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- Michael Burry's bet against the S&P 500 could prove to be painful, Kevin O'Leary warned.
- That's because the index is diversified and shorting stocks is highly risky.
- Burry made around $100 million betting on the 2008 crisis, but that was a different game, O'Leary says.
Michael Burry's bet against the S&P 500 could pay off one day – but it might be painful for the "Big Short" investor in the interim, according to "Shark Tank" star Kevin O'Leary.
"People that try to live off market timing have a very hard time. You get lucky once as he did with housing syndication in mortgage debt, but this is a whole different kettle of fish he's playing with," O'Leary said of Burry in an interview with Fox News on Wednesday.
"To say that I know when the market is going down – he will be right one day, when is unknown. And how much pain he will have to take along the way, and does he have enough dry powder, as they like to say, at the margin desk? Because every time that market goes up another 1-2%, that phone is ringing and they're saying 'send in some more cash.'"
O'Leary's remarks come just a few days after Burry revealed he bought bearish options on two exchange traded funds that follow the S&P 500 and the Nasdaq-100 last quarter, betting a notional value of $1.6 billion against the two benchmark indexes. That's a brave move, O'Leary said, considering the wide range of stocks and sectors included within that bet.
Burry made around $100 million in personal profit after betting on the subprime mortgage crisis in 2008 – but his success then was different, as he was only tracking a single sector, O'Leary added.
"What he's doing now is completely different. The S&P 500 has 500 mega-cap companies in it in 11 sectors of the economy, real estate only being one of them. You would need every single sector to falter or at least the valuations of every company in the S&P to significantly go down at the same time to win on that bet," he said.
The same goes for Burry's bet against the Nasdaq 100, which is largely concentrated in tech, but has leading stocks in different areas of the sector.
That means the Scion Asset Management chief has a big chance of losing a large amount of cash, O'Leary said, especially considering that investors shorting a stock have no limit to the amount of money they can lose.
"It's very risky," he added.
It's worth noting that Burry held put options against the two index ETFs at the end of June, limiting his downside to the premiums he paid for the puts. There's no indication that he was selling the ETFs short, which would expose him to the unlimited downside that O'Leary described.
Followers of Burry aren't surprised by the risk he's taken on. Burry has warned for years of an epic stock market crash, and previously told investors that they were trading in one of the "greatest speculative bubble of all time in all things." At the crux of the market's turmoil, the S&P 500 could plummet 57% to 1,900 and the Nasdaq could plunge 56% to 6,000, Burry predicted last year.