As you remember Michael Burry started his investment career as a poster on a message board about stocks. In the beginning he preferred to run an ultra-concentrated portfolio with only 4 to 6 stocks. Later Burry has changed his mind and targeted a more diversified portfolio of 9-10 stocks. After sometime he has evolved the way he thinks about diversification. He held up to 18 positions and said that “If anything that Buffett’s done can be said to have hurt value investors, IMO it’s his witticisms regarding diversification as a weapon of the ignorant or lazy.” Michael Burry said that because he could not handle the high level of volatility that comes from ultra-concentrated portfolio holdings. Guess what the volatility is when you have 4-6 positions and 2 or 3 goes down big way? He goes to say that he still outperform the market with a portfolio of 15 stocks so it’s better to diversify.
It is interesting to point out that Michael criticizing Buffett’s stance on diversification at a time when he himself is holding 15 positions. I believe that Buffett’s criticisms of over diversification are aimed at the closet indexers that do nothing to separate themselves from the market. While changing his believe that 4-6 stocks is the optimal diversification to believing that ~15 positions is the optimal mix in just about two years is a huge move. Still a portfolio of 15 positions today is considered as conservative. So the advice about do not do over-diversification is still active today.
Michael Burry’s investment approach is really complex and changing. He relies mainly on relative valuation, technical analysis and other rules that help him to sell or buy and make the decisions with no respect toward the tax efficiency and turnover.
Michael Burry is founder of the Scion Capital LLC hedge fund, which he ran from 2000 until 2008, when he closed the fund to focus on his own personal investments. Author Michael Lewis profiled him in his 2010 book The Big Short: Inside the Doomsday Machine.
