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Michael Burry, who first predicted the 2008 crisis, is back again and he is continuously saying that he sees a big bubble forming in AI stocks and perhaps the crash this time could be even bigger than the Dr.com crash. He has already taken some short positions. He has short positions in two specific big stocks.
Whose names are Nvidia and Palantir and I think we all know about these short positions at this point. In this video, we will discuss whether Michael Burry can really be right this time and what is his logic behind taking short positions? We will discuss this in detail in this video. The first thing we must understand about Michael Burry is this.
We will talk about them which will help us understand their psychology and I think understanding this is important for this video. So Burry Sahib is an MBBS medical doctor in Neurology but after becoming a doctor, Burry Sahib, Michael Burry Sahib, suddenly becomes passionate about investing. They get interested and then what happens is that Bari sahab does his stock specific analysis and he starts posting the analysis in online forum portals and what happens is that he starts getting an audience at that point.
Barry's stock analysis is very smart. It is pointed. She has high conviction. Which is a little different from traditional stock analysis and because of this, more people get attracted and come to the portal to read its insights. His investing style is exactly like Benjamin Gram, you know, he invests.
Which means that we look specifically at cash flows. Let's look more specifically at the balance sheets. Let's look at each and every thing. He reads the company's reports. The company's financial statements are read line by line. So their analysis is done at the fundamental level and valuation level which was very sharp and that is why people get associated with them.
In the year 2000, Bari starts his own hatch fund which goes by the name of Sion Capital and in this fund, the people who are associated with him before him invest their money and mostly after that he himself invests his money in this fund and this fund starts. Within a few years, Sion Capital scaled up and by around 2007, they were managing $600 million.
If we look at the returns of their hatch fund at this point. If we look at the returns from 2000 to 2008, then it has given around 500% returns to the investors. Which just means that they have made around six times the money. Which is I think a very very impressive return. But if we look at the returns of other Hatch fund managers in the same time period, their returns also fall roughly in the same range.
Just because generally, whenever there is a big crash in the market, I am talking about the dot crash, at this point, what happens is that generally after a big crash, a bull run is usually followed. So till 2007, Badi was known as a value investor. Used to be a value investor. And then comes that trade due to which Bari Sahab became so famous and everyone started knowing him.
There's a movie called The Big Shot. I think everyone should watch the movie. In this, he has told about the trades he has taken, how he has taken them and how he has done the analysis. In short, what happened was that around 2003-2004, we started analyzing the US market data. At the same time, they find out that many people whose credit history is not good at all are also being given loans in a fraudulent manner so that they can buy a house.
These loans are risky because their credit risk history is not good, yet they are being given. So these loans were being bundled and brought into the market in the name of mortgage back bonds. Ok. I understand the matter. These bonds were destined to default. Agreed at this point of time. And at this point, Mr.
Burry understands this and deploys his entire Hatch Fund portfolio to buy credit default swaps. Which just means that he is betting his entire Hatch Fund portfolio against the US market at this point. But here a problem arises. The problem is that Bury was specifically too early inside this trade. And what happens is that whenever you time the market, if you are even slightly late in timing it, then being late is almost similar to being wrong in the trade.
So here Burry bats shots against the housing market. Betted against. But even after that the market kept going up and what happened in the midst of all this was that Mr. Bari had to keep paying premiums to protect his positions, just to not let the margin call trigger, just to keep the trade going so that his position does not get squared off.
Meaning, if we look at it, from 2005 to 2007, everyone considered Michael Burry to be literally crazy. The investors of his fund started shouting at him and if we look around 2007, gradually the investors of his fund started redeeming their money. You know there was just a lot of pressure, a lot of heat that Bury had to face at that point in time.
Eventually, Burry came and said, "I am freezing redemptions in my funds at this point in time." This means that I will not allow investors to withdraw money from my fund after this. How will you let them take it out? Because your money is stuck in your short trade. So the investors dragged Bari to court again.
After that there were also law suits. But we are not interested in that. The point here is that Bury's thesis was absolutely correct. But the timing of the bailout was bad and after that their Sion Hatch Fund was closed and the bailout went missing for a few years. After that Burry comes back to the market and their perception is that Burry, Michael Burry is the Oracle, he can figure out what no one else could figure out back then, but if we look at his own returns after 2010, well, if we look at his returns of the last 10 years, then he has made a total of 250% returns in 10 years, so basically, not only has he beaten the index, he has also underperformed S&P 500 year on year and it is not a matter of one or two years.
Here is the underperformance of the entire 10 years with the index. The point here is that after 208 acquittal, the person who is acquitted automatically becomes a barred person. The ones who are there, they constantly start taking short positions in the market after 2008 and in fact if we look at 2021, they had also shorted Tesla and later we all know how much Tesla rallied.
The point I want to make is that Michael Burry works in a tendency. They work in a pattern and that tendency is the tendency of batting against the markets. There is a bearish tendency. But now we understand why they do this. Benjamin Graham, whoever comes to the Benjamin Graham style, always looks at intrinsic valuation.
First of all he looks at cash flow. Looks at the fundamentals of stocks. But all these things do not matter at all in today's tech stocks. Speaking of US tech stocks. Today's US tech market runs on just three things. Only on three things: liquidity, liquidity and liquidity. If we look at it from Bari's perspective, then even Bitcoin is wrong.
