You may have heard of the recent news that Michael Burry, the “Big Short” investor who became very famous for his correct prediction of the epic collapse of the housing market in 2008, has bet more than $1.6 billion ($866 million in PUT options on S&P 500 and $739 million in PUT options on Nasdaq 100) on a US stock market crash.
Michael Burry is using more than 90% of his portfolio to bet on a market downturn, according to the SEC (Security Exchange Commission) filings released on 14 Aug 23.
In another article, the famous book author of ‘Rich Dad Poor Dad’, Robert Kiyosaki, said that Warren Buffet, the world’s most famous investor, is anticipating a stock market crash by staying mostly in cash.
Buffett’s Berkshire Hathaway sold a net $8 billion of stocks and slowed its buybacks last quarter, which resulted in a 13% increase in its total amount of cash and Treasurys to a near-record $147 billion. While Buffett has not explicitly predicted a stock-market crash, he has sold $33 billion of stocks on a net basis and grown Berkshire’s cash pile by $38 billion over the last three quarters.
Buffet now has plenty of dry powder to go bargain hunting on cut-price stocks and acquisitions if the market does crash — just as he did during the Great Recession when he struck deals with Goldman Sachs, General Electric, and many other companies.
Is The Market Crash Coming?
The US stock market seems to be going through some kind of correction since the start of August but it has gone up quite a fair bit since the start of the year, in particular the Nasdaq-100 index, which is up 35.28% year-to-date (YTD).
Whether this is just a healthy correction since the share prices have gone up so much since the end of last year or this is the start of a major crash, no one really knows. Even the best investors in the world can get it wrong when trying to time the market.
One Piece Of Advice If You Think The Crash Is Imminent
If you think that a crash is imminent and would like to short the market, my advice would be not to go all-in at once, thinking of catching the top and getting maximum profits when the stock market really crashes. This is because if the market reverses and continues the bull run of 2023, you will suffer huge losses. As someone who has made such mistakes, I wish to share some of my earlier experiences and mistakes, so you can avoid these pitfalls.
Suffering Huge Losses In 2022 & 2023
In December 2021, when the market was showing signs of a U-turn after an amazing bull run that started in 2020, I was very confident that it was a fantastic buy-the-dip opportunity and loaded up on long-term CALL options worth USD100k, instead of exiting my positions. As it turned out, the stock market crashed due to the Fed’s aggressive interest rate hikes in 2022. I eventually lost a total of $$415k in options trading a year later.
I then followed a guru into thinking that a bigger crash was awaiting us in 2023 and placed huge bearish bets but the bull run since the start of the year wiped out all my bearish positions which amounted to S$40k. My Covered CALL positions that I sold on the stocks I own were all underwater as I placed my strike price much lower than my breakeven price. I was also stuck in a situation where I was not able to realize more than 66k worth of paper gain on my Nvidia positions.
Concluding Thoughts
Looking back, if I had portioned out USD100k investments in Dec 2021 as 5 separate investment capital of USD20k each, to “buy the dip” every month from December 21 to April 22, I probably have realized that the market was not going to recover in 2022 during that period, especially when the Russia-Ukraine war started in early 2022 and worsened the inflation problem.
I also learned from my costly mistakes in 2022 and 2023 not to blindly follow what the gurus or famous investors are doing because they may get it wrong or have huge funds to sustain until they finally got it right.
This is a tweet from Adam Khoo on Michael Burry’s predictions over the years.
For Michael Burry’s most famous prediction of the subprime mortgage crash, he was 2 years early in his prediction, which meant that he once had a 1.7B unrealized loss before making an 800M profit. If anyone would have followed Burry in 2005, they would suffer huge losses for 2 years before making any profits. Two years is a long time and will likely force out all weak hands to cut losses and exit their trades.
I think the best way to capitalize on a real market crash is to have ready cash to buy the shares of great companies at a bargain price. I remembered one of my best decisions was to invest in the Singapore banks when they were trading at half the current price during the market crash in 2020 due to the pandemic. So, if you believe that a crash is imminent, time to prepare some cash (get your war chest ready) for long-term investments rather than all in to try to short the market.
I hope this sharing has been useful to you and help you avoid some potential pitfalls. Thank you for reading through.
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