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It’s particularly enlightening to observe Scion Asset Management’s Michael Burry at work, picking and managing his firm’s stocks. The first reason is that he does an enormous amount of research before opening any new positions, and this includes making use of technical analysis on price trends. The second reason is that, after thoroughly checking out the numbers, he follows his instincts. He says that figuring out when and how large to make a deal is “In large part… a skill and a personality issue”. In other words, each trader should go his own way.
The trait with which he is, perhaps, most strongly associated is hard-headedness. Despite a torrent of sentiment going in the opposite direction, he opened a large short position on the US housing market in 2005, convinced as he was that it was about to plummet. His imperviousness to the naysayers and his strict focus on the figures in black-and-white paid off in a large way when the market, in fact, did crash. His clients grew $725 million richer, while he personally walked away with $100 million.
We can’t gain access to Burry’s mind, but what are some of the things we can take away for ourselves from his approach to share trading? Join us for a couple of minutes for the sake of good company.
Shaking off Bias
Burry demonstrates for us how to ignore the hype. During the housing crisis of 2007, he showed that most people can indeed be wrong. And this wasn’t accomplished through a lucky bit of arrogance, but rather through painstaking research. This is what justified him in setting his own course at 180 degrees to that of the majority. Don’t forget that Burry’s background was not in finance, but in medicine. Still, he proved that anyone can turn himself into the expert on a given asset or industry and make confident, independent decisions that yield big results.
A few years ago, Burry calmy recognized that Bitcoin was due for a major fall. He tweeted that believers in the coin were “On the whole, not wrong, just driven by speculative fervour to insane heights from which the fall will be dramatic and painful”. He saw that people’s views of the asset had become skewed by greed and FOMO. There is a valuable lesson in this for us: The insistence on gauging assets by the fundamentals and the cold, hard figures, irrespective of whatever emotions hold sway in the market. Needless to say, he turned out to be right.
Stepping Back to See the Big Picture
In Q2 2023, the general trend among fund managers was bullish when it came to equities. Apparently, US consumers were going out and spending; employment levels were high; and there was reason to believe the Fed would soon stop being so hawkish. By the middle of August, the Nasdaq Composite index had gained over 30% for the year, and the S&P 500 had put on almost 17%.
Burry – not much affected by the optimistic mood – went out and bought $866 million in put options (the right to sell an asset at a specified price) on a fund that tracks the benchmark S&P 500 stock index. He did the same with regard to another fund that tracks the Nasdaq 100 index, this time spending $739 million. He shorted the stock market at a time when it was riding high. When he closed his positions in November, the S&P and the Nasdaq had dropped by 3.6% and 3% respectively, vindicating Burry’s bold move.
What had happened to stocks in Q3? Morningstar said that the “growth stocks that helped usher in what many called a new bull market in the first half of the year ran out of steam”. Apparently, Burry’s cool head saw that these stocks had become bloated beyond recognition and were due for a pullback. Demand in the US for discretionary items like electronics was indeed weakening at the time, and people were watching their pennies quite closely. Interest rates were still high, and there were other signs of economic sluggishness available to the observant eye.
We see the importance of remembering the macroeconomic backdrop in which your assets are operating, and of considering its likely impacts. And once again we had the pleasure of seeing Burry’s signature dismissal of the prevailing mentality.
Wrapping Things Up
Burry usually revisits his portfolio every three months and, in Q3, he shaved it down from 33 positions to only 13. At the end of 2022, Scion actually held only nine stocks. Burry prefers to place his funds in fewer, better-researched stocks, rather than opening many positions and hoping the failures will be canceled out by the successes. The guiding principle behind his share trading is quite simple, he says: “Specific, known catalysts are not necessary. Sheer, outrageous value is enough”. Wherever there is value, he’s willing to bring his portfolio.
In November this year, Burry gave us a spell of déjà vu when he sidled up to the semiconductor sector – which had gained a massive 47% for the year – and showed how much respect he had for that number by laying down $47 million in put options against it. The fund he shorted holds such high-profile stocks as Nvidia Corp., Advanced Micro Devices Inc., and Intel Corp. Let’s keep an eye on things to see how they turn out!
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