And which is expected because Bitcoin does not have cash flow. Is there no earning in Bitcoin? Retail has entered Bitcoin in abundance, at this point, extra extra, so if we apply the framework of value investing, then Bitcoin should not exist at all. Bitcoin Should Not Exist. But that is not the point.
The point is that Bitcoin was never meant to be analyzed fundamentally. But this is a separate discussion. Let us now see what is the mentality, logic and thought of Bari Sahab in taking Nvidia and Pallavi shots ? For this I think we will have to see his tweet in which he has written this and you will see it on the screen.
You can pause and read the full tweet. Do you understand what is said in this tweet? What is Michael Burry trying to say? The problem is that according to Bury, whenever any big company, for example Microsoft, is going to buy Nvidia's chips, those chips have to be depreciated in five to six years, meaning in these many years, new versions of chips come into the market which will have to replace the old chips and they will replace them and in the tweet, he has also given a table, in which Bury sahab keeps telling that different companies have given different time frames.
To depreciate the router chips. For example, Meta says that we throw away old chips in 5 years. Let's change it. We place new chips. Microsoft comes and says that we will replace NVIDIA chips in six years. We have to buy new ones. But Mr. Bari says here that AI technology is progressing at such an advanced rate that the actual life of the chips is only two to three years, after which the chips will have to be replaced.
So what difference will it make if the life of Nvidia's chip is reduced from six years to three years ? Okay friend, what difference will it make? So now let's see the difference. Consider that Microsoft takes the numbers that are there. It wants to spend Rs 20 billion to purchase around 4 to 5 lakh GPUs from Nvidia.
To buy these GPUs, Microsoft buys them and installs them in its data centers. Let's consider for now that Microsoft will have to replace the GPUs in 6 years. As Microsoft has said in the table. So according to this, how much will it cost for one year? If we roughly take the expenditure for one year as 20 billion divided by 6, then it means that the expenditure per year will come to around $ billion.
But as predicted by Barry, if we see that these GPUs have to be replaced in 3 years, then what will be the annual cost in that case? In that case, the cost per year comes to 20 billion divided by 3, which is close to around 6 billion per year. So I think now you must be understanding that there is a difference between double here.
So, what Bury says at this point is that if any company gives more time for replacement of its chips than what it seems, then the earnings of that company will be more than what it should be. So for example, let's do a little math here. Let's do the arithmetic at this point. So currently if we see what is the share price of Microsoft ?
Around 480 will be 88. Some have a PE of 34. Price is equal to P * EPS, which means their EPS will be around 14. So going forward, if Microsoft adjusts its earnings so that the depreciation of GPUs can be correctly reflected in its earnings. Meaning, if Microsoft shows the depreciation of GPU for only three years, then their EPS will come down by around 15-20%.
If we consider it will come down, then the PE will remain the same i.e. 34. So according to this, their price as per the first formula will be adjusted to approximately $400 and I am taking the approximation only, I am calculating, which means a fall of around 20% can be seen in the stock, okay, this is also not a big fall, of course, but you are forgetting one point on this point.
Sentiment in the market is all that matters. And what will happen is that at this point, the rest of the investors will also start losing their confidence in Nvidia chips and AI infrastructure and due to this, the PE may get further compressed in the market and it may also happen that time correction may be seen in the stocks.
So now you people will say that why didn't Barry short Microsoft then, brother? Why go after NVD? They are leaving because Microsoft is a well diversified business. They have their own cloud business. These people sell different services. Microsoft Office Suite also belongs to them. They sell that too.
So it won't make much difference to them. But Nvidia being Nvidia is playing heavy in AI. Pure AI is a player. Which is why Bury is shorted Nvidia. Burry thinks that hyperscalers like Microsoft will make irrational decisions driven by the hype of AI. Will become irrational. But what will happen in a few years is that these irrational decisions will come to light.
Everything will be visible and then Nvidia stock has nowhere to hide in the market. This is his thesis. The question at this point is whether Michael Burry will be wrong this time or whether people have gone too far in the hype of AI. I think the truth at this point is that both things can be true simultaneously.
AI is absolutely real. The impact of AI is also massive at this point. But this does not mean that every AI's stock, every AI's valuation, every AI's narrative will automatically make money for you. Michael Burry 's work Seeing the Future. It's not Oracle's job. It is not their job to predict the future.
Their job is to expose the blind spots of the market and take advantage of them and this time that blind spot could be that we are trying to see AI not as a technology but as a guaranteed investment. Want to see. Maybe, maybe, Burry will sneak into this trade again early. It is possible that this bubble may never burst, not even tomorrow.
It may not bloom next year either. But history always teaches us that whenever investors' expectations become too high, their returns turn out to be disappointing. They turn out to be disappointing. What this means is not that we will simply shy away from AI. AI stocks will be avoided. This means that we have to understand the valuation.
Position sizing needs to be approached with understanding and understanding that a great company does not always mean a great stock. The question at this point is not whether the AI will crash or the AI will not crash? I think the question is whether we as investors align our expectations with reality and how much we align and how much we don't. So I hope this was helpful. Let's keep it till here. Thank you.
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