As often as not, he turned up what he called “ick” investments. In October 2001 he explained the concept in his letter to investors: “Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ‘ick.’” A court had accepted a plea from a software company called the Avanti Corporation. Avanti had been accused of stealing from a competitor the software code that was the whole foundation of Avanti’s business. The company had $100 million in cash in the bank, was still generating $100 million a year in free cash flow-and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avanti Corporation than any man on earth. He was able to see that even if the executives went to jail (as five of them did) and the fines were paid (as they were), Avanti would be worth a lot more than the market then assumed. To make money on Avanti’s stock, however, he’d probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.
“That was a classic Mike Burry trade,” says one of his investors. “It goes up by 10 times, but first it goes down by half.” This isn’t the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn’t do this if he was at the mercy of very short-term market moves, and so he didn’t give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year.
Really fascinating. In a recent review, Felix Salmon called The Big Short “probably the single best piece of financial journalism ever written”.