The story of Michael J. Burry, one of the few winners from the financial crisis

Dr. Michael J. Burry is one of the little known investors that foresaw the 2008 financial crises and profited handsomely from it. However, his story was not always one of unmitigated success.

From doctor to investor

Michael J. Burry was born and raised in San Jose, California. Got his medical degree at Vanderbilt. After coming home to California to do his residency at Stanford, he got bit by the investing bug and left school to start his own hedge fund, which he called Scion Capital.

Michael Burry was always awkward and anti-social. In fact, he has self-diagnosed with Asperger's disease. While he was brilliant, Burry had few friends and was not well known in investment circles when he started his career.

Michael J. Burry vs. the internet

Burry is a contrarian by nature and is willing to look at companies and society differently than other people. For that reason, he was early on the call that the internet had way overvalued companies with little to no revenue or profitability. He began shorting those stocks immediately and his hedge fund went up like a rocket ship. In the first year, Michael J. Burry returned 55% even though the S&P 500 fell 12%. The market continued to fall dramatically the next two years yet Burry's fund returned 16% and 50%, making him one of the most successful investors in the industry.

Burry and the big short

However, Mike Burry was soon onto a new idea as he began to analyze the subprime financing market and bank balance sheets. He noticed great irregularities and unsustainability in this market.

Michael Burry saw the riskiness of the subprime market as millions of borrowers with low income and few assets bought homes and cars with tremendous leverage. Some borrowers made very low or in many cases no down payments for mortgages that the couldn't possibly pay back if interest rates rose. However, the banking system was valued as if these mortgages would all be paid. Burry realized that this could not possibly continue over the long-term.

At the same time, Burry began to tell his investors of the enormous risks to the system. His investors were mostly institutions that did not want to hear his theory. Their other investments were all built upon the concept of a system with no subprime mortgage risk. Investors began to get nervous and demand their money back.

Unfortunately, it was too late as Burry had already gotten into several long-term, illiquid bets against the market using derivatives to bet the price of mortgages would fall. If he got out of the trades, he would suffer a huge loss - so Burry simply refused the investors' requests.

All of a sudden in 2007 the market started to turn in his direction as more and more people understood the risks to the system. Then the dominoes began to fall, first with Bear Stearns, then with Lehman Brothers, AIG, and the rest of the financial system. Burry's investments paid off handsomely and he made $100 million for himself and $700 million for his investors.

Michael J. Burry: brilliant but flawed

Interestingly, the relationship had become so tainted that his investors refused to work with him again. Despite all of his success, Burry could not succeed in fundraising again for his fund and he liquidated the assets. While Michael J. Burry is an extremely wealthy man, his anti-social behavior and poor relationship with investors eventually ended his career as a manager for public funds.

Source: Bloomberg Pro Terminal

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