Anatomy of a "meme rally": Michael Burry on how the market is painting itself into a corner

The phenomenon of meme stocks is formed due to massive investor interest, discussions in social networks and activity on the options market, when market behavior rather than the company's business becomes the price driver. At the beginning of 2021, this mechanism was fully manifested in GameStop shares. Michael Burry, a well-known short-seller, saw this story from the inside: he invested in GameStop before the meme rally and exited his position shortly before the explosive rise in prices. In his new memo Foundations: The Big Short Squeeze, Burry describes how the combination of options frenzy, a high proportion of short positions, and massive retail investor participation turned the market into an unstable construct and the growth itself into a meme bubble. He not only discusses the mechanics of this process, but also explains why he considers the meme rally dangerous primarily for private investors.

Michael Burry notes that his career has always been built on finding low-cost, distressed companies that appear to the market as "outcasts" but that have the potential to become "prom queens."

Burry's "simple fundamental stock research" helps him find such companies. In 2019, Burry's decision to invest in GameStop was based on this analysis: he saw not a dead company, but an asset with a huge margin of safety. Investors sold GameStop stock en masse, focused on the news backdrop of the "death of retail" and the shift of video games to digital. Burry countered that game consoles would continue to have floppy disks, which meant GameStop's business would live on.

In addition, he discovered that the amount of free funds in the company's accounts exceeded the market capitalization. For Burry, this was a classic asymmetric bet: the risk of capital loss was minimal (the money in the accounts insured against bankruptcy), and the growth potential was enormous. But to realize this potential, a catalyst was needed.

One of those catalysts was Burry himself. In August 2019, he wrote to GameStop's board of directors saying that instead of looking for complicated bailout strategies, they could take the simple and effective route: "A buyback is a much more concrete way to return shareholder value than vague 'strategic alternatives'." Burry insisted that if the market considers a stock trash, the company has an obligation to buy it back itself for nothing.

Under pressure from Burry, GameStop reduced the number of its shares by 37%, meaning it withdrew more than a third of all available shares from the market.

The buyback reduced the number of shares in circulation, but did not become a growth driver in itself: quotations remained weak almost until the end of 2020. Until Ryan Cohen, entrepreneur and founder of online pet stores Chewy, became a major shareholder in the company. He proposed turning the aging store chain into an e-commerce tech giant. Investors began buying up securities under the idea, but Burry saw the change of course as a high-risk execution scenario.

There was a conflict of two investment approaches. Burry believed in "hard" facts (money in the accounts), new management was proposing a complex reorganization of the business and essentially selling promises. Burry felt the company might not be able to meet its stated goals. "I was blinded by what I saw as execution risk. ...I felt that what had already been done [share buybacks] was more concrete than a vague 'technology-oriented' redesign with a bunch of execution risk."

Burry recorded a profit in the fourth quarter of 2020, selling his shares in full for about $13.50 apiece. "Roughly 50 days after Scion exited GameStop, this shameful, 'junk' business became prom queen. The whole world couldn't take its eyes off it. And neither could I."

In January 2021, GameStop shares jumped to $39, Burry recalls, with trading volume of more than 144 million securities in a single session - even though the company had 67 million in total. In fact, every GameStop share changed hands twice in one day. "I don't think I've ever seen that before," the investor admits.

"After that, the stock moved in a sideways range for a week with reduced activity," Burry writes. - Had I still held the securities, I would have sold them at that point. If I hadn't closed the position earlier, I would have done so right then. Yes, at the peak my $12 million could have turned into a billion, but that was never a realistic scenario for me.

Burry's logic is simple: he again saw the same anomaly in options that caught his attention in 2019, but the scale has changed. "In July 2019, I noticed call options trading, and abnormally high volume in equities.... But in January 2021, the volume was 10 times higher in both the number of stocks and call activity."

Usually, when brokers lend the same stock several times, the stock goes from lender to short seller, then to buyer, and then back to a new short seller. In the end, a chain of liabilities is layered on top of one real asset. And if the market is calm, this system works.

Burry writes: dealers have the tools to dampen market imbalances, "the people working on this are not idiots." He emphasizes that it took an exceptional event - the simultaneous actions of multiple retail investors - to collapse in January 2021. Burry says it's essentially buying up a control volume of a commodity to manipulate the price (cornering the market).

The investor notes a legal paradox: actions that qualify as illegal for institutional investors turned out to be legal because of their decentralized nature. "If a hedge fund or a group of funds had done this ... it would have been illegal. If a couple of non-Wall Street people found the capital to pull something like this off - also illegal. But spread the effort wide enough and it just becomes a free market." Regulators were powerless: it's impossible to accuse millions of disparate people of collusion. Burry ironizes the passivity of an agency that is supposed to protect investors: "The SEC said: "No, thanks, go ahead." But he gives credit to traders: "My hat's off to retail for going through this eye of a needle. I don't think it's ever happened before."

In the case of GameStop, when retail investors hit options en masse, traditional market defenses didn't work because everyone in the chain was trying to return the same paper at the same time: "The perfect chain broke down... The layering turned into chaos. Panic buying determined the outcome."

GameStop capitalized on the stock price increase by selling more than $1 billion worth of additional shares (at $225 apiece). Burry calls it an "absolutely smart move" by the company. "But gosh, I just thought retail was going to get 'slashed' on this meme." Burry gave an interview to Barron's in which he warned that meme stocks were a bubble, fueled by social media and options, in which the professionals would get out first and the main losses would be borne by retail investors convinced that the growth would be endless. Burry's prediction turned out to be correct: by 2023, the quotes of meme companies collapsed.

GameStop's capitalization in 2025 is about $10 billion. "That figure is staggering," writes an investor. - If I had held GameStop all that time, my investment in GameStop would be worth $250 million."

But Burry's view of GameStop hasn't changed. He still calls GameStop a "melting block of ice," a business with an aging model but now with money on the books: "GameStop is about as I saw it in 2018, except it's only 16% shortshorned."

This article was AI-translated and verified by a human editor