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Michael Burry Just Shorted the Market for $1.6B
Bought $890 million of $SPY put options
Bought $740 million of $QQQ put options
93% of his entire portfolio
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Many people are unfamiliar with Burry. Today, let’s take a look at the life experience of the Big Short:
Early life
Michael Burry was born in San Jose, California in 1971.
When he was two years old, he lost the sight in one eye due to cancer and has been wearing an artificial eye ever since. In Michael's world, he can only see clearly with one eye.
Perhaps it was his own physical defects that inspired his desire to study medicine. In college, Michael chose economics and medicine. After obtaining his medical degree, he worked at Stanford University Medical Center and engaged in neurology-related work for a period of time.
Michael's investment career began when he was a doctor. He worked during the day and studied the financial market after get off work at night. Compared with being a doctor, investing was obviously more attractive to him.
“Studying medicine won’t save Americans”? Maybe investing can.
Entering the investment world
He quit his job as a physician and started to focus on investment in 1996. At that time, the most popular investment exchange forum in the United States was called Sillicon Investor, where everyone discussed technology stocks, and Michael was also active on this website.
At that time, he was not a short seller. On the contrary, Michael was good at stock selection and was a believer in traditional value investment. He has said more than once that his investment philosophy is based on the book "Security Analysis" - which is also Buffett's investment guide.
All of my stock picks are 100% based on the concept of margin of safety.
Perhaps this is what is special about Michael's style as a short seller: short selling is only because the price deviates too much from the intrinsic value, and short selling in a bubble also has a margin of safety - in the opposite way.
In 2000, Michael used his own funds and money borrowed from his family to open a hedge fund called Scion Capital. The name came from his favorite novel, The Scions of Shannara by American novelist Terry Brooks.
Since 2000, Michael's investment performance has been quite good. Even in extreme situations such as the bursting of the Internet bubble, he has been able to outperform the market:
In 2001, the S&P 500 fell by 11.88% and Scion Capital earned 55%. The excess returns here came from short selling: short selling those overvalued stocks at the peak of the Internet bubble.
In 2002, the S&P 500 fell another 22.1%, and Scion Capital earned 16%.
In 2003, the market rebounded and the index rose by 28.69%, but Scion Capital was even more impressive, with a return rate of 50%.
By 2004, Michael managed more than $600 million in funds.
Starting in 2005, Michael began to notice the hidden concerns in the subprime mortgage market and he conducted a series of analyses on the real estate market.
At that time, the real estate market in the United States was booming, and banks were willing to lend money to residents to buy houses. The market was flooded with loans at "preferential interest rates". Such loans could even have a 0% interest rate in the first 2 to 3 years, and then return to the market interest rate. In other words, if you were considering buying a house, the bank would chase you and give you money, and you didn't have to pay the mortgage for the first two years. If you also added zero down payment, you could live in a big house for free. Wouldn't that be great?
Banks also know that these loans may not be recovered after they are lent out, so they package them and sell them to other investors who are willing to take over! As a result, all kinds of subprime loans and subprime bonds formed by packaging subprime loans emerged.
Michael found that when the interest rates on underlying subprime loans rose—usually within two years—the value of bonds based on these subprime loans would fall rapidly.
So he went to investment banks such as Goldman Sachs and customized some credit default swap products (CDS). This kind of financial derivative has a complex structure and is essentially an insurance product - you buy a CDS from an investment bank, and the insured object is the subprime bonds in the market. If the subprime bonds fall in the future, the investment bank (equivalent to an insurance company) will have to pay you a large amount of insurance compensation. In return, you need to pay the investment bank "premium" every year.
If there were no problems with subprime loans, everything would be fine and you would lose the premium. The key is that no one in the market at that time thought that subprime loans would have problems. Residents were willing to borrow, and the loans were packaged into bonds and sold. Trading was thriving and everything was so smooth. The investment bank thought Michael was crazy, but since you asked, I will get you a CDS! Don't cry if you lose money!
Buying CDS to short subprime loans was indeed a pure loss at the beginning, just as the investment bank said. Many investors, including Scion Capital, felt that it was unreliable and demanded redemption and withdrawal of investment.
It was a scene from the movie "The Big Short". Michael locked himself in his office, didn't answer the phone, ignored the roars of angry investors, and listened to music with headphones when he was under a lot of pressure.
Eventually the market started to turn downward and the crash began. Michael's CDS position made a huge profit, he personally made $100 million and made $700 million for the fund's investors.
From November 2000 to June 2008, Scion Capital's return rate was 489.34%, while due to the catastrophic subprime mortgage crisis, the S&P 500 only rose by 3% in these eight years.
Post-subprime crisis era
In April 2008, Michael sold all his CDS positions. He did not participate in the Fed's rescue and market recovery in 2008-2009. Although he gained fame and fortune in the disaster, Michael's heart was also complicated. He returned investors' funds, stopped managing large funds, and only made some personal investments.
In 2010, Michael expressed his views on the subprime mortgage crisis in the New York Times. He believed that if investors carefully studied the financial market from 2003 to 2005, it would not be difficult to find the possibility of the subprime mortgage crisis. Regulators turned a blind eye to the current risks and did not heed the warnings of external investors (Michael had contacted federal financial regulatory agencies many times to exchange his observations, analysis and theories, but no one paid attention to him.)
Later he said: "I don't specifically look for favorable shorts. I spend time looking for stocks that can rise. This subprime short was a last resort. Every bit of logic I have learned in this industry over the years pointed me to this short, and I had to do it."
In 2013, Michael reopened the business, still under the name of Scion, but registered the fund type as exempt reporting adviser (ERA), and invested in water, gold and agriculture.
The end of "The Big Short" says: The only small-scale investment he is making now is one: fresh water.
This is of course an element of artistic processing, but it does show Michael's focus for quite some time after the subprime mortgage crisis.
The familiar shorts are back?
The US Securities and Exchange Commission requires that a fund with more than $100 million must disclose account information through Form 13F. In 2016, Scion Asset Management submitted a 13F. On February 14, 2019, Scion submitted another 13F. At that time, the market value of the stocks held by the fund was $103,528,000, just exceeding the disclosure standard.
In August 2019, Bloomberg quoted Michael's email, saying that he believed that there was a bubble in the market at that time, especially the stock prices of large listed companies, due to the strategy driven by passive funds. However, looking at his holdings in 2020, companies such as Alphabet and Facebook still account for his largest positions.
In early December 2020, just after Tesla's market value surpassed Facebook, Michael Burry called out to Musk, announcing that he had shorted Tesla and kindly suggested that Musk quickly issue an additional 25-50% at the current "ridiculous" price.
He also declared that Tesla's stock price extravaganza was a bubble and would collapse like the subprime mortgage crisis.
“my last Big Short got bigger and Bigger and BIGGER”
（to Tesla investors: ）“enjoy it while it lasts.”
