Michael Burry just sold all his stocks and the reason why is terrifying

So Michael Burry just did something unthinkable in the world of investing: he sold his entire portfolio of stocks. Every single last one! Now, this action is so unconventional that it deserves your attention. As a professional investor working at an investment fund, I always study what prominent investors are doing within their portfolios. Typically, when an investor thinks the stock market is overvalued, they may do one of two things.

The first thing that they may do is move a portion of their portfolio into what I refer to as defensive stocks. Now, these are stocks that typically do well in the event of a stock market crash. This investor still has their portfolio invested in stocks, but they just make sure they're owning a lot of these so-called defensive stocks. The other thing that these investors may do is, quote, trim their stock holdings, meaning they may sell 10%, 15%, or even 20% of their stocks and move that amount to cash. However, the majority of their portfolio is still invested in the stock market.

This background provides some context into just how unique this move by Michael Burry is and why it is worth paying attention to. So, in this video, we're going to break down these actions in Burry's portfolio and examine his recent tweets for clues on why he did this. But first, make sure to like this video and subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. Now let's jump into the video!

When it comes to investing, talk is cheap. What I mean by that is that you only make money if you put actions behind your words. An example of this is the housing market crash that caused the great financial crisis and is where Burry really made his name. Now, plenty of investors probably did think the housing market was extremely overvalued. I mean, it was no secret that home prices had skyrocketed. People could even see that in their own neighborhoods. It was also no secret that less creditworthy borrowers were getting approved.

Check out this chart of publicly available data from the U.S. government: there was a significant downward slope in the median credit score of home buyers during the run-up of the housing bubble. All of this to say that the signs of a housing bubble were there for the entire world to see. And if you listen to people now with hindsight, they will say the signs were so obvious. However, there is one big difference between them and Michael Burry. Michael Burry actually put his money behind it.

He bet millions of dollars and his entire career on the collapse of the U.S. housing market. He had such high conviction in his belief that he was willing to literally bet it all on him being correct. And Michael Burry is showing the same level of conviction now. It isn't new news that Michael Burry has been talking about how the stock market is extremely overvalued and in a bubble. He has been extremely vocal about those views over the last 12 to 18 months.

However, there was always one big question I had about that: it didn't seem like Burry's actions lined up with what he was saying. Michael Burry was talking about how the stock market was in a bubble and that it soon would pop. He said that all while owning large amounts of stock. Many of the stocks that he owned wouldn't necessarily be classified as cheap.

Take a look at Burry's portfolio as of April of this year. He owned shares in Google, Facebook, and Booking Holdings, which is the parent company of travel websites Booking.com, Priceline.com, and Kayak. He also owned pharmaceutical company Bristol Myers Squibb, Warner Brothers Discovery, and materials company Ovintiv. He also owned payments company Global Payments and car company Stellantis, which owns brands such as Chrysler, Dodge, Jeep, and RAM. As you can imagine, many of these companies are extremely tied to the health of the economy. If the crash that Burry predicted were to materialize, these companies would sure be in trouble.

I think it's fair to say that there was a significant mismatch between what Burry was saying and how he was investing. On the one hand, he was talking about how the stock market was in a bubble and would crash soon. Take a look at what Burry tweeted last year: "People always ask me what is going on in the markets. It is simple: greatest speculative bubble of all time, in all things, by two orders of magnitude." Saying that the stock market is in the "greatest speculative bubble of all time" are very strong words, but he still owned large amounts of stock. This seemed like a pretty big contradiction to me, at least.

Well, that has all changed now. As the saying goes, Michael Burry is now putting his money where his mouth is by selling all of his stocks. When I say he sold his stocks, I mean he literally sold every single one of his stocks—nearly 200 million dollars' worth. Look at Burry's most recent activity in his portfolio.

Burry sold 250,000 shares of Sportsman's Warehouse Holdings, 66,700 shares of Global Payments, 600,000 shares of Stellantis, 76,200 shares in Nexstar Media Group, 300,000 shares of Ovintiv, 80,000 shares in Meta, 75,000 shares in Cigna, 130,000 shares in Alphabet, 750,000 shares in Warner Brothers Discovery, 8,000 shares in Booking Holdings, and 300,000 shares in Bristol Myers Squibb. He did buy one stock, however. Burry bought 501,360 shares of Geo Group. For those of you who aren't familiar, Geo Group is a private prison operator. This means that the company owns and operates prisons throughout the United States and abroad and gets paid for operating those facilities by the government.

Obviously, as I'm sure you can tell, calling these kinds of companies controversial would be quite the understatement. With that being said, unfortunately, companies like Geo Group are probably the most recession-resistant businesses in existence, meaning that whatever happens in the economy, their revenue will be virtually unaffected. If Michael Burry selling all of his holdings and buying a private prison stock doesn't tell you he really thinks things are going to get bad, I don't know what else will.

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We also have a special deal for our Australian users. You're going to want to check out our description box for all the details on this promotion. Sign up for free using the link below. Now that we're updated with what Michael Burry did, I want to get one step deeper and uncover why he sold all of his stocks. If you aren't aware, Twitter is Burry's go-to way of sharing his thoughts with the world.

Unlike most well-known investors, he doesn't really give interviews. In fact, I haven't seen Burry give an interview in years. The best way to find out why Burry sold his stocks is to look at his tweets. I went through Burry's recent tweets to search for clues as to why he made the bold move of selling all of his stocks. You have to sift through a wide range of tweets, ranging from his favorite music to politics, to find the stuff you and I are really concerned with. I was able to find two tweets that stand out to me that help explain Burry's thinking.

