'Big Short' investor Michael Burry warns of a massive bubble and epic market crash

[weijian]

To be honest, I think Bronte Capital's June2021 letter sums up the situation nicely. We all gonna look stupid, some way or another - ie. We have to choose our poison.

Some of Howard Marks' wisdom might be apt - Going contrarian against the Market is a losing game at most times (eg. those shorting a bull market, or those catching a falling knife). It only pays to go contrarian at market extremes. Unfortunately, timing market extremes is a low probability proposition but as OPMIs, we may be less affected by the institutional imperative and I reckon the best we can do, is really to weigh and hedge our bets accordingly.

I guess that is one of the best form of hedge and action we can take, as OPMIs - is to really spend the majority of our efforts to understanding businesses like an owner, and insisting on a margin of safety.

How to look stupid: choose wisely

This is a bubble. Bubbles make market participants look stupid.

i. If you participate in the bubble you will – like other participants – implode on the way down. You will look stupid in a crowd after the bubble. Being stupid in a crowd has limited career risk, but it is still stupid.

ii. If you do not participate in a bubble you will underperform on the way up, your returns will be lousy, and your clients will leave you. As a money manager your perfectly good business will disappear, and you will look stupid. Moreover, you will
look uniquely stupid and thus be the subject of derision.

iii. If you fight the bubble, your shorts will roll you over, you will lose frightening amounts of money and you will look stupid because you are stupid.

http://files.brontecapital.com/amalthea/...202106.pdf

[Wildreamz]

Being over-confident and speaking in absolutes on inherently unpredictable and unknowable events, often enough, will eventually make you look stupid.

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Interesting recent Ray Dalio interview (June 2021):

[weijian]

Calling something a bubble VS calling when the bubble pops are 2 different tings.

The former is not "inherently unpredictable and unknowable events". It is the latter that is.

Then again, calling something a bubble doesn't mean you need to "sell everything and stay away". It simply means one needs to be cautious moving ahead - whether is it in terms of temperament (managing our "FOMO") and insisting on the margin of safety. Investing is always probabilistic (in the words of specuvestor, it is not binary decision making)

I do not smell any sort of "over confidence or speaking in absolutes", from these folks (Ray Dalio or John Hempton)

[Wildreamz]

Calling something a bubble VS calling when the bubble pops are 2 different tings.

The former is not "inherently unpredictable and unknowable events". It is the latter that is.

..

My comment was not specific to any particular claim or individual per se. But a general statement on absolute statements.

But specifically with regards to calling something a "bubble"; I think in general, one needs to be careful what it means and implies (usually a certainty of massive deflation of value at some point, right?). And when it does not come into fruition, that's when one would look foolish. Even if you hedge your bets by not specifying time frame. As the old cliché goes: "Being early is as good as being wrong." IMO, it's fair to be judged accordingly.  

Remember when Amazon (2010) and Apple (2012) were called bubbles? These predictions will get no credit, even if Amazon and Apple decline 50% in 2021.

And it's easy to not look foolish, instead of "bubbles", one can use wordings like "frothy", "valuation is too rich for my risk profile" 

[specuvestor]

Is China meltdown providing the spark? Let's see if the Fed will alleviate or add to the pain tomorrow

Spark can come from anywhere including a failure along the chain, but the conditions has to be there in the first place. Breaking the buck for money market instrument during GFC was another unforseen. Don't fight the Fed with the hike coming could be one this time as catalyst but probably won't be THE one.

Looking back it's hard to know how at the time, but the why is easily explained. And of course ex-post people can write books about it like it's all predictable.

I think it's "more" and major shareholder index funds don't attend AGMs or briefings to question management
https://www.theatlantic.com/ideas/archiv...my/618497/
Indexing has gone big, very big. For nine in 10 companies on the S&P 500, their largest single shareholder is one of the Big Three. For many, the big indexers control 20 percent or more of their shares. Index funds now control 20 to 30 percent of the American equities market, if not more.

[specuvestor]

It's a very small index impact but opportunists can already see the loophole

Bloomberg - Do you own shares of Perennial Energy Holdings Ltd.? 

You might be surprised. Thanks to the machinations of MSCI’s benchmark indices there’s a good chance that you do, so long as you own broad exposure to China or emerging markets in general (where the Middle Kingdom now accounts for 35% of total exposure) through passive vehicles. 

