how much did michael burry bet against the housing market
How Much Did Michael Burry Bet Against the Housing Market?
Michael Burry, through his hedge fund Scion Capital, ultimately purchased over $1 billion in credit default swaps, essentially betting against mortgage-backed securities. While the exact initial investment isn’t clear, this bet paid off substantially when the housing market crashed.
Burry’s Bet Against the Housing Market
In the early 2000s, Michael Burry, then an obscure hedge fund manager at Scion Capital, delved deep into the intricacies of the booming US housing market. Unlike many who saw it as a symbol of prosperity, Burry spotted a ticking time bomb. He observed rampant subprime lending practices, with mortgages being handed out to borrowers with poor credit and low income, often with adjustable rates that would spike after an initial period. Burry recognized that these risky mortgages were being bundled into complex financial instruments called mortgage-backed securities and sold to investors seeking high returns.
Believing this to be a house of cards, Burry decided to bet against the market. He approached major Wall Street firms like Goldman Sachs and asked them to create credit default swaps (CDSs), a type of insurance against the default of mortgage-backed securities. Essentially, he was buying insurance on a financial catastrophe that most didn’t believe would happen. His investors were skeptical, and he faced immense pressure as his bet initially seemed to backfire, with the housing market continuing to soar. However, Burry remained steadfast in his analysis, convinced that the bubble would eventually burst. By 2007, the house of cards began to crumble. Defaults on subprime mortgages surged, triggering a domino effect that rippled through the financial system. Burry’s foresight proved accurate, and his once-ridiculed bet paid off spectacularly. While the exact amount of his initial investment isn’t publicly available, he purchased over $1 billion in CDSs, and his fund, Scion Capital, ultimately recorded profits of over 700%, with Burry himself pocketing an estimated $100 million.
Burry’s Investment Strategy and Portfolio
Michael Burry is known for his value investing approach, deeply rooted in fundamental analysis and identifying undervalued assets. He meticulously researches companies, often going through their financial statements line by line to understand their true worth. Burry isn’t afraid to be a contrarian investor, often going against prevailing market sentiment and seeking opportunities where others see only risk. This was evident in his bet against the housing market, where he recognized the unsustainable nature of the boom while many others remained blindly optimistic.
Burry’s portfolio often reflects his contrarian views and focus on value. He has a history of investing in companies facing temporary challenges or undergoing restructuring, believing that their long-term potential outweighs short-term difficulties. He is also known for being a patient investor, willing to hold onto his investments for extended periods, even if they face initial setbacks.
While the exact composition of his portfolio isn’t always public knowledge, regulatory filings and reports offer glimpses into his investment decisions. Over the years, he has taken positions in various sectors, ranging from retail and healthcare to technology and commodities. This diversification reflects his belief in spreading risk and capitalizing on opportunities across different market segments. However, a common thread throughout his investments is his commitment to thorough research, identifying undervalued assets, and a willingness to bet against the crowd when he sees fit.
The Big Short and its Aftermath
Michael Burry’s bet against the housing market, meticulously detailed in Michael Lewis’s book “The Big Short,” catapulted him to fame and solidified his reputation as a financial visionary. The book, and subsequent film adaptation, chronicle Burry’s rigorous analysis of the subprime mortgage market and his bold decision to short the housing bubble, a move met with skepticism and resistance even from his own investors.
When the bubble burst in 2008٫ triggering a global financial crisis٫ Burry’s prediction proved accurate. His fund٫ Scion Capital٫ profited immensely٫ earning his investors a staggering 489% return (after fees and expenses) between its inception in 2000 and June 2008. While Burry himself reportedly walked away with an estimated $100 million٫ the experience deeply affected him. He witnessed firsthand the devastating consequences of the financial system’s flaws and the widespread suffering caused by the crisis.
In the aftermath, Burry closed Scion Capital, choosing to focus on managing his personal investments. However, he remained a prominent voice in the financial world, often sharing his insights and predictions through public statements and social media. While his subsequent bets haven’t always been as successful as his housing short, his willingness to challenge conventional wisdom and identify bubbles continues to captivate and inspire investors and analysts alike.
Burry’s Recent Market Positions
While Michael Burry is best known for his epic short against the housing market, he has continued to make significant investment moves in recent years, often taking contrarian positions. Publicly available data through required 13F filings reveal glimpses into his portfolio activities٫ though the exact details and rationale behind his trades often remain shrouded in speculation.
In 2023, Burry made headlines for placing a substantial bet against the S&P 500 and Nasdaq 100 indexes through put options, suggesting a bearish outlook on the overall market. This move, reminiscent of his housing short, sparked widespread debate about his motivations and the potential for another market downturn.
Additionally, Burry has been actively adjusting his portfolio, taking both long and short positions across various sectors. He has reportedly invested in companies like Alphabet and Meta Platforms, while also shorting others like Apple and a physical gold trust. These moves suggest a diversified approach with a focus on identifying overvalued and undervalued assets in a volatile market environment. However, it’s essential to recognize that 13F filings offer a limited snapshot and don’t reveal the full extent of his short positions or the strategies involved.
Analyzing Burry’s Investment Success
Michael Burry’s investment success is a blend of in-depth research, contrarian thinking, and a remarkable ability to withstand pressure. His legendary short against the housing market, though incredibly profitable, was a stressful endeavor that tested both his conviction and the patience of his investors.
While his early success with Scion Capital cemented his reputation, Burry’s subsequent investment activities demonstrate a willingness to take calculated risks across various market conditions. His recent bearish bets, though not yet as profitable as his housing short, highlight his commitment to independent analysis and identifying potential bubbles.
However, it’s crucial to acknowledge that even the most astute investors experience setbacks. Not all of Burry’s predictions have come to fruition, and some of his recent trades have incurred losses. Nevertheless, his long-term performance and ability to identify mispriced assets continue to attract attention and inspire both admiration and scrutiny from the financial world.
Analyzing Burry’s investment approach requires looking beyond individual trades and recognizing his emphasis on thorough research, independent thinking, and a deep understanding of market cycles. It’s a strategy not easily replicated, requiring a rare combination of intellectual rigor, emotional discipline, and a contrarian mindset.