Big Short Manager Bet $1.6B or 93% of His Fund For Stocks to Crash - Should You Sell?

Michael Burry gained recognition through his role in the film 'The Big Short,' which chronicles his contrarian and substantial wager on the 2007-08 US housing market collapse.

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Consequently, he became a closely watched investor, drawing attention whenever investors seek indications of impending market downturns.

According to the recently released 13F filing, he is presently placing another substantial bet on a market decline.

Burry, along with his Scion Asset Management fund, invested $886 million in put options against the SPDR S&P 500 ETF Trust and allocated an additional $739 million to put options against the Invesco QQQ Trust ETF.

Collectively, the short bet amounts to $1.6 billion, representing a staggering 93% of the fund's total portfolio.

The question arises: should investors interpret these actions as a warning of an impending stock market crash and sell their stocks?

My short answer is no. Allow me to elaborate.

First, we have to understand that Burry is a contrarian investor. He epitomizes the characteristics of a black swan investor - he would often bet on remotely probable but high impact events.

This means that he tends to be wrong most of the time.

One Reddit user has done an analysis on Burry's prediction accuracy.

In 2017, he expected a global financial meltdown and World War 3 but they didn't happen.

In 2019, he asserted that index funds were driving an impending market bubble due to their substantial size and influence on the demand for constituent stocks. Despite this, US indices continued to perform admirably, excluding the COVID-induced crash.

At the end of 2020 and the start of 2021, he said that Tesla was grossly overvalued, prompting him to short the stock. While Tesla experienced a brief correction early in 2021, it subsequently rallied for the remainder of the year. Notably, in 2022, the stock did experience a significant downturn.

Additionally, in 2021, Burry identified Bitcoin as a speculative bubble, and his timing proved correct as Bitcoin endured nearly a 50% decline between March and July.

You get the idea, the accuracy has been pretty poor. Most investors can't invest this way and hence you can should not blindly follow whatever Burry say.

However, when he is correct, he wins big. For instance, from 2000 through the crash of 2008, Burry earned his Scion investors 489.34% in returns or about 25% per year. In contrast, an S&P 500 ETF investor would have experienced almost a 30% loss. Notably, the bulk of his gains were derived from a single event. How many investors can tolerate the wait?

Secondly, he might unwind his short positions in a jiffy and we will only know about it next quarter due to the regulatory need to disclose.

We aren't sure how long he is betting on this big short. Case in point, he was adding positions to Alibaba and Tencent in the first quarter and he sold both and switched to shorting the markets in the second quarter.

This contrasts with an investor like Warren Buffett, who is renowned for his long-term orientation and comparatively stable portfolio turnover. Nonetheless, even Buffett has demonstrated instances of swift buying and selling - TSMC was an example.

In summary, it doesn't pay to blindly follow your investment idol, especially you have no idea what they are doing and lack understanding and insights about the investments they make. You won't have the conviction like they do. And worse, you might end up holding big losses which you can't bear to sell.

So I would say, stick to your investment plan and strategy. And not just sell your stocks because Mr Big Short is shorting big in the market right now.