Today's Fear Is Great for Long-Term Investors

"What about that guy from The Big Short?" a friend asked me over dinner recently. "Didn't he just make a massive bet against stocks?"

My friend didn't need to know his name to know his reputation. "That guy from The Big Short" is Michael Burry... the hedge-fund manager who made history by betting against the 2000s housing bubble.

Burry made roughly $100 million for himself on that contrarian call – and his hedge fund, Scion Capital, brought in $700 million for investors.

In August, reports came out that Burry had bet against stocks to the tune of $1.6 billion. And, naturally, that spooked a lot of folks...

"He nailed the financial crisis," my friend continued. "If he's making that bet now, he probably knows something we don't."

I don't blame my friend for that logic. But Burry's short position isn't quite what it seems.

More important, the way folks examined it shows where sentiment is in the market today. And if you're a long-term investor, this kind of fear is exactly what you want to see.

Let me explain...

The initial story was that Burry's hedge fund – now called Scion Asset Management – had bet $1.6 billion against both the S&P 500 and Nasdaq 100 indexes combined... putting more than 90% of his portfolio at stake.

If you're not a finance expert, you'd think Burry's conviction couldn't possibly be any higher. You'd think he was literally betting the farm on a market crash.

The catch is, Burry made his short bet with options. By doing it this way, he's benefiting from massive leverage – and a defined downside.

It also means he likely only spent around $26.5 million to build his short position of $1.6 billion. In other words, $26.5 million is the most he could lose if he's wrong.

That's not nothing... But it's only a small fraction of Scion's estimated $238 million in assets.

Simply put, Burry didn't bet the farm that stocks would collapse. He didn't put more than 90% of his capital on the line. He made this bet with just 11% of Scion's portfolio.

Still, everyone got caught up in the big numbers. The financial media ran with the story – likely in hopes of covering the "next Big Short." And many folks, like my friend, took it as a legitimate concern... and a potential reason to get out of the market.

This misunderstanding shows exactly how jumpy investors have gotten in recent weeks. But let me be clear...

This kind of investor psychology is incredibly bullish. It's a sign that this bull market is only just beginning.

Bull markets die when excitement reaches a fever pitch. When everyone is fully invested in stocks... and there's nobody left to buy... that's when the market hits its peak.

Today, despite this year's incredible 14% rally in stocks, we're nowhere near that kind of euphoria. Investors got more bullish in 2023... But it only took one headline about an eccentric hedge-fund manager to put that bullishness to bed.

Of course, folks have had more headlines to worry about since then. Everyone's afraid that inflation and high rates will continue dragging on, and geopolitical uncertainty is on the rise.

However, for investors, sentiment like this means the bull market is nowhere near its end. We'll use stop losses to protect our downside. But remember – we want to buy when others are fearful.

The worst-case scenario rarely comes to pass. Like Burry's bet, the truth is usually better than it seems. And that's why times like these – when everyone you know is looking for a reason to sell – are the exact times you want to buy.

Good investing,

Brett Eversole

Further Reading

Investors panicked in August at the first signs of volatility. But the fear pushed stocks into "oversold" territory... meaning the sell-off went too far, too fast. Now, this indicator is flashing an even better sign that higher prices could be on the way... Learn more here.

Psychology isn't usually on your side as an investor... especially when the rest of the market is fearful. You might get spooked into selling your winners too soon – or you might cling harder to your losing positions. These tips can help you take emotion out of your decision making... Read more here.