6 ms·

The Greatest Trade Ever: Profiting from the Crash

43 points by jakarta 17y ago

steveplace 17y ago
And after the crash, he formed a fund buying up distressed debt and junk bonds (which did quite well this year). His main investment shown by some filings is a pairs trade of long dollar long gold, which is a very interesting position as noone seems to be taking the long side of both those assets at the same time. Some further reading: http://www.marketfolly.com/2009/06/john-paulsons-43-billion-gold.html http://www.marketfolly.com/2009/06/john-paulsons-43-billion-...
- zandorg 17y ago
  Funny URL! says "43" when it is "4.3"!
jakarta 17y ago
one of the biggest lessons here is really how he actually shorted those mortgages. He created a situation where the downside was relatively limited. Some people balked at his potential 8% loss on the trade, but it also meant that he was not betting the farm on the trade. At the same time, he had this great optionality in place. If what he predicted did happen, the fund would profit hand over fist, and it did. If you look at the people who profited from the crisis, they all did a similar play. It was not shorting stocks, it was taking advantage of mispriced insurance.
patio11 17y ago
A $147 million friends and family round... Words fail me.
RyanMcGreal 17y ago
>Mr. Pellegrini added a "trend line" that clearly illustrated how much prices had surged lately. He then performed a "regression analysis" to smooth the ups and downs. Interesting use of "quotation marks".
mattmaroon 17y ago
"By the summer of 2006, Mr. Paulson had managed to raise $147 million, mostly from friends and family, to launch a fund. " Wow are some people's lives far different than mine.
- jakarta 17y ago
  Yeah but it makes sense when you think about it. If your friends are Harvard MBAs who have been working for ~30 years on Wall Street, they'll have a nice bit of cash set aside for funding
idm 17y ago
Did anyone else think that article/excerpt ended a little strangely? First, this investor is set up as an authority figure in bear markets, then it reports where his current trajectory is headed, at which point the article abruptly ends. Gold bugs have been ramping up their rhetoric during the last decade, and during that time period, the data have shown that gold is strong against the USD. However, the way the article reads, and particularly the way it ends, verges on scaremongering of the sort that can only reinforce the very investments described in the article.
- j_b_f 17y ago
  I agree with you about the abrupt ending but I think it's because the article was adapted from an upcoming book ("The Greatest Trade Ever" by Gregory Zuckerman). Weird editing, but maybe the purpose was to make it abrupt enough that people who want to go get the book to figure out what happens next.
  - alanthonyc 17y ago
    A lot of it is also because we are still in the middle of the story. The jury is still out on that bet.
- jeromec 17y ago
  Yeah, I agree, especially in light of recent events and coming from the WSJ. Whether or not scaremongering was the intention it doesn't exactly help.
codexon 17y ago
Can anyone see what the value these traders add to the market? It seems so perverse that they can earn so much money while creating so little value. And the financial industry is essentially allowed to bet on funds that don't exist (unbacked insurance), safely knowing that the government will print cash to help pay these imaginary sums should disaster happen.
- jakarta 17y ago
  of course there is value. Do you know anyone who benefits from a pension fund or endowment? Well-- those guys benefit from someone like Paulson who can profit when the market tanks. But let's go broader. You are looking at capital incorrectly. Let's say you are given money from investors for your start up. Eventually though, your start up begins to tank. Competitors are coming in, you are just not good enough, and any incremental reinvestment in the start up will likely yield negative returns. Is it really wise of you to squander your investor's money like that? No. You would be better off parking that capital where it will generate returns (i.e.: a financial investment) or giving it back. Warren Buffett was confronted with this prospect when he took over Berkshire Hathaway, a failing textile mill. Textiles were rapidly going overseas and Buffett had a choice to make. He could take the business' cash flow and buy new equipment, to try to compete. Or he could invest it elsewhere. He chose to invest it elsewhere and look where Berkshire is today: $10K invested back then would be $50M today. Sometimes investing in the business is the wrong choice, especially when you have a responsibility to your investors.
  - codexon 17y ago
    Investing in derivatives like CDOs is completely different from investment in equities. Its like if I sold you insurance for $999 trillion that there wouldn't be an earthquake in California tomorrow. I obviously don't have that much money, just like those banks didn't have the money that they are now paying Goldman Sachs and the guy in this article with taxpayer money. Ironically you cite Warren Buffet when he himself was quoted as saying "I view derivatives as time bombs". http://news.bbc.co.uk/2/hi/business/2817995.stm http://news.bbc.co.uk/2/hi/business/2817995.stm
MikeCapone 17y ago
http://en.wikipedia.org/wiki/Survivorship_bias http://en.wikipedia.org/wiki/Survivorship_bias When markets move this much, there's bound to be at least one person who made an out-of-the-ordinary amount of money. Doesn't mean he can do it again.

