'Big Short' Investor Michael Burry To Close Hedge Fund as He Warns on Valuations (ft.com) 65
Michael Burry, the investor made famous for his bet against the US housing market ahead of the 2008 financial crisis, is closing his hedge fund [non-paywalled source] as he warned that market valuations had become unhinged from fundamentals. From a report: Scion Asset Management this week terminated its registration with US securities regulators, according to a Securities and Exchange Commission database. Burry told investors that he would "liquidate the funds and return capital -- but for a small audit/tax holdback -- by year's end," according to two people with direct knowledge of a letter he sent to investors.
"My estimation of value in securities is not now, and has not been for some time, in sync with the markets," said the letter, which was dated October 27. The move to close Scion comes as some investors have become concerned that markets are trading at frothy levels after years of strong returns. Those jitters flared up on Thursday, with the tech-heavy Nasdaq Composite sliding nearly 2%. Still, the big gains for tech stocks this year, driven by hopes that artificial intelligence will transform business and society, have left valuations at lofty heights compared with their average in recent years.
"My estimation of value in securities is not now, and has not been for some time, in sync with the markets," said the letter, which was dated October 27. The move to close Scion comes as some investors have become concerned that markets are trading at frothy levels after years of strong returns. Those jitters flared up on Thursday, with the tech-heavy Nasdaq Composite sliding nearly 2%. Still, the big gains for tech stocks this year, driven by hopes that artificial intelligence will transform business and society, have left valuations at lofty heights compared with their average in recent years.
Honest man (Score:5, Insightful)
It is rare to have someone that says "Hey, I don't think I know what the market is doing anymore, so here is your money back."
Usually, it's "Yes I do know better than you and better than the market, give your money to me."
Then again, this guy made more than enough money in 2008, he can just live off the cash.
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Re:Honest man [and smart timing, too?] (Score:3)
The future remains fundamentally unknowable, but timing still matters. He's been winning those market timing games, but now he says he can't go on?
I think the root of what destroyed the stock market (pending proof via implosion) is that the metrics became broken. Mostly that means the Dow Jones as the leading metric. Originally the idea was an index of "top companies" based on reality-based factors like sales and assets, but the Dow could always swap out "slower runners" for better ones, which is a fundamen
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He thinks the market is going to shit the bed and sooner rather than later. Rather than risk his and his clients money on short bets and try to time it, since metrics he'd normally use to figure such things out don't seem to be matching up with reality, he's cashing out for now. Presumably he'll be back in once he thinks the market finds a new support level.
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He thinks the market is going to shit the bed and sooner rather than later. Rather than risk his and his clients money on short bets and try to time it, since metrics he'd normally use to figure such things out don't seem to be matching up with reality, he's cashing out for now. Presumably he'll be back in once he thinks the market finds a new support level.
That's my take as well. The guy understood markets that held some tenuous relationship to reality. What this move really signals is that the market is so detached from reality that even someone with absolutely impeccable instincts on such markets is skittish. Something big is gonna happen, but he can't trust that he can read the tea leaves precisely enough to time it right. If he misses by far enough before the crash, his clients will be pissed that they could have earned more. If he misses the other direct
Re: Honest man [and smart timing, too?] (Score:1)
How much more would this permabear have made by just buying and holding the S&P as it keeps setting new record highs, decade after decade?
Re: Honest man [and smart timing, too?] (Score:2)
How much more would you make by tripling down on an irrational market? Hell, go all in. We can't ALL ignore fundamental value all the time, you understand how catastrophically stupid that is?
"This time is different" "It always goes up"
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Not sure how much I concur. There's also the possibility that he thinks there won't be any value in the currency after the coming crash, so there's no point in placing more bets. "Full faith and credit" may implode on the "faith" dimension? Or perhaps he thinks "legal tender" will implode on the "legal" dimension?
Re:Honest man [and smart timing, too?] (Score:4, Interesting)
He used to win these market timing games because no one was paying attention to huge short positions. You could quietly bet against a company, or, better yet, you could quietly amass a short position and then release stunning negative news that you had uncovered and watch the stock price tank.
These days it is more likely that online investors will notice a large short, and drive the price of the stock up until the person holding the short gets margin called and loses all of their money. The shorters then provide the liquidity you need to get out of the position. There used to be good money in shorting terrible companies, but in an age where hordes of armchair investors can drive the price of GameStop to the moon that strategy is just too risky.
