The trials of a successful investor:
A few months ago I had dinner with an old friend who told me an amazing story.Two years before, a nice guy with no experience at all in real estate had come to him and said that there was a fortune to be made betting against the U.S. housing market. This fellow hoped to raise money for a hedge fund whose sole purpose was to do this, by shorting the subprime mortgage market. He asked my friend to invest with him but my friend turned him down. Now my friend felt foolish.
``It all happened exactly like he said it would happen,'' he said. ``In every single detail.''
The hedge fund creator's name was John Paulson. And -- as Bloomberg News's Jenny Strasburg and Anthony Effinger and the Wall Street Journal's Gregory Zuckerman laid out recently -- by making between $3 billion and $4 billion for himself in 2007, he appears to have set a Wall Street record.
In the long history of money-making, no one has ever made so much so fast. As the Journal story also showed, Paulson's instincts now tell him to lay low and avoid calling attention to his fantastic triumph over his fellow Wall Street man.
He got lucky. One of the reasons there are so few short selling hedge funs is the old trader's adage: the market can stay irrational longer than you can stay solvent.
great link to michael lewis's (of liars poker, moneyball etc fame) -- he nailed it -- down to even how to play with the new-found fortune!
Even a blind squirrel finds a nut every once in a while.
What do you mean by the statement "there are so few short selling hedge funds"? There are a zillion, actually. Did you miss the hedge fund boom of the last few years? Perhaps you meant short only. Most hedge funds are market neutral, but the whole idea of a hedge fund is to get beyond the long-only constraint that bedevils non-hedge fund managers.
It's more like, "given a statistically significant number of blind squirrels in a massive forest of oak trees it's a mathematical near-certainty that one will stumble upon a crapload of acorns, and breathless business-porno journos tend not to write glowing features about tha squirrels that starved to death."
The adage is often attributed to Keynes.
The adage is often attributed to Keynes.
Yep. Like most people, I knew the housing market bubble would burst. And the same for the dot-com bubble before it. I just didn't know when. Both bubbles persisted at least a couple years longer than I'd have expected. Had I tried to get rich shorting the market, I'd have gotten killed.
And I've been expecting the real estate bubble to burst in the UK as well, and it looks like that is now underway. But again I had no good idea when it would happen.
"Avoid teams of reporters from the Wall Street Journal, the New York Times or Bloomberg News. Embrace the would-be artist from the New Yorker," or the glib dilettante from the Atlantic Monthly.
I think I'd follow Paulson's instinct and lay low as well. Not that I'd be ashamed of what I had done, I just would never want to draw attention to myself when those kinds of sums are involved. Michael Lewis' suggestion to talk to the press seems overtly self serving.
I predict the name John Paulson will be the defendant in multiple civil and criminal complaints now that his cover is blown- and it won't make a dime's worth of difference that he likely did nothing wrong.
Let's not forget the part where Paulson gave big money to the Center for Responsible Lending, one of the 'consumer' groups helping to hype the 'crisis' and drive down the value of mortgage investments. And then he sells short! What a coincidence.
DN,
subsidizing 'the last straw', when you notice the load that the Camel is endeavoring to carry, just might be considered 'genius'...
might be different if it was Mozilo shorting the house of cards he helped create..
It's not really luck.
Luck is when stuff happens, and absent your really doing anything, stuff still happens.
This guy is no more lucky than Goldman Sachs, who also were doing quite a bit of thinking on the issue across their management ranks.
Yes many of us probably thought, "This bubble is gonna crash...maybe" But do most of us really bother? We often lack the courage, the tools, the drive to act.
Do we attempt to scrape up enough cash to buy some long term put options on some financial index, and selling shorter term options against the position each month to reduce our cost a basis?
Do we sit around asking why Baidu or Google should be priced so high in a time of possibly declining advetising revenues?
Uhm no. Because some of us are ideological and wedded to ideas like efficient markets and indexing, and we feel rather comfortable in the herd. Besides, there are crocs out there. "Crock of poop!," we say about the "lucky" ones and their ways.
Others of us are conspiracists and believe that "only those with inside knowledge 'know' and can exploit these things".
Still others of us, instead of popping open a good book on options or value investing or the history of market risk, kick back, grab a coke, and flip on the television or download porn from Youporn.com (stop looking at me).
Some events go rather unwatched by the average person. Nobody sits and thinks, "Oh gosh, those Baidu options are overpriced and I can probably, place a bear call spread a day or two before expiration that will earn me $50 per $500 committed within a 24 hour period".
We don't think. We sit, and point, and say, "Wow, look how lucky".
Looking pretty is luck. Being born American is luck. Winning the lottery, luck.
But if you are a person with an idea, and the knowledge and savvy to put it into place, how is that different from any entrepreneur?
And every time you pop into some business, or some new shop, the founder was some person who said, "I am not going to index my life to the averages."
Luck walks past so many of us, but usually it is not conforming to the worldview or life choices that have become our anchor and idol. A tidbit of knowledge or wisdom gets lost right in front of our faces.
It's rather odd to find that some libertarians can mark individualism as luck.