Superhero or Stopped Clock?

How much weight should we put on previous accurate predictions?

Now and again, someone makes a prediction that is correct, and also gets widespread attention. One such person is Michael Burry, the hero of the film The Big Short, played by Christian Bale, of Batman fame.

The events of the film actually happened, albeit heavily dramatised. Burry, a hedge fund manager, predicted that the US housing market was going to take a tumble, and gambled huge amounts of his clients’ money by ‘shorting’ CDOs, securities based on the US property market. He turned out to be correct, and his clients ended up making a lot of money.

As of August 2023, Burry is currently predicting that the US stock market will crash this year, and, because of that one event, made famous by the film, people seem willing to listen.

What happened since The Big Short?

However, we have been here before.

  • In 2015, while Burry was forecasting an impending stock-market crash, the S&P 500 went up by 11%.
  • In May 2017, it was a global financial meltdown that was the story.
  • In September 2019, he was warning of a stock market crash caused by exchange trade funds forming a bubble.
  • In March 2020, it was revealed that he had taken a big bet against the US market, which proceeded to jump over 20%± over the course of the year, as the world recovered from covid.
  • As late as September last year, he predicted a crash in the winter of 2022, and sold his US stock except for one holding.

Does it matter?

None of the above proved accurate. Is Burry right now? I don’t know. He might be – even a broken clock is right twice a day, and sooner or later there could be a significant market correction. While we await that potential eventuality, some points are worth noting.

  • If we go back to the first of those false starts in 2015, the Great Companies of the World have more than doubled in value – an increase that investors who followed the prediction would have lost out on.
  • Even if he had been right on any one of the occasions above, and someone had acted on the prediction by bailing out, what next? One needs to be able to predict correctly when to go back in, as well as get out at the right time.
  • If you have watched the film, one of the things you will have noticed was how stressful it was for the investors. As the US housing market continued upwards, Burry had to pump in ever more of his clients’ money to keep his bets alive. Fortunately for all concerned, there was enough money to keep going until the market did, eventually turn, but it was not a comfortable experience for them in any way. I was reminded of John Maynard Keynes’ quotation from the Great Depression of the 1930s – Markets can remain irrational longer than you can remain solvent.

Loyal readers of these notes will know that we don’t invest your money based on what I think is going to happen in the market. That’s not to say that I don’t have an opinion on the matter, but I am certainly not going to invest your money on the basis of a hunch that may or may not be correct.

Please feel free to get in touch to discuss any point raised in this email, or if you have any other financial planning questions. I or one of the team will do our best to help.

Aka the MSCI World index which, between 01/01/2015 and 21/08/2023, increased by 108.56%.

±S&P 500 from 01/03/2020 to 31/12/2020, increased 23.79%. The increase is significantly more when measured from the middle of March 2020.

Important note: investments can fall as well as rise, and past performance may not be a reliable guide to the future. Returns from an index exclude fees.

Source of market data: Morgan Stanley Capital, Standard & Poors, FE Analytics

Photo by Jon Tyson on Unsplash