied, their investment of $500,000 became $5,500,000.
    4. 3rd opportunity: bet on a company that delivered oxygen tanks directly to sick people in their homes. their investment of $20,000 became $3,000,000
    5. 4th opportunity: Event-driven investing – ethanol futures
    6. Cornwall seeks highly asymmetric investments, in which the upside potential significantly exceeds the downside risk, across a broad spectrum of strategies ranging from trades that seek to benefit from market inefficiencies to thematic fundamental trades. The firm has produced an average annual compounded net return of 40 percent (52 percent gross).

About Timeless Investor

My name is Samual Lau. I am a long-term value investor and a zealous disciple of Ben Graham. And I am a MBA graduated in May 2010 from Carnegie Mellon University. My concentrations are Finance, Strategy and Marketing.
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