Michael Burry, the hedge fund manager whose bet against the housing market was famously chronicled in The Big Short, has made the headlines again. He has ... gasp ... turned bearish on this year's rally, making some sizable investments that will reward him if the market goes down.
Here's the thing: Burry is market timing, which is a tricky business that most investors should avoid. And he could be wrong. If the news of Burry's bearish investments has you wondering if you should follow him, there are a lot of issues to examine first. Here's what you should consider before making any decisions based on what a famous investor is or isn't doing.
1. The media is doing its job
When it comes to Wall Street, there's always a bunch of stuff going on. Most of it is pretty mundane and boring. And yet there's an entire media industry around reporting that news, from newspapers to websites to cable news stations. The media largely gets paid for attracting eyeballs to the advertising that lives around the content it creates.
Image source: Getty Images.
Michael Burry is an investment personality, much like Warren Buffett or Carl Icahn. Everyday market followers like to read stories about famous investors, so stories are written about them whenever possible. To be fair, famous investors are usually famous for a reason, so there might be some value in understanding why they do things. But just because there was an article written about Burry, Buffett, or Icahn doesn't guarantee that the information will be valuable. Often, news outlets need to make things sound more exciting than they really are. You have to go in with a skeptical mindset or you'll find your emotions pulled from extreme to extreme.
2. Famous investors aren't always correct
Burry is a wealthy man, so he's clearly managed to make some good decisions in his life. But it is highly unlikely that every decision he's ever made was good. Even Buffett, the Oracle of Omaha, has made bad calls in his day.
You may know that when Buffett bought Berkshire Hathaway (BRK.B -0.69%) (BRK.A -0.76%) in the 1960s, it was a textile company. Buffett quickly began remaking it into the massive conglomerate it is today. But he could never turn around the struggling textile business, and roughly two decades after he took it over, he shut it down. In a way, you could argue that one of Buffett's most famous investments was one of his biggest failures.
The problem, of course, is that human beings like to listen to experts, often imbuing them with superhuman powers. Perhaps they are right more often than they are wrong, or their winning calls outweigh their losers, but famous investors just don't have superhuman powers. Even if they are legitimate experts that doesn't mean they can predict the future. At best, they are making educated guesses.
3. Burry is market timing
So what is Burry actually doing? He made some options trades that effectively mean he is shorting two prominent index ETFs, betting that stocks will decline in value. It's a pretty big bet, too, with the trades accounting for over 90% of his portfolio, according to some Burry watchers.
There's pretty much a binary outcome here. If he's correct and the market declines, he could make a lot of money. If he's wrong and the market doesn't go down, he could lose money. Very few people have the financial wherewithal to make such an aggressive bet on the market's direction. Fewer still have the resources and the temperament.
There's a reason why investors are told to have a diversified portfolio -- it protects you from massive losses. Do you really want to risk losing your nest egg because some guy you saw portrayed in a movie made a particular investment decision? And even if you did, Burry may not tell anyone when he's closed his trade, and likely won't until after he's out of it. How will you know when to turn bullish and bet on the market rising again?
Market timing isn't something most investors should bother with. There are too many chances to make mistakes.
4. Create a plan and stick with it
If you are an avid investor, you probably enjoy reading and watching (perhaps overhyped) Wall Street news. And it's probably extra interesting when it is a famous investor making a big, risky bet on a highly uncertain future event. That's fine, but that interest doesn't mean you have to do anything about the news. In fact, as we've already discussed, you probably shouldn't.
So what should you do?
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The long-term answer is to find an investment approach that works for you -- and stick to it. That could be as simple as buying a balanced fund, outsourcing the work of picking investments, while you focus all of your attention on saving money. Or you could follow Buffett's broad advice and buy great companies at reasonable prices and look to hold them forever.
The point is that sticking with a thoughtful long-term plan is more likely to bring you success than jumping from idea to idea, even if those ideas come from famous investors like Burry. After all, the stock market has a long history of trending irregularly higher over time.
Don't get too excited, it isn't worth it
People watching is a lot of fun, and the news about Burry's short on the market is basically the Wall Street version of people watching. It's OK to do it, but you still need to live your own life. Getting vexed because one investor, no matter how famous, thinks the market is going to fall just doesn't do you much good. Take a few minutes and you can probably find someone else who is super bullish.
It is much better to focus on an investment approach that works for you and to stick with it through the market cycle. That doesn't mean that you can't ever change your investment approach, but just because some famous investor does something isn't enough reason to throw away a thoughtful long-term plan.