Here is the first one: "Adjusted for inflation, 2022 first half S&P 500 down 25 to 26 percent and NASDAQ down 34 to 35 percent, Bitcoin down 64 to 65 percent. That was multiple compression. Next up, earnings compression. So maybe halfway there." The key words here are "halfway there." Based on when Burry tweeted this, this means he thinks the S&P 500 will fall to 2800, considering the S&P 500 currently trades at over 4,200. This means that Burry believes the stock market will fall by 35%.

Let me explain the math behind this. In order to truly understand this tweet and when Burry refers to multiple compression and earnings compression, you have to understand how investors value a stock. The math behind it is surprisingly simple: investors look at what a company's earnings are and then they assign what is called a multiple to those earnings to get a stock price. That multiple reflects how optimistic investors are. In the most simple terms, the higher the multiple, the more optimistic investors are about the future. The lower the multiple, the more pessimistic investors are.

Of course, there are a ton of other variables that influence this, but this is the most simple and straightforward way to think about it. For example, let's say we have a stock that has an earnings per share of ten dollars. And let's say investors are super excited about the growth prospects for this company, so they assign a 25-times multiple to those earnings. This means that stock is trading at 250 dollars per share, calculated by multiplying the ten dollars in earnings per share by the 25-times multiple.

However, let's say investors start to get worried about the health of the economy. As a result, investors are more pessimistic about the future of the company and are only willing to give it a multiple of 21 times. Doing the same math as before, this brings the stock price down to 210 dollars a share. Notice how this price is 16% below what the stock price was previously trading at. This is an example of the multiple compression Burry referenced in his tweet in action.

Multiple compression is where investors decrease the multiple they are willing to assign to a stock due to them becoming less excited about the future growth prospects of the company. Due to this multiple being lower, this brings the stock price down. In this example, it brought the stock price down by 16%. Now, that is multiple compression at work. But let's see how earnings compression can bring the stock price down further.

Going back to our example, let's say the economy starts to slow down and as a result, the company is not making as much money. Let's say earnings per share falls from ten dollars per share all the way down to eight dollars per share. This eight dollars per share multiplied by our lower multiple of 21 times gets us a stock price of 168 dollars per share. Now, this example shows how multiple compression and earnings compression can bring stock prices lower.

Let's look at Burry's tweet again. He says, "The fallen prices that we have seen so far this year is the result of multiple compression. He then goes on to say earnings compression is coming next." Going back to our example here, see how multiple compression caused our stock price to fall by 16%, and then when the stock got hit by earnings compression as well, it brought the stock down another 17%. When the stock market gets hit by both multiple compression and earnings compression, stock prices can plunge.

I think it's so important to point something out in the tweet that isn't getting a ton of attention. If you look closely at the date of the tweet, you can see it was posted on June 30th. June 30th just happens to be the last day of June. Okay, so why does that matter? Because every three months, large investors like Burry are required to release the names of all the stocks they bought and sold during that period. Burry's most recent government filing showed that he sold all of his stocks in his portfolio from April 1st to June 30th.

Burry is a very smart guy, and he knows that people follow his portfolio closely. I don't think it was a coincidence that he tweeted this on the date he did. I think it was his way of leaving clues as to why he's doing what he is in his portfolio. However, since Burry tweeted this, the market hasn't crashed further like he predicted. In fact, since June 30th, the S&P 500 is up around 10% as of the making of this video. The tech-stock dominated NASDAQ is up even more; the NASDAQ index was up nearly 20% from the end of June to August 15th.

This is why going completely to cash can be very difficult. While an investor may be correct in stating a market is overvalued, that doesn't mean the stock market will immediately come crashing down right after that investor sells all of his stocks. In fact, the market can continue going up and become even more overvalued. So, is this proof that Burry was wrong in selling all of his stocks? He says not so fast. Here is what Burry had to say as he watched the market rise after he had already sold all of his stocks: "NASDAQ a bull market because it is up 20 off its low? Who makes this stuff up? After 2000, the NASDAQ did that seven times as it fell 78% to its 2002 low."

In this tweet, Michael Burry is making the argument that the recent rise in the stock market is what is referred to as a bear market rally. Historically, when the stock market declines, the fall isn't straight down. Look at this chart of the NASDAQ from the year 2000 to 2003. The NASDAQ peaked at around 8,200 in February of 2000 and then went on to bottom out at around 1,900 in September 2002. Notice how there are four distinct sharp upward movements in the NASDAQ in just a couple of years on the way down.

All of these sharp upward movements and prices provided false hope for investors. By comparing the recent rally in the stock market to this time period, Burry is saying we may still have a long way to go until stock prices truly reach a bottom. Only time will tell whether he's right. Now, don't go out and sell all of your stocks just because Michael Burry is doing it. Obviously, Burry is a very smart guy, but with that being said, there are a ton of other very smart investors who are actually buying stocks right now. One of those being Warren Buffett—none other than the legend himself!

Buffett has been buying tens of billions of dollars' worth of stocks this year. Obviously, Michael Burry's comments and actions do get a ton of attention, and rightfully so. However, my goal with this video was to analyze these moves more in depth than just what a headline in an article can. I hope I was able to do that for you guys. Make sure to like this video and subscribe to the channel because it's my goal to make you a better investor. As always, thanks for watching, and talk to you again soon!