August 20, 2023
By guest author Spencer Jakab from the Wall Street Journal.
“Sooner or later a crash is coming, and it could be terrific.”
A wimpy prediction like that would struggle to go viral in 2023. It caused a sensation in 1929, though, weeks before Black Tuesday. In a preview of that calamity, stocks briefly plunged in what would be called the Babson Break.
America was about to sink into the Great Depression, but newsletter writer Roger Babson would reap fame and fortune from his timely call, founding a college and even running for president. Few remember that he also predicted trouble in 1927 and 1928, and later on made a premature recovery call.
Every market crash or bottom has a Babson—someone who can dine out forever by nailing it. In 1987, it was Elaine Garzarelli, who predicted a collapse days before Black Monday. She became the best-paid strategist on Wall Street for a while and went on to run some poorly performing mutual funds. In 1982, it was Elliott Wave theorist Robert Prechter’s predicting a roaring bull market after stocks spent 16 years in the doldrums, but also crashes that never materialised. Both are still making money in the punditry business despite decades of mostly lousy predictions.
(In response to emailed questions, Garzarelli says that claims on her website of “94.5 % correct calls” have been audited, while Prechter was more humble, admitting that criticisms of his record are “about right”).
Michael Burry is the latest seer with a shaky encore. His early but successful bet on the 2007-08 housing bust made him rich and—after Christian Bale played him in the Hollywood adaptation of Michael Lewis’s “The Big Short”—famous. But he has also made at least five dire predictions about stocks in just the past four years with comments such as “could be worse than 2008” and “greatest speculative bubble of all time.”
Buying the S&P 500 instead would have made an investor money each time in the six months after his views became public. The average annualized gain was 34 %—about four times the index’s long-run appreciation. His latest public warning was a one-word tweet this January from a frequently deleted account called Cassandra BC: “SELL.”
That one didn’t work out either, but Burry’s investment firm, Scion Asset Management, still gets outsize attention. There have been 264 print-media mentions of Burry in the past month alone, according to Factiva, spurred by Scion’s latest securities filings. It purchased puts—bets on a market decline—on two popular stock index funds. To the uninitiated, the notional value of the derivatives makes it look as though he bet nearly everything on a crash. That isn’t the case at all, but Burry has done nothing to disabuse his 1.4 million followers on X (formerly known as Twitter) of that idea.
Burry, who didn’t respond to requests to comment, might fancy himself a Cassandra, but he is the polar opposite. The Trojan priestess was cursed with always being right but never being believed. It isn’t hard to understand why prophets of doom get so much public attention, but how does one explain famous ones being so unimpressive after they become famous?
Numerous studies of expert opinion have shown that pundits are, as a group, as accurate as a coin flip. Some have a special knack for being wrong, though. In an analysis of 68 stock market gurus several years ago, CXO Advisory Group had Prechter as dead last. The explanation is simple, according to “Predicting the Next Big Thing,” a 2010 study by Jerker Denrell and Christina Fang. People who got rich and famous on extreme bets tend to follow up with more of them, and outlier predictions typically fail.
The saying, though, is that “a broken clock is right twice a day,” not once. Burry is certainly eccentric, but probably less-so than Babson, who tried to reinstate Prohibition and invent an antigravity device. And, unlike most pundits, he put his money where his mouth was on his big housing call and many successful stock picks.
Talk remains cheap. If you aspire to become the next Babson, Prechter or Garzarelli, this might even be an ideal time to make a call on social media and timestamp it: Rising interest rates and historically high stock valuations provided the backdrop to wipeouts in 1929, 1973, 1987 and 2007. Unfortunately, the cacophony of online voices means that, on any given day, there is someone out there also predicting a calamity.
Unless you are saying it on CNBC or have Goldman Sachs on your business card, the chances of being sought for your views are far higher if you actually risk money—ideally other people’s, not your own. And if your timing is impeccable, the hardest part is over—you will be rich. Now just get Michael Lewis to write a book about you.