Why should Michael Burry have assumed that he had more insight about Avant! Corporation than the people trading with him?
Because he did a lot of research and “knew more about the Avant! Corporation than any man on earth”? If you have good reason to think that you’re the one with an information advantage trades like this can be rational. Of course it’s always possible to be wrong about that, but there are enough irrational traders out there that it’s not ruled out. Also note that it’s not actually needed that your counterparties are irrational on average, it’s enough that there are irrational traders somewhere in the broader ecosystem, as they can “subsidize” moderately-informed trading by others(which you can take advantage of in individual cases)
The second wheelbarrow example has a protagonist who knows the true value of the wheelbarrow, but still loses out:
At the town fair, a wheelbarrow is up for auction. You think the fair price of the wheelbarrow is around $120 (with some uncertainty), so you submit a bid for $108. You find out that you didn’t win—the winning bidder ends up being some schmuck who bid $180. You don’t exchange any money or wheelbarrows. When you get home, you check online out of curiosity, and indeed the item retails for $120. Your estimate was great, your bid was reasonable, and you exchanged nothing as a result, reaping a profit of zero dollars and zero cents.
But, in my example, Burry wasn’t outbid by “some schmuck” who thought that Avant! was worth vastly more than it ended up being worth. Burry was able to guess not just the true value of Avant!, but also the value that other market participants placed on Avant!, enabling him to buy up shares at a discount compared to what the company ended up selling for.
The implied question in my post was, “How do you know if you’re Michael Burry, or the trader selling Avant! shares for $2?”
Because he did a lot of research and “knew more about the Avant! Corporation than any man on earth”? If you have good reason to think that you’re the one with an information advantage trades like this can be rational. Of course it’s always possible to be wrong about that, but there are enough irrational traders out there that it’s not ruled out. Also note that it’s not actually needed that your counterparties are irrational on average, it’s enough that there are irrational traders somewhere in the broader ecosystem, as they can “subsidize” moderately-informed trading by others(which you can take advantage of in individual cases)
The second wheelbarrow example has a protagonist who knows the true value of the wheelbarrow, but still loses out:
But, in my example, Burry wasn’t outbid by “some schmuck” who thought that Avant! was worth vastly more than it ended up being worth. Burry was able to guess not just the true value of Avant!, but also the value that other market participants placed on Avant!, enabling him to buy up shares at a discount compared to what the company ended up selling for.
The implied question in my post was, “How do you know if you’re Michael Burry, or the trader selling Avant! shares for $2?”