Michael Burry Bets Against Cathie Wood's ARK Invest

Well, you have to love this time of the quarter. Q2 is over! We've waited patiently for 45 days, and now we get to glimpse inside the portfolios of the world's super investors once again. If you didn't already know, this what I'm referring to here is the SEC 13F filing that all the big money managers have to file 45 days after the end of each quarter. That document discloses everything in their equity portfolio, so you can see what they're buying and selling.

Today, we're looking into the 13F filing for Mr. Michael Burry, probably the investor that's caused the most headlines over the past year. From his GameStop position, to his big short against Tesla, to him predicting upcoming hyperinflation in the United States, to his tweet warning us all of the "mother of all crashes" that we're likely to see in the not-too-distant future. Now, whether all of that comes true or not, I don't know. But either way, he's back and he has made some very, very interesting moves in Q2, including, as you would have seen in the title, a short position against Kathy Wood's ARC Innovation ETF.

So, let's roll the intro and get stuck into it.

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Now, in terms of just straight-up equity holdings, Burry made a lot of moves. Out of the super investors that I followed, Burry is definitely the biggest mover and shaker. Check this out: his equity portfolio is now up to a value of 138 million dollars, which, by the way, is nowhere near the amount of money he actually controls. But even in that relatively small equity portfolio, he added to six stocks, bought five new ones, and sold out of 14 stocks.

Now contrast this with someone like Charlie Munger, who holds five stocks in the Daily Journal portfolio and has held four of them for about a decade. Yes, Michael Burry is certainly very active with his portfolio. But honestly, that equity portfolio is nothing. It gets even crazier than that because very often, Michael Burry doesn't just play around with stock holdings. A big part of his 13F filings are his put and call option positions.

Simply put, call and put options are derivatives which are kind of like betting contracts between investors. If you buy calls, then you bet that the stock is going up, and if you buy puts, you bet that the stock is going down. Now, the reason that investors use these is that you can make a larger return from betting with options for the same amount of money. But they're also riskier than holding the stock because all options have an expiry date. If the conditions of that option haven't played in your favor by the expiry date, then the option expires worthless, and you've lost your entire bet.

Now, as I said, Burry loves playing with options, and he has continued to do so in Q2. That's where we find his position against ARKK, the ARK Invest Innovation ETF. This is a fund, obviously offered by Kathy Wood's ARK Invest, that aims to invest in companies that rely on or benefit from the development of new products and services, technological improvements, and advancements in scientific research relating to DNA, energy, automation, manufacturing, next-generation internet, and innovative financial services.

So, what has he done? Well, Scion Asset Management, at the end of Q2, held put options against 235,500 ARKK shares, representing 31 million dollars. So during Q2, Burry has formed a decent bet that the shares of ARKK are going south.

Now, unfortunately, we don't get to know what strike price Burry has on these options, and we don't get to know the expiry date, which honestly is a bit of a bummer for us watching along at home trying to figure out whether he's in the money. All we know is that at some point in Q2 2021, Burry placed this bet against ARK, and he still held the bet at the end of Q2. This means the share price at the time he made his bet could have been as low as $99 or as high as $130 per share. Honestly, with the share price currently sitting like right in the middle, it is difficult to know if Burry is in the money so far with this bet.

Okay, great! So Burry bets against Kathy Wood's Innovation ETF using put options. But one question you might still have is: well, what on earth is even in this fund? Well, this fund consists of 49 holdings, with the top 10 holdings making 47% of the fund. And this won't surprise you: the biggest holding of the fund is Tesla. Classic Michael Burry, always wanting to short Tesla. So Tesla makes up 10.68% of this fund, which is double the next biggest position.

Then we also have Teledoc Health, Roku, Coinbase, Unity, Zoom, Square, Shopify, Twilio, Spotify, and so on. Yes, as the name suggests, it's full of companies that do things differently in their industry and have gained tremendous popularity for it.

But here's the thing, and I think this is now getting to the core of Michael Burry's investment thesis here: these stocks are all quite pricey. Have a look at the price to free cash flow. This number compares market cap to the trailing 12-month free cash flow. The lower the number means the lower the stock price is compared to its free cash flow, and the lower the number, the better the value.

So here we can see we're getting stocks up in the hundreds, 200s, and 300s. Yes, that means investors are willing to pay 300 times last year's free, or the last 12 months' worth of free cash flow just to own the stock. Then on top of that, some of these companies don't even make any free cash flow.

Now, just for a comparison, I've also chucked in some of the big cash flow companies in the world, like Microsoft, Google, Apple, Facebook—they're all around the 30 mark. Now, honestly, I don't know enough about a lot of the stocks in the ARK fund to make a confident call on their true valuation. But what these numbers do tell us is that investors in these stocks expect huge growth in free cash flow to make their valuations justified as an investment. So Michael Burry is simply saying that he believes investors are expecting way too much growth from these companies and will be disappointed in the eventual reality of the situation, and thus their valuations will fall, and so the price of the ARK Innovation ETF.

So, there you go! Burry has placed his bet against the ARK Innovation ETF. Although, to be honest, we shouldn't blow this one out of proportion. This position is 1.48% of his portfolio, so not a lot. Compare that to his short position against Tesla itself, which is now 35.11% of the portfolio. You know, all of a sudden, this move seems pretty tiny. So definitely keep that in perspective. It is quite a small bet overall, but interesting nonetheless.

Other interesting things in the options part of the portfolio this quarter: Burry increased his Facebook call position by 71%. So he is very bullish on Facebook in the short to medium term, and he would have done very, very well with these Facebook calls. He's been buying them since Q2 2020, and since that time, the stock has done nothing but skyrocket. In fact, since the start of Q2 last year, the stock is up 137%.

But Burry continues to buy more calls. He now has calls on more than 941,000 Facebook shares worth 327 million dollars. That position now takes up 15.7% of his portfolio. Then lastly, with the options portfolio, remember last quarter he made all these bets against the 20-year Treasuries? Well, despite selling out of TTT and TMV and reducing 80% in TBT, which are all bets against the 20-year Treasury bonds, he has increased his put option position on the iShares 20-year Treasury Bond ETF by 53%.

So Burry is still maintaining a sizable bet on inflation and interest rates rising. But in all honesty, I think I might make a separate video talking about those moves because there's probably a fair bit to unpack there.

I think overall that will just about wrap up Michael Burry's 13F for this quarter. Definitely playing hot potato with the equity holdings, then increases the Tesla short, increases the Facebook call, increases the bet against the 20-year Treasuries, and as we've been talking about, starts betting against Kathy Wood's ARC Innovation ETF.

Anyway guys, that will do us for today. I hope you enjoyed the video! Let me know what you think of Michael Burry's moves down in the comments section below. As always, remember you definitely don't want to go out and straight up copy the moves that he's making. Even though he is a really smart investor, remember the reason that I make these videos—the reason they should be useful to you—is it's kind of just like a little bit of info, a bit of an ideas list for some things that you might want to learn more about for your own investing.

But anyway, guys, I hope you liked the video. Be sure to leave a like on it if you found it useful or if you enjoyed. Subscribe to the channel if you have not done so already. You can check out Profitable if you'd like to learn how I go about my investing, both active investing and passive investing. Links are down in the description below.

But guys, that will do us for today. Thank you very much for watching, and I'll see you all in the next video!

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