A bubble in the making?

Passive investing could result in a market bubble, suggests Michael Burry, who was one of the early voices to warn against the 2008 crash

- Mithilesh Bhaumik

What should drive a stock's price? In a perfect market, a stock's price should be tied to its intrinsic value. But what happens when hype takes over the market? Take the example of tech companies of the early 90s. The internet was still in its infancy and everyone wanted a piece of it. This skyrocketed the stock prices of companies like Pets.com, Webvan, Boo.com, etc., which, if one looked closely, were doomed to fail from the beginning. When they finally failed, they took the market down with them. Economists call such episodes a bubble - a period where the stock prices greatly exceed their intrinsic value. And every time a bubble bursts, there's a massive sell-off in the market. For instance, the housing bubble led to the 2008 financial crisis.

Passive investing and the possibility of a bubble

It's hard to separate the 2008 financial crisis and the name Michael Burry, the then hedge fund manager of Scion Capital. He was among the first ones to sound the alarm about the brewing housing bubble. And he is back with another warning.