bull market

Michael Burry is famed for being among the first to both discern and heavily trade on the ridiculousness of subprime mortgages circa 2007. He is a quirky guy: brilliant, but probably Asperger‘s. That comes through in his portrayal in the 2015 movie based on the book, The Big Short.

He called it right with mortgages in 2007, but was early on his call, and for many months lost money on the bold trading positions he had put on in his hedge fund, Scion Capital. Investors in his fund rebelled, though he eventually prevailed. Reportedly he made $100 million himself, and another 700 million for his investors, but in the wake of this turmoil, he shut down Scion Capital.

In 2013 he reopened his hedge fund under the name Scion Asset Management. He has generated headlines in the past several years, criticizing high valuations of big tech companies. Disclosure of his short positions on Nvidia and Palantir may have contributed to a short-term decline in those stocks. He has called out big tech companies in general for stretching out the schedule of depreciation of their AI data center investments, to make their earnings look bigger than they really are.

Burry is something of an investing legend, but people always like to take pot shots at such legends. Burry has been rather a permabear, and of course they are right on occasion. For instance, I ran across the following OP at Reddit:

Michael burry is a clown who got lucky once

I am getting sick and tired of seeing a new headline or YouTube video about Michael burry betting against the market or shorting this or that.

First of all the guy is been betting against the market all his career and happened to get lucky once. Even a broken clock is right twice in a day. He is one of these goons who reads and understands academia economics and tries to apply them to real world which is they don’t work %99 of the time. In fact guys like him with heavy focus on academia economic approach don’t make it to far in this industry and if burry didn’t get so lucky with his CDS trade he would be most likely ended up teaching some bs economic class in some mid level university.

Teaching econ at some mid-level university, ouch. (But a reader fired back at this OP: OP eating hot pockets in his moms basement criticizing a dude who has made hundreds of millions of dollars and started from scratch.)

Anyway, Burry raised eyebrows at the end of October, when he announced that he was shutting down his Scion Asset Management hedge fund. This Oct 27 announcement was accompanied by verbiage to the effect that he has not read the markets correctly in recent years:

With a heavy heart, I will liquidate the funds and return capital—minus a small audit and tax holdback—by year’s end. My estimation of value in securities is not now, and has not been for some time, in sync with the markets.

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To me, all this suggested that Burry’s traditional Graham-Dodd value-oriented approach had gotten run over by the raging tech bull market of the past eight years. I am sensitive to this, because I, too, have a gut bias towards value, which has not served me well in recent years. (A year ago I finally saw the light and publicly recanted value investing and embraced the bull, here on EWED).

Out of curiosity, therefore, I did some very shallow digging to try to find out how his Scion fund has performed in the last several years. I did not find the actual returns that investors would have seen. There are several sites that analyze the public filings of various hedge funds, and then calculate the returns on those stocks in those portfolio percentages. This is an imperfect process, since it will miss out on the actual buying and selling prices for the fund during the quarter, and may totally miss the effects of shorting and options and convertible warrants, etc., etc. But it suggests that Scion’s performance has not been amazing recently. Funds are nearly always shut down because of underperformance, not overperformance.

Pawing through sites like HedgeFollow (here and here) , Stockcircle, and Tipranks, my takeaway is that Burry probably beat the S&P 500 over the past three years, but roughly tied the NASDAQ (e.g. fund QQQ). This performance would naturally have his fund investors asking why they should be paying huge fees to someone who can’t beat QQQ.

What’s next for Burry? In a couple of tweets on X, Burry has teased that he will reveal some plans on November 25. The speculation is that he will refocus on some personal asset management fund, where he will not be bothered by whiny outside investors. We shall see.

I focus much of my investing energy in the “high yield” area, finding stocks that pay out highish yields (8-12%, these days). Unless the company really hits hard times and has to cut its payout, I know I will make those returns over the next twelve months. But with ordinary stocks, you cannot count on any particular returns. The price of any stock a year from now will be the earnings per share (which can be forecasted with some degree of accuracy) times the price/earnings ratio, which is largely dependent on the emotions (“animal spirits”, in the words of Keynes) of the millions of market participants. Will I find a “greater fool” to buy my Amazon stock in a year for 20% more than I paid for it??

I have never gotten really comfortable with that as an investing model, and so I have erred on the side of caution and generally held less than the recommended 60% or so of my portfolio in plain stocks. In hindsight, that was a mistake. Every $10,000 put into the plain, dumb S&P500 fund SPY twenty years ago has turned into roughly $200,000. One reason for my caution has been a steady stream of articles that always warn that stocks are overvalued; after going up so much in the past X years, surely returns will be poor for the next several years.

But I try to learn from my mistakes, and I am now forcing myself to hold more equities than I “feel” like. To support this hopefully rational behavior, I am paying more attention to articles that present bull cases for stocks. One author on the Seeking Alpha investing site who has been consistently and correctly bullish for the past two years is Lawrence Fuller. Here I will summarize his Oct 9 article with the tongue-in-cheek title Be Afraid, Be Very Afraid. (To read articles on Seeking Alpha, you may have to start a free account, where you just have to give them an email address; I use my secondary “junk” email for these sorts of applications, which tend to send a lot of junky (not malicious) notifications).

He first addressed the angst that says, “Stocks have already run up so much, they are due for a crash”, by means of this chart showing cumulative returns in preceding bull markets:

It is obvious that, compared to the average bull market, we are still in early innings with the present bull which started in Oct 2022.

Fuller also makes the case that the good news on earnings has spread recently from the so-called Magnificent Seven big tech stocks (Microsoft, Apple, Nvidia, etc.) to the broader market. This should serve to support further price rises in the broad indices:

The chart below, which shows a similar story, in terms of net income growth:

He concludes:

“It is also important to recognize that the valuation of the S&P 500 is far more reasonable when we exclude the exceedingly expensive Magnificent 7 and focus on the remaining 493. In fact, we don’t have the valuation problem that bears purport we have today. Hence, I advised investors to avoid the market-cap-weighted indexes and focus on equal weight or look at sectors that had been left behind during the bull market to date…Therefore, I suggest not succumbing to fear. Instead, focus on whether the weight of evidence suggests we should be in wealth accumulation mode or wealth preservation mode.”

In a follow-up article, Are You Worried About An Overvalued Market? , Fuller notes that small cap stocks (as defined by the Russel 2000 index, which is held by the IWM fund) are more reasonably valued than big tech, and so are likely to outperform over the next year.

For another bullish perspective, see Why Economic Data Is About To Get Ugly And 3 Things Investors Need To Know, by Dividend Sensei. He notes the robust growth of GDP and of corporate earnings, which can justify a seemingly high price/earnings ratio. The article summary points are:

Economic data will appear alarming due to hurricane impacts, but the economy is growing at 3% with strong corporate profit prospects and low recession risk.
Inflation is on track to fall to 1.8% by May, with real wage growth outpacing pre-pandemic trends. Future inflation is expected to remain stable at 2.1% over the next 30 years.
Market valuation is not as overvalued as feared, with potential for significant upside (up to 30% to 38%) based on corporate profit growth and falling interest rates.
Short-term market volatility is normal; long-term investors should embrace corrections for potential high returns as fundamentals remain strong.
The average 2-year return after a 10+% correction is 35%, meaning long-term investors should embrace corrections as wonderful buying opportunities. Buy with confidence in the face of any short-term market weakness, as long as you stick to your optimal personal asset allocation, based on your specific risk profile and financial needs.

This article has a number of interesting and informative sections, including on why cash flow/enterprise value is a better metric for assessing the valuation of a stock than price/earnings.