Re:Honest man (Score:5, Informative)
Even before then he had shorted the 2000's tech boom and was probably very wealthy already so it was also it seems hes been in it for love of the game.
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.
https://www.businessinsider.co... [businessinsider.com]
Re: Honest man (Score:1)
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If we want to call all hedge fund managers gamblers I am not opposed but that is not unique to this guy.
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Well, VIX is +20% today and NVidia is down 3,5%. Did the bubble just start bursting, or is it just a temporary setback when ton of people waiting in the wings will now "buy the dip"?
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My guess is he's getting out before that.
I do find it hilarious that he's famous for predicting the housing market crash that every single sensible and honest economist was telling us was coming.
We really really hate listening to experts. There's a reason that stupid mov
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Re: Honest man (Score:1)
If the Fed had bailed out Lehman, would the crash have been contained (more like Evergrande)?
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54 and retiring like Warren Buffet (Score:2)
I'd consider that continuing for a few years in the investment field nearly means that you will have to ride out the next crisis from the downturn, bottoming and then recovery.
It'd be a commitment of 5 to 10 years based on the 2008 pandemic.
Assuming here that he is 54 has a few million in the bank and is retiring to become a paid speaker and paid consultant without the 7 day x 18 hour daily grind of running a hedge fund.
Smart man (Score:2)
AI is not delivering on it's promises, and we're figuring that out. The market is due for a serious correction.
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Re:Smart man (Score:5, Insightful)
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Recessions have been made illegal. Doesn't matter who is running the show, their incentive is always to prop up the markets in any way possible so they can point to those utterly meaningless numbers and claim the economy is great. Its been that way our whole lives, its just that as real conditions continue to worsen, the disconnect gets more and more obvious.
Re: Smart man (Score:1)
Have your taxes gone up or down since 2008? Why keep pretending taxpayers pay for bailouts when you know the Fed simply prints money to buy assets?
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There Is No Alternative (TINA) [investopedia.com]
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Even if it is, and it certainly isn't, the growth is predicated on more electricity generation infrastructure being installed than the world can build right now. And that's all heavy industry, you can't spin up new capacity overnight. It's nonsensical.
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When it crashes (Score:2)
It'll be a black swan. It'll come out of the blue. 98% of people won't be prepared for it, and they'll be devastated financially.
2% will likely know in advance and they'll be able to protect most of their investments.
Re:When it crashes (Score:4, Interesting)
Maybe, but we actually know that the AI companies do not make nearly the money required to justify the investments in them.
We know that when the head of the Federal Reserve retires the likely replacement will be in favor of keeping interest rates low even when the economy is hot and inflation is rising.
We know we are accumulating debt faster than ever before.
We know that the top 7 stocks are all companies that do the same thing, more or less, and represent 36.6% of the S&P 500 so a downturn in the tech sector could be more devastating than it would be if it was a normal sized sector.
We know that, due to tarriffs and other factors, the world trade balance is shifting and the dollar's position as the medium of world exchange may be faltering.
We know that we have stopped getting reliable economic data, or in many cases any data at all from the usual sources.
We know that the market cap for Bitcoin, a currency based on nothing that nobody uses for currency is $1.4 trillion.
We know that certain other enormous companies have an extremily high P/E ratio and market caps of hundreds of billions of trillions, suggesting that there may be some seriously overvalued stocks out there.
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About half the people have nothing to protect*, and half of the remainder will never do active management.
But even those not gambling on stocks will get hurt. This system sucks.
* https://www.investmentnews.com... [investmentnews.com]
Damning (Score:5, Insightful)
Translation here is that he knows it's going to break, but there's no way to figure out when, which is important for a hedge fund. So, rather than play any of the games, the safest hedge was to cash in his chips and go home. While he may not have cashed out at the peak, he and his customers have avaoid the inevitable freefall that will reach relativistic speeds before hurtling out of the solar system..
Re:Damning (Score:5, Insightful)
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So true. Sadly these days the market can stay irrational almost indefinitely. The factors that helped constrain this irrationality, like actual government oversight and discipline of equities and debt, willingness to let large corporations fail, and investor discipline in discerning real growth from financial games have all been eroded.
I have no idea when valuations will fall, and I wouldn't want to be better on a market that has no basis in fundamentals at all.
