Michael Burry’s big bet is no big deal – Hans Lee

There’s no reason to doubt the old investment adage: never put all your eggs in one basket. Not even Cathie Wood, who appeared in yesterday’s 13F series installment, has all of her Tesla customers’ money. Far from it, actually.

But that truism seems to have missed Michael Burry entirely. Burry, the former pre-med graduate, had a secret hobby outside of his time as a pathology resident at Stanford University: investing. Since then, he has become famous for his bet that the global financial crisis would start in the US subprime mortgage market. The story is the subject of the hit movie. the big bet.

These days, Burry manages his own money, but his moves remain front-page news. That’s why we’re including him as the first of our two new featured people in Series 13F. In this cable, we’ll look at his background and some of his background. Finally, we will tell you about the holding company that he currently has. That’s right, he now only has a retaining because he sold the other 11.

Burry’s background

I already mentioned that Burry’s investment background stems from his time in California medical schools. But when he dropped out of medical school, he took over the management of his own hedge fund. Scion Asset Management was built on a strictly value-oriented approach. In fact, Burry was once quoted as saying that all of his investments are based on the “margin of safety” principle.

Well it worked. In 2000, the year the fund was created, the S&P 500 fell 12% while the Scion fund rose 55%. The secret? He shorted overvalued tech stocks.

Then, in 2005, he changed his strategy to the housing market, arguing that the housing bubble was doomed to burst. His research was enough to persuade Goldman Sachs and others to sell him credit default swaps against vulnerable mortgage pools (MBS). That trade netted him $800 million for clients and himself.

His most recent “big bet” likely left him with a new batch of enemies, given that he was up against Tesla’s share price. In December 2020, Burry initiated short positions in the company and built them over time. Ultimately, the crowd won and he took off his shorts at the end of 2021. However, he did short a US$31 million bet against Cathie Wood’s ARK Invest ETF, but now that too has been taken off.

Burry changes at a glance

It’s what you sold that counts

As you can see, Burry was very interested in shedding a lot of holdings last quarter. From Apple to Alphabet to the owner of local TV station Nexstar, Burry hit the sell button many times. So why was it so easy to shoot? Burry’s tweet (since he was deleted) may have something to do with it:

In short, he sees retail profits as the story to watch as overflowing inventories could lead to a substantial reduction in inflation. And, of course, slower and lower inflation will lead to a pause in the Federal Reserve. Of course, this is all good news if it works, but Burry is quick to remind his more than 1 million Twitter followers that nuance is key:

So what do you like?

The only stock in his portfolio is a new holding, and it’s one that has stumped more than a few people. The Geo Group (NYSE: GEO) is a company that provides private correctional, detention and treatment facilities around the world. The Florida-based firm has most of its facilities in the southern United States (Texas, Florida and California specifically), but it also owns three small correctional facilities in Australia (two in Victoria and one in New South Wales).

Two things are worth noting here:

1. Burry’s GEO Group bet doesn’t have as great a value as some of his other bets (especially Apple and Tesla)
2. 13F filings do not require disclosure of short bets. Therefore, the only investments that legally need to be mentioned are long bets.

This means that, for all we know, GEO Group may be your long bet, but Burry may have a lot of smaller or unknown short bets in the background.

one last tweet

Burry usually deletes his tweets shortly after posting them. But this tweet (now deleted but kept in an automated archive) can sum up how he feels about the market in general:

If you’re right, then your single action bet may make a lot more sense than we first thought.

Tomorrow’s Profile: Howard Marks

Tomorrow we will conclude our 13F series with Howard Marks of Oaktree Capital. Although Howard is best known for his investment philosophy spiel, Marks’ fund still owns more than 380 holdings in stocks and managed funds. We’ll take a look at the properties, what’s changed, and most importantly marry it to his long-term thesis.

never miss an idea

If you’re not a Livewire subscriber yet, you can sign up to get free access to investment ideas and strategies from Australia’s top investors.

I’ll be in charge of asking questions of Australia’s best macro strategists, economists and fixed income fund managers. If you have questions of your own or from guests we should chat with, please email us: [email protected].