The Bigger Short?
In the stock market, shorting is often frowned upon. Although many investors use financial devices such as put options to hedge their long positions, the Street being heavily shorted on certain stocks is often punished. Not by the SEC, but retail traders as we witnessed in the massive January short squeezes. However, smart shorting can be rewarded, with the recent example being Pershing Square Capital. The Hedge Fund, led by legendary investor Bill Ackman, was rewarded very nicely with their decision to short the overall market in February of 2020, which turned their 26-million-dollar hedge into 2.6 billion. Today, we will be focusing on the more famous instance of shorting, which was done by Michael Burry.
Michael Burry was the manager of Scion Capital, a Hedge Fund that ran from 2000 to 2008. Burry was a virtuoso at value investing, and continuously outperformed the S&P 500. He managed to keep this up during the dot-com crash, posting absurd profits even with the indices falling into corrections and bear markets. However, that isn’t even what he’s known for. In 2005, Burry sensed that the housing market was in a bubble, and he extensively studied what was going on behind the scenes. Concluding that the housing bubble would pop by 2007, he convinced major banks to finance his short position, and placed a good amount of the fund’s money into it. This caused some investors in Burry’s fund to revolt, but his bet ended up paying off when Lehman Brothers filed for bankruptcy and the housing market crashed, leaving his investors with a profit of 700 million. It was dubbed “The Big Short”, and it has been considered as one of the greatest shorts of all time, with an Oscar-winning movie and book displaying the events that took place.
Burry closed his fund in 2008, but he has been passively managing his personal portfolio ever since. In fact, Burry made a hefty profit off the GameStop short squeeze. However, he isn’t finished with his ambitious shorting just yet. Burry defied the one rule that all short sellers agree with: never short Tesla. On Monday, it was announced in a SEC filing that Burry shorted Tesla with 530 million dollars using put options, which surprised everyone. Burry, in a deleted tweet, wrote that Tesla has a heavy reliance on using regulatory credits to generate their profit. In simple terms, Tesla receives these regulatory credits from government programs that support renewable energy, and they sell it to other automotive companies such as Stellantis for a profit, who need them to reduce their carbon footprint. This has worked for Tesla, but the classic companies are starting to penetrate the electric vehicle industry, which would allow them to receive their own regulatory credits. With Tesla receiving 1.6 billion dollars in profit from the credits, Burry’s thesis is that Tesla would now become unprofitable, sending their stock down. It makes sense, but Musk and Reddit hate short sellers, which leaves an interesting situation. Do you think Burry is making a good decision?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.