A market without rules
Michael Burry, the Wall Street legend made famous for shorting the 2008 U.S. housing bubble in Michael Lewis’s book The Big Short, is ramping up his short thesis again, while taking direct aim at the “idiots” (his term) in what he calls “Trump’s market”.
His core thesis isn’t just that stocks are overvalued; it’s that intrinsic value and traditional price discovery have been completely decoupled from the equities market. We are, in his view, living through an era where fundamental metrics – price-to-earnings (P/Es), free cash flow, debt-to-equity (D/E) – simply don’t matter.
It sounds like a ‘dummy spit’ from someone who’s been short the market, and it hasn’t worked out, but lift the hood and history reveals that when prices stop mattering, the hangover can be devastating.
The danger of “disconnect”
To Burry, today’s broad-market euphoria looks similar to the speculation between the collapse of Long-Term Capital Management (LTCM) in 1998 and the peak of the dot-com bubble in March 2000.
During that two-year window, rational valuation models were also thrown out the window. Back then, speculators dumped billions into internet startups with zero revenue, and momentum trading superseded balance-sheet health. As Burry notes, “Complete idiots made permanent fortunes during that span.”
Eventually, however, gravity returned. By 2002, market indices had reached multi-year lows, telecom bonds had collapsed, and the hype-fueled fortunes of anyone who hadn’t cashed out evaporated. Burry’s point is simple: Markets can stay irrational longer than you can stay solvent, but bubbles eventually collect their debt.
The “Trump Market”
So why are investors and traders today repeating the behaviours and dynamics of 1998-2000? Burry lays much of the blame on political (read Trump) ‘signalling’, combined with speculative mania surrounding artificial intelligence (AI).
As is typical in a market heavily driven by headlines, political endorsements, and retail momentum, underlying business fundamentals have taken a back seat. Nowhere is this clearer than in tech.
Take software and hardware giants like Palantir (PLTR), Nvidia (NVDA), and Micron (MU). Palantir recently rocketed nearly 37 per cent in a week after announcing beat-and-raise quarterly results alongside an endorsement by Trump. But short sellers are less enthused. While the bulls believe AI transformation, government contracts, and political protection mean numbers can go up indefinitely, the bears note when stocks trade at astronomical price-to-earnings (P/E) multiples, even the slightest margin contraction, cooling of growth or macro shock can and has wiped out tens of billions overnight.
According to Burry, who holds put options against several of these tech giants, asset prices disconnecting from historical cash-flow valuations is like watching a slow-motion train wreck.
The danger of ignoring price
When sentiment, momentum, and political backing dictate stock prices rather than fundamental analysis, three major risks emerge that are worth calling out:
- With index funds and Exchange Traded Funds (ETFs) channelling capital automatically into the top mega-cap stocks, overvalued companies stay overvalued simply because they are big. This creates a dangerous feedback loop.
- In a market where “idiots shine,” sound risk management might look like foolishness but it’s the investors taking on leverage or chasing speculative momentum that will ultimately be shown to be swimming naked.
- When the repricing event finally occurs, it doesn’t transpire slowly. As Burry warns, “When price matters again, you’ll have no idea what happened, and no one will even have the heart to tell you.”
Protect your portfolio today
Whether you believe Michael Burry is early, wrong, or a savant, his warnings offer a reminder about portfolio diversification.
Riding momentum will yield short-term gains, but long-term wealth preservation requires discipline.
Step one requires the rebalancing of Concentration Risk. If a handful of high-flying AI stocks make up the vast majority of your portfolio, consider trimming gains to raise cash.
Step two is to look for value and margins of safety in the equity portion of the portfolio. Focus on quality – those companies generating real free cash flow with resilient balance sheets and sustainably high rates of return on capital.
Finally, reduce or avoid excessive leverage. For obvious reasons.
The market feels like a non-stop party right now, and it seems prices don’t matter. But according to Burry, history reminds us that every party comes to an end – and the longer the music plays out of rhythm with reality, the sharper the exodus when the lights come back on.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
