Michael Burry is one of the best investors of our time. He correctly predicted the housing crash of 2008 and earned a fortune shorting it. That's why we call him "the big short" to this day. But more recently, he also successfully shorted the ARK Innovation ETF (ARKK) as well as Tesla (TSLA). He was also early to invest in GameStop (GME) before it became a meme stock.
No one is always correct, but he has a proven track record of timing major directional shifts in the market, and so when he recently sold nearly all of his holdings, it made a lot of noise
But as we explain in a recent article, Michael Burry isn't actually selling everything as many recent headlines have made it seem.
Yes, he may have sold most holdings of his hedge fund, but not all his wealth is inside that fund. His personal wealth is also considerable and while we don't have perfect data on all his personal investments, we have enough information from past interviews and tweets to assume with reasonable certainty that he is still heavily invested in some specific assets, and I am here referring to farmland in particular.
Why is Michael Burry, "the big short," investing in Farmland?
That's the question that we explore in today's follow-up article. As you will see shortly, it is not a coincidence that he owns farmland, a safe-haven, in today's uncertain world.
Michael Burry's Bet on U.S. Farmland
In a now 12-year-old interview with Bloomberg, Michael Burry explains that he is investing his personal fortune into farmland. He explains that:
"I believe that Agriculture land with water on site will be very valuable in the future and I've put a good amount of money into that. So I am investing in alternative investments."
The interviewer seems surprised by Burry's answer and follows up by asking him what percentage of his portfolio he is investing in farmland. Burry answers the following:
"I don't want to disclose that, but it is a significant amount."
Yes, that was 12-years ago, which is a very long time in today's world, but remember that farmland is an illiquid asset that investors typically hold for the long term. It is not like a stock that you can sell from one day to another.
Later, when the "The Big Short" movie was released in 2015, Burry again doubled down on his conviction for farmland. The end statement of the movie says that "the small investing that he still does is all focused on one commodity: water" and by that, he clearly means farmland. In a later interview, he clarified that the best way to invest in water is through farmland:
"What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas."
So Burry is not just investing a little bit in farmland.
He is saying that he is basically investing most of his wealth into it.
Below, we discuss 5 reasons why we think that Burry is investing so heavily in farmland:
Reason #1: Exceptional Track Record
Over long time periods, farmland has been one of the best-performing asset classes in history. It has outperformed the returns of REITs (VNQ), the S&P 500 (SPY), Gold (GLD), Treasuries (IEF), and most other major asset classes:
Here is another study of Farmland returns, comparing them over a different time period:
You will note that farmland is not just more rewarding, it is also a lot safer. Farmland investors have achieved above average returns with below average risk, which is precisely what active investors like Michael Burry are seeking.
You will also note that the above returns are unleveraged. If you had bought your farmland with some debt, then your returns would have been even better.
Reason #2: Inflation Protection
We are not making any more land, but its product (food) is absolutely necessary to the survival and prosperity of our society.
Moreover, its need is only growing over time as the population gets larger and there are mouths to feed.
That explains why, historically, farmland has been one of the best inflation hedges. Burry has often pointed this out on his tweeter:
You can just look at farmland's performance in 2021 and 2022 to get an idea of its inflation resistance.
Farmland Partners Inc. (FPI), which is the largest farmland REIT by acre, said this on their most recent conference call:
"I think year-over-year, we're going to see another gain in the 10% or more asset appreciation. That's after the 2021 year may have been as high as 15% or 20% improvement in asset values. Our revenues are up strongly. The rent releasing process that we are in we have now released approximately 1/3 of the farms that are up for renewal, and we are getting in excess of 15% rent bumps in that releasing effort."
So if you fear inflation (like Burry), this is exactly what you would want to own. Its income and values are growing far faster than even the high rate of inflation and this is unleveraged. If you add some debt, the returns get even larger.
Reason #3: Wealth Preservation During Uncertain Times
Because farmland is absolutely necessary to our society, regardless of how the economy is performing, its income and value also remain fairly stable.
And in a way, it is also black-swan resistant.
Let's take the recent invasion of Ukraine as an example. When Russia began its invasion of Ukraine, most risky assets dropped in value. This is because the war causes great uncertainty and inflation in energy and food prices. Suddenly, people are fearing that we could be at the door steps of a third world war, and besides, the economic damage is significant.
