Predicting a stock market crash is easy. For every actual stock market crash we’ve had in my lifetime, I think about 10 have been forecast.
But it takes courage to bet big on one when you think it’s about to happen. Especially when you go in with a $1.6bn pot.
That’s what Michael Burry in the US has just done. Sorry, Michael who?
Famous shorter
He’s the guy behind the movie The Big Short. And he made a bundle betting against the US housing market just before the subprime lending crisis hit.
Now through his Scion Asset Management firm, he’s bought $866m of put options against an S&P 500 tracker, and a further $739m shorting a Nasdaq 100 fund
He can sell both at a specified price if they fall in the future.
What should we do?
What should UK investors do? If the S&P 500 and the Nasdaq both crash, I reckon the FTSE 100 will probably fall too, no matter how good UK stocks might look.
Should we sell then? A couple of key thoughts spring to mind.
So someone got a big investment gamble right once, did he? Lots of people do that, but it doesn’t mean they’ll be right every time.
He might be right
Now that’s no criticism of Burry. He’s managing billions of dollars in investment funds, and I’m not. And I’m quite sure he has his finger closer to the pulse of the US stock market than I do.
And I reckon there’s a good chance he’s right. But the reaction to his moves might be over-egged.
You know, the way financial reporters like to hype up the headlines for dramatic effect.
If we think stocks are cheap, we should buy them, right? Well, it surely makes the same sense to sell them when we think they’re expensive.
Crash, or not?
And even if he is right, that doesn’t necessarily mean a full-blown stock market crash.
If the two index funds he’s shorted just drift slowly down in the next few months, he’s in the money.
On top of that, he might be right about stock valuations, but wrong about the timing. It seems he tipped January 2023 as a time to sell, but admitted he got that wrong a few months later.
Prepare for a crash?
The S&P 500 is on a price-to-earnings (P/E) ratio of more than twice the FTSE 100 right now.
So US stocks could fall by half, but still be more highly valued than UK stocks. I find that truly bizarre, especially as most FTSE 100 stocks are every bit as international as their US counterparts.
So I’m definitely not going to sell any FTSE 100 stocks. And I certainly won’t short anything over this side of the pond.
Time to buy
In fact, if any US stock market correction should shake the Footsie, I’ll be looking for even cheaper stocks to buy here.
And deciding on the best buys I think would be a very nice problem to have.
