Investor extraordinaire Michael Burry recently announced the de-registration of his hedge fund, Scion Asset Management. Such announcements aren’t always newsworthy, but in this case, it commanded considerable headline interest on Wall Street in view of Burry’s reputation as a long-time market pessimist.
Burry is famous for being profiled in the best-selling book (later made into a film), The Big Short, by Michael Lewis. He was portrayed in the movie version of The Big Short by actor Christian Bale, who brought to life his exploits in correctly anticipating the 2008 credit crisis. Impressively, he reportedly made $100 million for himself by shorting the market during that event, plus a hefty $700 million in profits for his Scion investors.
Burry’s persistently bearish outlook on the equity market has long been a subject of fascination among both his admirers and critics. And while that outlook served him extraordinarily well at times, a case can be made that it also held him back from profiting from more than a few market booms in the years since 2008.
Indeed, over the last 17 years, he frequently issued warnings of market “bubbles” or trends he viewed as unsustainable in various segments of the market (but mainly the tech sector). In more than a few instances, Burry’s bearish predictions would precede a major market rally, presumably undermining his short positions and leaving his investors underexposed during bull markets.
In his final letter to his fund investors, Burry wrote, “Sometimes, we see bubbles. Sometimes, there is something to do about it. Sometimes, the only winning move is not to play.” He had recently placed a sizable put-option bet against Nvidia (NVDA) and Palantir (PLTR), reportedly based on his conviction that the AI boom is dramatically overextended—a belief that has evoked a strong backlash among AI-focused investors.
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Ironically, those recently disclosed bets were his final act as a registered fund manager. In his decision to stop reporting to the SEC as an investment advisor, he’s essentially expressing frustration with what he views as unsustainable AI-driven valuations.
Granted, this doesn’t mean Burry is through operating as a big-time trader—nor does it mean he has surrendered his bearish sentiment. But one can’t help seeing a certain degree of resignation in his decision; that of a contrarian endlessly (and, some would say, hopelessly) fighting against the market’s long-term uptrend.
In its own version of a requiem for Mr. Burry, ZeroHedge wrote:
“This is the [bullish] environment that broke Burry. The compass is broken, the poles have reversed, the Bizarro World is now and everything you ever knew about markets and economics is no longer as rooted in basics, fundamentals and common sense as you thought.”
Burry’s supporters will see in his decision to de-register, not so much an acknowledgement of defeat, but a calculated move to maintain his (correctly in their view) bearish outlook on big tech without having to endure widespread scrutiny and endless public criticism for being “wrong” or “right too early.”
For my part, I have no axe to grind with Mr. Burry, nor will I comment on whether or not I think his description of the AI boom as a bubble will prove correct. Instead, my intention in writing this is to underscore a long-held belief that short selling is an extremely dangerous endeavor that’s best relegated to dedicated, experienced professionals. It typically requires precision timing, deep pockets and a willingness to endure at times harsh countertrend moves before eventually making money (assuming your short trade was correct).
Indeed, if market history teaches anything, it’s that short selling is inherently risky: Equities tend to rise over the long run, and short positions carry asymmetric risk exposure. Because shorting operates through margin and has limited upside but theoretically unlimited downside, adverse price moves can quickly lead to significant losses for the countertrend investor.
But if you happen to share Michael Burry’s inveterate pessimism, I would argue that a better approach than short selling is to focus on buying significantly undervalued stocks that have limited downside, and which can theoretically outperform even in a bear market—a strategy we practice here at the Cabot Turnaround Letter.
Again, history shows that bullish positions are typically far more rewarded by the market than bearish ones, so attempting to fight the market’s dominant trend (especially from a long-term investor’s perspective) is more often than not a costly proposition.
In my estimation, the takeaway from Michael Burry’s recent capitulation is that while Mr. Market may sometimes reward short sellers, he punishes them far more frequently. It would do his would-be emulators well to remember this point.
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