I received an email today with the subject heading of:
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History by George Zuckerman (it is a book)
The email said:
This guy made like $24B in two years. More than all the combined profits of all the trend followers in history. 100% based on the fundamentals. You’d gain even more credibility if you acknowledged that other strategies besides trend following make money.
This is quite possibly one of the most ignorant emails I have ever received. This emailer finds one guy who bet the ranch and won — a strategy that no one else has ever replicated — and that is proof positive of what? The great thing about trend following: There is NOT just one practitioner who made $24B. Don’t get me wrong I salute John Paulson and his brilliance to figure out this great trade as it is the stuff of legends, but trend followers are not about one trade. In looking into Paulson I found this note about his success at Portfolio.com:
Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging?
Paulson deserves admiration. Period. If you hate Paulson’s success, you are a punk.
November 23rd, 2009 at 7:03 pm
Quick comment - Paulson didn’t actually bet the ranch; the trade didn’t cost him that much to put on because no one really knew what was going on initially except for him.
November 23rd, 2009 at 10:22 pm
When it really comes down to it “riding trends” and “managing risk” is what all good traders do.
The rest is just mere ornamentation.
Here is what John Paulson has to say in describing his investment philosophy: “Watch the downside, the upside will take care of itself. That’s been a very important guiding philosophy for me.”
So, much for “100% based on fundamentals”.
November 24th, 2009 at 1:22 am
You show poker players in your new DVD, did you ever hear about a poker player taking a shot and going all in ? I understand you are a promoter and trend following is valid, but just because it is valid does not mean something else is not valid, you will add credibility if you let trend following speak for itself and stop trying to “sell” too hard…. yes you are a promoter but tone it down a bit…
November 24th, 2009 at 10:10 am
Bruce Kovner is billionaire.. so what..?! Who heard of Kovner or many other trend trading guys? Very few. If i ride the trends and i run a big pool i would want a least possible media exposure.
November 24th, 2009 at 10:13 am
According to the Wall Street Journal this is what Paulson did, when: `Housing remained strong, and the fund lost money. A concerned friend called, asking Mr. Paulson if he was going to cut his losses. No, “I’m adding” to the bet, he responded, according to the investor. He told his wife “it’s just a matter of waiting,” and eased his stress with five-mile runs in Central Park.
“Someone from more of a trading background would have blown the trade out and cut his losses,” says Peter Soros, a George Soros relative who invests in the Paulson funds. But “if anything, the losses made him more determined.”`
http://online.wsj.com/article/SB120036645057290423.html
November 24th, 2009 at 11:04 am
Oori, you seem to want to make several points in your comments, but tie them together illogically:
1. Yes, poker players are on my film DVD talking odds. If the odds are on their side they play a certain way. Same as with trend followers. They have been doing it for a long time. Paulson did it too — on this trade. I see Paulson more as a Bill Gates or Google — the opportunity was there and a few people saw it and won. But where is the next Paulson, Gates and Google guys?
2. Yes, I “promote” trend following. Yes, I make comparisons. Why does that have to be toned down?
November 24th, 2009 at 1:47 pm
Quote:
“Even after he makes the bet, Mr. Zuckerman points out how there are so many times that people tell Mr. Paulson to take the bet off or cash in his profits too early. His own investors complained. Complaints also came from brokers from Bear Stearns and others who helped sell him the credit default swaps on the toxic tranches of mortgage bonds, as well as the most troubled sub-prime lenders and banks holding the troubled securities.
Even his own staff complained that he wasn’t taking money off the table. They told him to sell when he was down in his trade and they told him to sell when he was up on the trade after New Century reported its first blown quarter in early 2007. Through it all, Mr. Paulson stuck to his guns because he foresaw even bigger profits ahead - and he was proved right.”
David, yes someone with an itchy finger would have blown the trade. Being in the trade and riding the trend is vastly different from analyzing it.
November 25th, 2009 at 1:24 am
John Paulson definitely was not the only one that saw it coming. There were plenty of “analysts” that sounded that alarm.
November 26th, 2009 at 3:01 am
Let’s face it, Paulson saw the storm coming and got in early and kept adding to his position as the trend continued. It wasn’t an overnight thing but, it took at least 6 months. It’s no different than trend follower who enters a position and adds to it until he’s maxed out his position limit. Maybe he went all in but, then again as a trend continues your risk decreases. Michael even had an illustration of the principle in his book. Many of us saw this coming but, didn’t pull the trigger. The fact that he made a bit of money from in a sense shorting the market is noteworthy but, not something we haven’t seen before.
Here’s my late 2000 Paulson style play with SUNW now JAVA minus a few billion. Sadly I didn’t make the papers.
http://finance.yahoo.com/echarts?s=JAVA#chart2:symbol=java;range=my;indicator=volume;charttype=ohlc;crosshair=on;ohlcvalues=0;logscale=off;source=undefined
December 1st, 2009 at 7:49 am
paulson was definitely not the only one to put on the CDS trade. we did at my former fund and made a ton of money. one of my friends started a sizable hedge fund based on some great CDS trades. and one clarification - paulson did not bet the ranch, he didnt have to. in the early days of the CDS trade (2005-2006), on many trades (actually defined as contracts), the counterparty would not require ANY capital up front, only capital adjustments based on price at defined periods going forward. most all of our trades until early 2007, we put up zero money, and never had to put up any money… they simply just paid out on default. so paulson then didnt put up a lot of capital up front, but certainly had contingent liability should the trades go against him. my guess is that he bought all these in a separate entity to limit the liability to the parent should the trades have gone against him.