The Hong Kong-listed coal miner was included in MSCI’s China Index back in May as part of the benchmark index provider’s quarterly review. Shares of the company, based in China’s southern Guizhou province, had surged almost 450% in the year before the index inclusion took effect, boosting its market value to a high of almost $3.4 billion -- sizable enough for it to be included in the China Index.

But shares of Perennial dropped a stunning 69% on the first day of trading following its inclusion in the benchmark index. Since then, shares of the company have dwindled to a fraction of what they once were, taking its market cap down to around $420 million.

And so, the inevitable has happened. Overnight, MSCI announced that it was removing the company from the index.

The exclusion means passive investors effectively bought at the top and are exiting very near to the bottom.

Perennial’s brief adventure in the benchmark big leagues therefore serves as a neat reminder of the influence of index providers and who’s left holding the bag as more active investors try to take advantage of passive flows.

The link I provided is to demonstrate that indexing affects price of the security, regardless the fundamentals of the underlying. "Passive" is a misnomer when it gets big enough. There is a supply and demand factor just like Meme stocks... A ponzi will continue as long people don't draw out more than it was put in.

As indexing becomes a larger part of the market, the supply shrinks in a sense and gives rise to the similar phenomenon of Malaysian market where the PE of big cap has been high since AFC as the government owns more and more of the market which in Australia it's the superannuation.

The timebomb is that when people starts to rush out of the door at the same time and it will be the cash market that will have to hold the weight of the run. Arguably portfolio insurance was not a major volume generator in 1987 but it crashed the market, just as flash crashes that we see ever now and then in individual markets or stocks. Similarly CDOs traded in notional much more than the underlying. In fact one red flag is when the derivatives trades significantly more than the underlying cash market.

A rising tide lifts all boats but when people start going for the exit, that's when we know who have been swimming naked. It's simplistic to just focus on trading volume determines the safety of index funds, just as saying PE fund volatility determines that it is safer than treasuries.

[Wildreamz]

https://www.fool.com/investing/2021/06/1...ng-better/

Active Management Still Didn't Win in 2020 -- Is Indexing Officially Better?

Active management still didn't outperform in 2020
During bear markets and volatile periods is when investment talent is supposed to shine. Sophisticated investment strategies can deliver returns in any situation. Day-to-day volatility creates opportunities for larger gains than you get in calm markets. It's harder for fund managers to justify their worth when the market is sending everyone's account higher. If active management can't clearly separate itself during tougher times, the credibility of the whole approach is threatened.

With that in mind, it bodes poorly for fund managers that most U.S. equity funds lagged the total market for full-year 2020. Studies showed that active managers were struggling to outpace indexes halfway through the year too. Even more concerning, last year was actually one of the more successful years for these investors. Fewer funds outpaced the indexes during the bull market of the past decade.

2020 was the most turbulent time for stocks since the Great Recession, and it should have been a standout year for active strategies. Instead, passive investing proponents gathered more ammo to support their stance.

🤷

Passive investing in an index fund is not perfect, but I will probably still recommend them over the alternatives for 95% of investors with a long time horizon.

Peace.

[specuvestor]

yes that's essentially what Buffett had been saying, but often misquoted, if you don't want to spend time and effort on it

I would look for active managers that can manage downside risk. Upside tracking is often hard with cash drag and fees, excluding VBs of course And the bull market has been relentless since 2009 so there is an upside skew there.

Even for index funds, how many will continue to hold on in March 2020, not to mention GFC or AFC. Long time horizon does imply discipline but I'm not a proponent of buy and forget.

[Wildreamz]

https://www.barrons.com/articles/michael...22?tesla=y

Michael Burry of ‘The Big Short’ Is Betting Against ARK’s Cathie Wood

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IMO, it doesn't make sense to short an actively managed fund as a strategy. This is personal.

[karlmarx]

well, you can track his 13F over the years Scion

https://minesafetydisclosures.com/stock-screener

Found this other site which also tracks the portfolio of famous investors:

https://www.dataroma.com/m/managers.php

A few things struck me:

1) Most of them own many of the same names.

2) Some of those really huge portfolios (in the size of Bs) are super concentrated (40% in a single stock, 3-5 stocks). While some are extremely diversified.

3) Some of them own mostly mundane, old economy, or 'no moat'  stocks. Similar to David Webb.