The Man Who Predicted the Housing Market Crash Lost $574 Million Due to This Particular Stock

Illustration: chriswhetzel.com

The 2008 financial crisis seems like a farfetched event to many, yet industry experts and news reporters don’t quite seem to go slow on their skepticism regarding the recent U.S stock market rally.

One such individual who had amassed a massive fortune for his clients as well as himself is Scion Asset Management’s CEO, Dr. Micheal Burry.

In addition to businesses going bankrupt, an asset class that people believed was immune to “default risk” had speculators from all walks of life gamble away their life-savings; simply because a group of investment bankers had bet that the asset class would not be prone to added risk, which were being pooled away through CDO’s and passed onto other ‘uninformed investors’.

They believed that their ‘hedged positions’ through various derivative contracts were more than enough to ride out the storm.

But unlike many others, Dr. Michael Burry of Scion Asset Management LLC had predicted the housing crisis way ahead of its time. He might have lost a few million for being too early, but eventually, he was reported to make a profit of $750 million for his firm when the storm was over.

Ever since then, Dr. Burry has been a key figure in the US financial markets.

His 13-F filings from Q2 2020 had speculators wondering why he had started building massive short positions on particular stocks.

One such company was GameStop, the video game retailer that has been in the news recently all thanks to Robinhood, Wall Street bets, and skeptics who believed that they could take down the hedge funds through the unlikeliest of collaborations in U.S history.

Even though the firm’s equity holdings were sitting at $91 million for the first half of 2020, the firm’s portfolio is in fact worth slightly over $315 million. It held diversified positions in multiple stocks such as GameStop, Qorvo, Maxar Technologies, Jack in the Box, and Facebook.

Image credit: New Money

However, post the second quarter he had readjusted the firm’s portfolio and utilized all the “call options” he had acquired on various companies.

Image credit: New Money

“Some of his biggest call option positions are Google, Facebook, Booking Holdings Ltd, and Goldman Sachs”.

However, the famous fund manager as portrayed in the award-winning movie “The Big Short” was shorting GameStop heavily until the end of Q2 2020.

After he realised that the stock was being heavily shorted, he stopped shorting and rather built up a position to benefit from the “gamma squeeze” effect, a phenomenon that the entiore world has already witnessed when retail traders from a Reddit subgroup, called Wall Street bets had average Joes make millions of dollars in unrealized gains.

He sold out GameStop way too early according to the recent 13F filing which came out mid-February, which exhibited that he had sold his entire GameStop position within the high teens to low twenties, whereas the stock simply skyrocketed after that point!

When computing the lost profits, it can be estimated that he would have made a profit of $574 million had he been able to liquidate his entire holding at the peak price of $483.

Image: New Money

This is all hypothetical now, but it only goes to show the power of sentimental analysis in the market. I wouldn’t necessarily say that “buy and hold” would be the appropriate term given the situation, but a few more days of holding the stock would have literally made him many more millions.

For the most part, if the stock price rises you can end up with a profit, without taking on all of the downside risks that would otherwise result from going ‘short’.

A group of Redditors were also able to magnify their gains through leverage, by acquiring multiple ‘call options’ outright which further increased the stock price causing it surge beyond belief.

What was surprising was that Dr. Burry, who is an avid expert at utilizing derivative contracts like call and put options, wasn’t able to exercise his expertise in this particular case but rather simply warned the average investors via Twitter that whatever was happening on Wall Street was pure madness.

Perhaps he was a supporter of funds like Melvin Capital, or quite simply his priorities lied elsewhere. Either way, it just goes to show that no matter how great of an investor one might be, “to err is human, to forgive is divine”, and in this case, I hope that the investors of Scion Asset Management are generous enough to forgive him for cashing out too early.

Disclaimer: This article is for information purposes only and should not be treated as financial advice. Please consult a financial advisor prior to making any investment decisions.

Image: Michael Förtsch on Unsplash

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