But one asset class has kept appreciating and it is farmland.
Ukraine and Russia have historically been some of the biggest wheat, corn, and soy exporters in the world. Now, their supply chains are heavily disrupted, but people still need to eat, and as a result, we have seen significant inflation in crop prices.
U.S. farmland is filling the gaps and farmland owners are therefore, profiting in a way from this crisis. If you fear that the war in Europe will continue to escalate, then U.S. farmland can serve as a safe-haven asset class to protect your portfolio. This is also evident in FPI's performance relative to other stocks since the beginning of the war:
But you could go back in history and study other black swans as well.
The great financial crisis of 2008-2009 caused almost all assets to crash in value, but farmland remained stable and kept on rising in the following years.
Same for the dot-com bubble and crash of 2000 and countless other crises in history. Burry is bearish and sees significant risks in today's world and that explains why he is so eager to own a lot of farmland to protect himself.
Reason #4: Highly Predictable Future Prospects
It does take a genius to understand farmland's future prospects.
The amount of productive farmland with good infrastructure and water access is limited and declining each year due to better-use conversions, global warming, and other issues, such as the war in Ukraine.
Yet, the demand for food is constantly rising due to two main reasons.
The population is rising rapidly and expected to reach ~10 billion by 2050:
Secondly, the middle class is growing even faster in emerging countries, and as people get richer, they typically switch to protein-heavier diets, which increases the need for farmland.
As long as the global population continues to rise and increasingly many get out of poverty in emerging countries, then there will be growing demand for food, and the limited supply of farmland will continue to grow in value in the long run.
Reason #5: High Yield Potential
While farmland appreciation is always uncertain in any given year, its income is highly consistent and predictable, helping you to remain patient and focused on the long term prospects.
Some type of farmland yields only 3-4% and that's what FPI is buying for the most part.
But then some other type of farmland yields as much as 5% or 6%. Good examples are citruses, nuts, berries and other fresh produce. Gladstone Land (LAND), another farmland REIT, focuses on this higher yielding segment of the farmland market. It structures long triple net leases with its tenants, which makes its cash flow highly consistent and predictable.
FarmTogether, a farmland investment crowdfunding platform, takes this a step further. It mainly targets higher yielding farmland properties, but it also accepts operational risk, which boosts its average yield even further. Some of its deals pay ~8% per year:
I don't know exactly what type of farmland Burry is buying, but it is safe to say that he likes the substantial income that it generates.
How Can You Invest in Farmland?
Burry buys the farmland directly in the private market, but this is not something I would recommend for most people. Farmland investing requires a very specific skill-set and diversification is key to mitigate risks. Farmland is fairly safe if you are well-diversified by crop and region, but it can be quite risky if you are concentrated since bad weather alone could ruin your crops in any given year.
So unless you have $10s of millions to invest, you probably shouldn't buy farmland directly in the private market.
Personally, I have nearly 10% of my net worth invested in farmland and farmland-related businesses, and I get most of my exposure via real estate investment trusts ("REITs") and Crowdfunding.
Both have pros and cons.
Farmland REITs provide instant diversification, liquidity, and professional management. Also, since they have access to public capital markets, they may grow faster over time as they raise more capital to buy additional properties. On the flip side, the yields of farmland REITs are very low.
Crowdfunding platforms offer investments with higher risk and higher (potential) reward. These investments yield way more, often exceeding 8%. But you are also giving up on liquidity and you will be more heavily concentrated, which may result in more volatility. As long as you have a long term focus, that's fine, but clearly this is not for someone who is impatient.
I find that a combination of both is the best for most investors.
Bottom Line
Michael Burry is not all in cash as many media outlets have made it seem to be. In reality, Burry is heavily invested in alternative assets like farmland, and that's how he is protecting his wealth from inflation.
So don't make the mistake of trying to copy him and going into cash, as that's not what he has done as far as we know.
Just like Burry, I am currently accumulating real assets like farmland, but also apartment communities, industrial warehouses, timberland, cell towers, and other real assets through the REIT market, which is currently discounted.
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