Michael Burry is at it again. The hedge fund manager made $100 million during the subprime mortgage crisis in 2008 on a huge short position. And he became famous for it as a result of The Big Short book and movie. Now, Burry is bearish about the S&P 500 and the Nasdaq-100.
But while he was successful in the past, another famous investor isn't convinced Burry is making a smart move this time around. Billionaire Shark Tank star Kevin O'Leary (aka Mr. Wonderful) thinks that Burry's shorting of the S&P 500 is "very risky."
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Burry's bearish bet
Burry's Scion Asset Management revealed last week via regulatory filings that it bought put options for the SPDR S&P 500 ETF Trust (SPY 0.95%), an exchange-traded fund (ETF) that tracks the S&P 500. Scion also bought put options for the Invesco QQQ Trust Series 1 (QQQ 1.54%) ETF, which tracks the Nasdaq-100 index. Scion's 13-F filing listed the combined value of these put options at close to $1.8 billion.
The hedge fund still owns positions in close to 30 stocks. However, Burry's SPY and QQQ puts appear to be more than simply a hedge that would provide a cushion for the rest of Scion's portfolio.
Burry has been vocal about stock valuations for a while. In June 2021, he tweeted that the market was experiencing the "greatest speculative bubble of all time in all things."
The S&P 500 and Nasdaq-100 went on to plunge the next year. However, both indexes are now higher than they were when Burry issued his dire warning.
Why O'Leary is leery
O'Leary, though, expressed skepticism about Burry's latest big bet against the stock market. He told Fox News last week that Burry could be in store for some pain.
The Shark Tank star said, "People that try to live off market timing have a very hard time." He acknowledged that Burry will be right "one day" that the S&P 500 will fall, but there's no way to know when that day will come.
O'Leary also argued that the current situation is much different from Burry's huge short that made him so much money years ago. He stated in the Fox News interview, "This is a whole different kettle of fish he's playing with."
O'Leary pointed out: "The S&P 500 has 500 megacap companies in it in 11 sectors of the economy, real estate only being one of them. You would need every single sector to falter or at least the valuations of every company in the S&P to significantly go down at the same time to win on that bet."
Who's right?
So which of these famous investors has the stronger case? They're perhaps both right in some respects.
O'Leary was correct that it's very difficult to accurately predict the timing of when the stock market will fall. It's also true that the current situation is a lot different from the period leading up to the subprime mortgage crisis that caused stocks to tank in 2008.
But O'Leary's description of Burry's bearish bet as "very risky" was exaggerated. First, Burry spent a lot less buying the put options on SPY and QQQ than $1.8 billion value listed in Scion's 13-F filing. Second, buying put options doesn't come with the unlimited risk that shorting either of the ETFs would. Burry's risk is limited to how much he spent on the options.
O'Leary is also oversimplifying things quite a bit in his explanation of the S&P 500. It wouldn't take the valuations of all or even most of the members of the index to decline for Burry's put options to pay off. That's because the S&P 500 is weighted by market cap. Its top 10 stocks make up close to 30% of the index's total value.
It's a harder call whether Burry is right to be bearish about the near-term prospects for the S&P 500 and Nasdaq-100. The valuations of both indexes are high compared to historical levels. However, stocks can remain priced at a steep premium for long periods of time.
I think another famous investor probably has the best perspective. Warren Buffett isn't totally avoiding stocks or betting against the market. He bought five stocks for Berkshire Hathaway's portfolio in Q2.
However, Buffett has been very selective about which stocks he's buying. He has also built a huge cash position so that Berkshire will have plenty of dry powder if and when there's a major pullback.
