Why Michael Burry’s “index fund bubble” prediction doesn’t matter

Why Michael Burry's Index Fund Bubble Prediction Doesn't Matter

Michael Burry is the guy who famously predicted the real estate collapse in 2007 and was depicted in the movie “The Big Short”. He’s recently come out predicting a new bubble that’s about to pop: Index funds. So we should be worried, right? No. Here’s why:

Got it right once syndrome: The media LOVES to overweight the opinion of the person who famously called the last market crash correctly. This is amplified even further by the fact that Burry was played by Hollywood hunk Christian Bale in a blockbuster movie. But those things don’t make him the all knowing source for what’s going to happen in the future. A Random Walk Down Wall Street does a great job marching through the history of market doomsday predictors. For every crash, there was a brilliant predictor who called it correctly. The media coronates them as the king or queen of knowing the future and happily publishes their next big predictions as front page news. Then, without fail, they’re never right again. Is Michael Burry going to be the one to change that track record? I doubt it.

Michael Burry says a lot of stuff: In addition to betting against subprime mortgages, in 2015 he talked about water as the next great investment, in 2018 he opened a fund to invest in Asia stocks, in 2019 he said GameStop is a good investment, and despite saying there is a large cap bubble, in 2019 his fund Scion Asset Management invests in a lot of large cap stocks, like Google, FedEx and Western Digital. I don’t mean to imply Burry isn’t a smart guy. He definitely is. And he’s out there in the market competing against lots of other really smart people. The price of assets is being set based on where all those smart people are trading with each other. I don’t think doing everything Burry says is a good recipe to consistently beat the market.

His own prediction says he invests in small cap stocks: And you know where small cap stocks are? In total stock market index funds. So you already own them if you own a fund like VTSAX or a target date index fund from Vanguard, Fidelity or Schwab.

So what if it crashes? Burry famously called the 2007 housing crash. But even KNOWING WHAT WE KNOW NOW, if you went back in time and did the WORST POSSIBLE THING, you bought a home the DAY of the peak of the market in June of 2006, and simply held the property until today, your investment would be UP by 14.6%. And Burry didn’t call the day exactly. He was a few years off (so you would be up by even more). And he certainly doesn’t know the day of the next one. And even he did, market crashes are temporary, then the market rebounds. Instead of trying to time them, simply buy and hold and ignore the temporary changes in price.

So what to do? Do what rich people do: Live below your means. Invest early and often. Buy and hold. Ignore the news.

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