43 points by jakarta 17y ago

And after the crash, he formed a fund buying up distressed debt and junk bonds (which did quite well this year). His main investment shown by some filings is a pairs trade of long dollar long gold, which is a very interesting position as noone seems to be taking the long side of both those assets at the same time. Some further reading: http://www.marketfolly.com/2009/06/john-paulsons-43-billion-gold.html http://www.marketfolly.com/2009/06/john-paulsons-43-billion-...

zandorg 17y ago
Funny URL! says "43" when it is "4.3"!

jakarta 17y ago

one of the biggest lessons here is really how he actually shorted those mortgages. He created a situation where the downside was relatively limited. Some people balked at his potential 8% loss on the trade, but it also meant that he was not betting the farm on the trade. At the same time, he had this great optionality in place. If what he predicted did happen, the fund would profit hand over fist, and it did. If you look at the people who profited from the crisis, they all did a similar play. It was not shorting stocks, it was taking advantage of mispriced insurance.

patio11 17y ago

A $147 million friends and family round... Words fail me.

RyanMcGreal 17y ago

>Mr. Pellegrini added a "trend line" that clearly illustrated how much prices had surged lately. He then performed a "regression analysis" to smooth the ups and downs. Interesting use of "quotation marks".

mattmaroon 17y ago

"By the summer of 2006, Mr. Paulson had managed to raise $147 million, mostly from friends and family, to launch a fund. " Wow are some people's lives far different than mine.

jakarta 17y ago
Yeah but it makes sense when you think about it. If your friends are Harvard MBAs who have been working for ~30 years on Wall Street, they'll have a nice bit of cash set aside for funding

idm 17y ago

Did anyone else think that article/excerpt ended a little strangely? First, this investor is set up as an authority figure in bear markets, then it reports where his current trajectory is headed, at which point the article abruptly ends. Gold bugs have been ramping up their rhetoric during the last decade, and during that time period, the data have shown that gold is strong against the USD. However, the way the article reads, and particularly the way it ends, verges on scaremongering of the sort that can only reinforce the very investments described in the article.

j_b_f 17y ago
I agree with you about the abrupt ending but I think it's because the article was adapted from an upcoming book ("The Greatest Trade Ever" by Gregory Zuckerman). Weird editing, but maybe the purpose was to make it abrupt enough that people who want to go get the book to figure out what happens next.
- alanthonyc 17y ago
  A lot of it is also because we are still in the middle of the story. The jury is still out on that bet.
jeromec 17y ago
Yeah, I agree, especially in light of recent events and coming from the WSJ. Whether or not scaremongering was the intention it doesn't exactly help.

codexon 17y ago

Can anyone see what the value these traders add to the market? It seems so perverse that they can earn so much money while creating so little value. And the financial industry is essentially allowed to bet on funds that don't exist (unbacked insurance), safely knowing that the government will print cash to help pay these imaginary sums should disaster happen.

jakarta 17y ago
of course there is value. Do you know anyone who benefits from a pension fund or endowment? Well-- those guys benefit from someone like Paulson who can profit when the market tanks. But let's go broader. You are looking at capital incorrectly. Let's say you are given money from investors for your start up. Eventually though, your start up begins to tank. Competitors are coming in, you are just not good enough, and any incremental reinvestment in the start up will likely yield negative returns. Is it really wise of you to squander your investor's money like that? No. You would be better off parking that capital where it will generate returns (i.e.: a financial investment) or giving it back. Warren Buffett was confronted with this prospect when he took over Berkshire Hathaway, a failing textile mill. Textiles were rapidly going overseas and Buffett had a choice to make. He could take the business' cash flow and buy new equipment, to try to compete. Or he could invest it elsewhere. He chose to invest it elsewhere and look where Berkshire is today: $10K invested back then would be $50M today. Sometimes investing in the business is the wrong choice, especially when you have a responsibility to your investors.
- codexon 17y ago
  Investing in derivatives like CDOs is completely different from investment in equities. Its like if I sold you insurance for $999 trillion that there wouldn't be an earthquake in California tomorrow. I obviously don't have that much money, just like those banks didn't have the money that they are now paying Goldman Sachs and the guy in this article with taxpayer money. Ironically you cite Warren Buffet when he himself was quoted as saying "I view derivatives as time bombs". http://news.bbc.co.uk/2/hi/business/2817995.stm http://news.bbc.co.uk/2/hi/business/2817995.stm

MikeCapone 17y ago

http://en.wikipedia.org/wiki/Survivorship_bias http://en.wikipedia.org/wiki/Survivorship_bias When markets move this much, there's bound to be at least one person who made an out-of-the-ordinary amount of money. Doesn't mean he can do it again.