Is Michael Burry Really Betting Big on a Stock Market Crash?

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Michael Burry Just Bet Big On A Stock Market Crash, Or Did He?

Aug. 16, 2023 9:00 AM ET

It seems as though every time Michael Burry, the famed investor known for his successful bet against the housing market in 2008, makes a move, the financial world takes notice. Recently, headlines have been ablaze with news that Burry has placed a $1.6 billion bet on a market crash. But before we jump to conclusions, let’s examine the facts and separate the hype from reality.

Did Michael Burry Just Short The Market?

The answer is not as straightforward as the headlines would have you believe. Burry did purchase Put Options on the S&P 500 ETF Trust (SPY) and the Nasdaq Invesco QQQ Trust (QQQ), but this does not necessarily mean he is betting on a market crash. Put options can be used for hedging or speculative purposes, and Burry does not appear to have gone “all in” on a market crash. In fact, his fund, Scion Management, has increased its holding in MGM Resorts, Expedia, and CVS, which suggests that he is still bullish on certain stocks in the market.

Understanding the Notional Value

The $1.6 billion figure being thrown around in the media is misleading. This number refers to the notional value of the options, which represents the total value of the underlying assets, not what Burry actually paid for the options. In reality, he paid a fraction of $1.6 billion for the options. So, while Burry did make a significant investment, it is important to keep this in perspective.

Market Crashes Are Inevitable

One thing that we can say with certainty is that the stock market will crash again. History has shown us that market crashes are a regular occurrence, and they have happened numerous times in the past few decades. However, predicting when the next crash will happen is extremely difficult, if not impossible.

The Importance of Diversification

Given the uncertainty surrounding market crashes, it is crucial for investors to diversify their portfolios. Investing in high-quality companies in secular growth industries is a winning long-term strategy, as is having cash on the sidelines to take advantage of buying opportunities when stock prices drop. It is also wise to consider hedging strategies, such as selling covered calls on overvalued stocks.

Examples of Hedging Strategies

One example of a hedging strategy is selling covered calls on stocks that have seen significant growth. For instance, The Trade Desk (TTD) has experienced a 64% increase in its stock price this year. Selling a covered call on this stock can provide income and serve as a hedge against a potential downturn.

Another example is investing in recession-resistant companies that generate consistent cash flow and offer dividends, such as AbbVie (ABBV). These types of companies tend to perform well during market downturns, providing some protection to investors.

Lastly, investing in companies like Alphabet (GOOG, GOOGL) that have a strong history of generating cash flow and buying back shares can also provide a layer of protection during market downturns.

Conclusion

While Michael Burry’s recent investment may have garnered attention, it is important to approach the news with caution. Burry’s actions do not necessarily indicate a market crash is imminent, and there are steps that investors can take to protect their portfolios from potential downturns. Diversification, hedging strategies, and investing in strong companies with cash flow are all prudent approaches in navigating the unpredictable nature of the stock market.