Re:Damning (Score:5, Interesting)
Re: Damning (Score:1)
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Computers don't become obsolete in the same way they did in the days where there were 20-30% improvements per-year in processing power. A 5 year old computer is still quite usable (on a personal note, I only recently replaced my 2012 iMac due to software obsolescence not hardware problems - it did nearly everything I needed - I would have kept using it if the software kept up). There may be shenanigans going on, but this particular deprecation doesn't seem to me to be unrealistic (this is likely especially
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Re: Damning (Score:1)
If prices can be irrational, why assume inflation is a signal of scarcity rather than simply irrational upwards-biased noise?
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Probably not the bankers, the big banks aren't dumb enough to have lent huge amounts of money to companies in the tech bubble. And they're much better capitalized than last time. The investment firms with large holdings in the magnificent seven have lots of other holdings and can afford to take the hit when things go to shit. But the government will bail out all the stupid VCs who kept pouring money into tech bubble 2.0 companies. “We have to save them so they can invest again or we'll lose the AI wa
Re: And WHEN it breaks... (Score:1)
Did your account get debited when the Fed created $trillions to buy assets in 2008 and 2020?
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When a government prints money, you don't pay for it in taxes, you pay for it in higher inflation. In 2008, the economy was tottering enough that deflation was a real fear so maybe it was worth it then (and the higher inflation wasn't much noticeable). The aftereffects of 2020 seem to include higher inflation - which caused political problems for Biden and now Trump in his turn (though Trump is hell-bent on policies that will increase inflation to give tax cuts for the rich).
Re: And WHEN it breaks... (Score:1)
In 2020, was it a good deal to raise base high-powered money 40% and see inflation barely touch 9%? Has the Fed proven ut can print faster than prices rise, which increases real purchasing power?
Or covering his shorts got too expensive (Score:3)
Tough gambling shorting. Even the movie showed how close he came to collapse and the movie didnt show the many many many other people who lost everything trying to maintain their short against the housing market. He was just lucky enough to have gotten the timing right...
Just last week he was in the news saying he was shorting the AI market guess this week he came up short of the cash to keep it going.
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Lucky, maybe. But smart enough seems more likely.
Government debt causes asset inflation (Score:2)
Well for most companies that's never going to happen. Share prices to earnings no longer have any relation. The primary purpose of the stock market is a P
Re: Government debt causes asset inflation (Score:1)
Why so zero-sum? What if we vastly overproduce so everyone can take more money put of the stock market than inflation plus the money they put in?
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"If there are 1000 stocks in company A that were originally sold for $1 and someone buys one share for $2, the value of the stock is now $2000 even though only $1001 were ever put into the market. "
I hope you aren't an "investment" advisor.
He does this a lot (Score:3)
The warning bit comes every so often from him and has done for many years. Doesn't mean he's wrong, though.
Selling Short (Score:2)
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Perhaps it's his level of confidence on the timing of any collapse. Selling short is very risky. Selling your current stock is a much less risky way of saying you don't have confidence in current valuations - but it is still showing a lack of confidence.
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Presumably the stocks held were not bought for shorting. He does have a responsibility to behave as advertised when managing a portfolio for investors.
Consistently timing the market is impossible (Score:2)
The guy has made a fairly large number of predictions of market crashes over the last few decades. He was right once, which was a big deal. But he has been wrong a lot of other times. Eventually, there will be another recession, and another market crash, and he will be right again.
In the long term, markets generally go up, though. Staying short for long periods of time is not advisable, and very costly.
Passive funds, such as index funds are the way to go. In finance, you get what you don't pay for - fund ex
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Passive funds, such as index funds are the way to go. In finance, you get what you don't pay for - fund expense ratios and other transaction costs.
Might work, but buying at any price doesn't sound very advisable.
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Your comment would be actionable if you had a valuation model useful enough to signal when the market is overvalued or undervalued, so that you could decide when to sell or buy. Smart people like Michael Burry, and others even smarter than him, have tried and failed to produce such a model. Even Nobel laureate Shiller's CAPE ratio won't help you time the market over short periods, by which I mean less than a few years. Good luck.
perhaps its become impossible to predict due (Score:2)
The neighborhood is going to shit (Score:2)
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There was an article on the WSJ about a week or so ago that said roughly 60 % (or it might be 40 %, memory fades) of wage earners had money in the stock market in various guises. They have been buying on the dips. That, according to this article, is what has been propping up the market. There is also froth from AI-Mania. I suspect the big boys have been feeding it thinking they are savvy enough to bail in time when it all goes pear shaped.
The small investors have been doing this for quite awhile, and as lon
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