While “The Big Short” investor Michael Burry is sticking with his bearish wagers even as the S&P 500 hits record highs, I spent some time on a video call with investors and partners discussing the state of the markets and, of course, our model portfolios.
Many charts popped up during the discussion. Probably too many. That is what happens when you put a group of investment people together on a video call.
For those interested, Burry continues to believe we may be near a major market top and has even raised the possibility of a 1987-type fall. His concern is not simply valuation. As markets rise and volatility falls, volatility-targeting funds tend to increase leverage, while momentum strategies pile in. This can push markets higher until, one day, it works the other way.
He remains confident in his longer-term view although he says he will cut his losses if the trades move decisively against him. After three decades watching markets, I would add that predicting the end of a bull market is not for everyone. You can be absolutely right about the destination and painfully wrong about the timing.
That is why our discussion was less about whether Michael Burry is right or wrong and more about what we are actually doing with our portfolios. Markets are at record highs. AI enthusiasm remains strong. Valuations in parts of the market are certainly not cheap. There are plenty of risks around.
Rather than trying to pick the exact top, something I gave up pretending I could do a long time ago, we focus on portfolio construction, diversification and managing risk while continuing to participate in the upside.
If Burry turns out to be right, we want the portfolios to be able to take the punch. If he is wrong, we do not want to spend the next year sitting on the sidelines waiting for a crash that never came.