Wall Street Called Him Insane. Michael Burry Was Right

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An investor looked at the housing market in 2005 and saw something everyone else missed. The market was about to collapse. He bet that the market would collapse with billions of dollars he didn't even have yet. Everyone on Wall Street thought he was insane. His name was Michael Burry, a former doctor turned hedge fund manager who ran a small, relatively unknown fund called Scion Capital.

While banks and investors around the world treated mortgage-backed securities as nearly risk-free, Burry did something nobody else bothered to do. He actually read thousands of loan documents line by line. What he found terrified him. Millions of mortgages had been issued to borrowers who could never realistically repay them, bundled together and sold to investors as safe, highly-rated investments.

Burry became convinced that the entire housing market was built on a foundation that had already begun to crack. So, he went to major banks and asked for something that didn't really exist yet, a financial product that would let him bet against the housing market itself. The banks, confident that housing prices could only go up, were happy to take his money.

The bet lost money for over a year because the market stayed calm. And Burry's own investors were furious, demanding their money back. Burry wasn't the only person who saw this coming. A handful of other investors made similar bets around the same time, but he was among the earliest to notice, and his research into the raw mortgage data was unusually thorough for the time.

His position wasn't risk-free, either. The ongoing premiums nearly bankrupted his fund before the crisis actually hit. In 2007 and 2008, the housing market did exactly what Burry had predicted. Mortgage defaults surged, major banks collapsed, or required massive bailouts, and the global financial system came to the brink of total collapse.

Burry's fund, which had to endure a year of investor anger and heavy losses, ultimately returned over 700% to the investors who stayed. While millions of people lost their homes and savings in the crisis Burry had foreseen almost exactly, he profited from the very system that was collapsing. Today, Burry remains one of the most closely watched investors in the world.

In recent years, he has repeatedly issued warnings about a new kind of bubble, this time centered on artificial intelligence stocks, arguing that extraordinary valuations have once again disconnected from underlying reality. Whether he will be right again remains to be seen, but markets still move whenever he speaks.

The Bank of England was defeated by by information. A continent was ruled by a company. And in 2008, one man was right about a collapse everyone else refused to see coming. Different centuries, same lesson. The crowd is rarely the first to notice when something is about to break. Subscribe. We will keep watching who notices it next.