Quote Originally Posted by Joshuatree View Post
Micael Burry's liquidity risk argument is a good one imo, not sure about the rest stacking up.
I'm not seeing liquidity as a problem. Even during 2008 / 2009 did the DOW and S&P500 lose out on liquidity? Not even a hope in chance. Though I do agree liquidity is a risk in small cap stocks for the simple reason that the kind of investors that buy such sub $1/share stocks tend to be more trigger happy at exiting their positions; it's a issue of quality vs issue of liquidity. Large caps are long running companies that have tested through decades of stock market crashes, therefore the investors buying such stocks tend to hold them longer or less likely to sell off. Likewise in a recovery, they're more likely to rebound while the small caps you'll find the vast majority just disappear. In a sense, Mr Burry is ignoring the "quality" aspect of investing in stocks.

Now for a brief moment, let's look at the NZ stock market. Is there an explanation why liquidity has been drying up in the NZX? The large hedge funds looking to buy NZ stocks are well aware of the major liquidity risk involved. As all brokers i've spoken to in NZ, if a person had $1M invested in any NZX share, how quick could the investor buy or sell that single NZ listed company without going unnoticed when the share price spikes or drops so quickly? Just look at the commission scheme NZ brokers work on - large positions are costly to buy and sell and must be done over a spread, many days or weeks resulting more commissions for the brokers. My belief why the NZX is drying up is more to do with gov't regulations (ie the FMA) and many brokers in the US for eg. have simply exited the NZ share market and thus, for their clients operating hedge funds.

I did enjoy the movie The Big Short. But the reality is there's countless of guys like Mr Burry that simply got lucky. Even Buffet himself said he was lucky on his performance record. You have guys like Robert Kyosaki (Rich dad....poor dad) calling each year that the stock market will crash, sooner or later he will guess it right. But no one knows with certainty year after year where the markets will go.

I strongly advise investors (especially new into this game) to at least spend the full 12 minutes watching Buffet do a spew against hedge funds (ie. managed funds, Kiwi Saver funds, any portfolio where they try to beat the index by trying pick winners).

https://www.youtube.com/watch?v=xp9KUCel778