Why Burry is shorting ARKK

Tesla vehicle in red
IheartTesla / Twitter

Michael Burry’s introduction to most of America came in the form of the movie* The Big Short*, which detailed his uncovering of the fraud at the heart of America’s subprime mortgage madness of the mid-2000s. (Burry was played by Christian Bale.)

By shorting the U.S. housing market, the collapse of which he felt was inevitable, Burry generated a reported $700 million for investors and pocketed about $100 million for himself.

Burry’s issue with ARRK is the seemingly unsustainable growth expectations being priced into its valuation.

In a since-deleted tweet from February, Burry compared Wood and ARKK to investor Gary Pilgrim and his PBHG Growth Fund, which soared in the mid-1990s by backing innovative technologies, much like ARKK does.

After the brief explosion in value tech stocks enjoyed in 1999, PBHG Growth fell by 34% in 2001 and another 30% in 2002.

Could ARKK be following the same path? After increasing by an eye-popping 153% in 2020 on the back of investments in companies like Tesla, Zoom and Shopify, ARKK has produced negative returns this year.

The fund is down 4% year to date and has fallen almost 25% since peaking at $156.58 in February. And yet, the fund has drawn in another $6.5 billion in assets this year, according to ETF Stream.

"If you know your history, there is a pattern here that can help you,” Burry, who is also shorting Tesla stock, tweeted. “If you don't, you're doomed to repeat it."

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The case for ARKK

Cathie Wood headshot photo
Forbes / Twitter

Wood politely dismisses Burry's skepticism.

“To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market,” wrote Wood in an August 17 tweet. “I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.”

Wood went on to tout her belief that the technologies ARK believes and invests in “should transform the world” in the next decade.

“If we are correct, GDP and revenue growth will diminish until the opportunities in nascent technologies begin to move macro needles. In this environment, innovation based strategies should distinguish themselves.”

There’s a good chance Wood will inevitably be proven right. But at their current levels, do the sectors and companies she and ARKK are backing have substantial room to run?

Shark Tank host and Dallas Mavericks owner Mark Cuban believes they do. After Burry’s short position in the ARKK fund was made public, Cuban came out in support of ARKK’s investment strategy, particularly its healthy exposure to the artificial intelligence space.

"There are 2 kinds of companies in the world: Those who originate their own AI successfully, and everyone else," Cuban tweeted. "The top companies are AI dominate [sic] and running away from their Non-AI competitors. AI's competitive advantage is exponential, but nowhere to be seen on a Balance Sheet."

The lesson for investors

Multi exposure of businessman hand with pen working with virtual creative financial chart hologram on blurred office background, research and analytics concept
Pixels Hunter / Shutterstock

While Cathie Wood and Michael Burry have different opinions on the future of the ARKK ETF, they both approach the question of the fund’s value the same way: through careful, exhaustive research.

Burry’s analysis might be more backward-looking and Wood’s more speculative, but they’re both weighing the available evidence and making informed decisions — exactly what successful investors would be expected to do.

Whether you’re investing for short-term growth or long-term stability, it’s important not to rush out and throw your money around until you’re sufficiently educated about the sectors you hope to round out your portfolio with.

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You can get started with a popular investing app, which not only offers ETFs, but fractional shares as well.

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And if you agree with Burry that the tech stock mania has gotten out of hand, you might want to consider the above-average returns being generated by farmland thanks to both rising land and food costs. An innovative new company is offering investors the chance to own shares in thriving farms across the country.

Fine art as an investment

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Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.

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On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.

Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.

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About the Author

Clayton Jarvis

Clayton Jarvis

Reporter

Clayton Jarvis is a mortgage reporter at MoneyWise. Prior to joining the MoneyWise team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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