Michael Burry's Warning to Wall Street Just Rang Out Loud and Clear. Should You Listen?

Michael Burry's name has been echoing throughout Wall Street in recent days, much as it did several years ago when the hedge fund manager bet against the U.S. housing market -- and won. Burry made $700 million for his investors back then, during the subprime market crash, and his story was popularized through the movie "The Big Short." Today, though, Burry hasn't been taking action against the housing market; instead, he's focused on artificial intelligence (AI) stocks.

In the third quarter of this year, the famous investor placed a bet against two of the most successful AI stocks around, Nvidia (NASDAQ: NVDA) and Palantir Technologies (NASDAQ: PLTR). And just this week, Burry took steps to close his fund. A Financial Times report indicated this latest move was spurred by concern about valuations -- they've climbed significantly in recent months as stocks have soared.

With this move, Michael Burry's warning to Wall Street just rang out loud and clear. Now the question is: Should you listen? Before making any decisions, it's important to consider the following points.

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The promise of AI

First, let's consider the AI story so far. Investors have piled into AI stocks over the past couple of years on optimism this technology could become a game changer, like the internet, or to reach farther back in time, the printing press. This is because AI promises to overhaul the way certain things are done, supercharging efficiency and potentially boosting corporate earnings.

Some companies, those building and as well as using AI, have already reaped benefits, and this has translated into earnings growth and stock performance. Nvidia and Palantir are two examples, with their share prices each advancing more than 1,000% over the past three years. And investors also have bought shares of companies that seem well-positioned to benefit from AI down the road too. All of this has helped the S&P 500 climb over the past two years and continue to advance this year.

As a result, valuations have increased too, with the S&P 500 Shiller CAPE ratio recently reaching 40, a level it's only surpassed once before in history.

Now, let's consider Burry's latest move. The hedge fund manager ended registration of Scion Asset Management as of Nov. 10, Bloomberg reported, according to a Securities and Exchange Commission filing.

Burry's letter to investors

Burry wrote the following to investors, The Financial Times reported, citing two people with knowledge of the letter: "My estimation of value in securities is not now, and has not been for some time, in sync with the markets."

Before this, in the third quarter of this year, Burry bought put options in Nvidia and Palantir, totaling more than $1 billion. The current market value of those puts exceeds $1 billion. A put option, allowing the investor to potentially sell the stock at a certain price by an agreed date, is a bet that the stock will fall. Burry declared the move in his 13F filing, a quarterly report required of investors overseeing more than $100 million in securities.

So, Burry is worried about valuations, and his Nvidia and Palantir moves suggest this concern applies to some of the biggest AI stocks. His message to Wall Street has rung out loud and clear: Valuations today represent a risk for the market and investors.

Now, let's return to our question: Should you listen to Michael Burry's warning? Yes, you absolutely should consider valuations -- and avoid buying shares of companies that may never live up to enormous expectations.

But this doesn't mean you should turn away from the entire stock market or even all AI stocks. Though valuations may be a concern today, AI companies, including Palantir and Alphabet, for example, reported solid growth in the recent quarter and spoke of high demand in the market. This adds to evidence that the AI growth story remains intact.

Considering this, if you aim to invest over the long term -- and this is the best way to invest, as it allows you to accompany a company as it develops -- AI and other growth stocks still could deliver a win for your portfolio. You can find bargains or reasonably priced stocks in any market environment, so the key is scooping them up and holding on for at least five to 10 years as their exciting stories play out.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.