

The Greatest Trade Ever: Profiting from the Crash - jakarta
http://online.wsj.com/article/SB10001424052748703574604574499740849179448.html

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idm
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
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
A lot of it is also because we are still in the middle of the story. The jury
is still out on that bet.

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RyanMcGreal
>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".

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MikeCapone
<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.

------
patio11
A $147 million friends and family round...

Words fail me.

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jakarta
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.

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steveplace
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-...](http://www.marketfolly.com/2009/06/john-
paulsons-43-billion-gold.html)

~~~
zandorg
Funny URL! says "43" when it is "4.3"!

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mattmaroon
"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
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

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codexon
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
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
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>

~~~
jakarta
Warren Buffett also invests in mispriced derivatives.

You should take some time to read the following:

<http://www.berkshirehathaway.com/news/may0208.pdf>

Also, note that during the 2008 AGM Warren Buffett remarked that a small
canadian insurance company had profited from credit default swaps, and
mentioned that they aren't all that bad.

He was referring to Fairfax Financial, a company I myself invested in over 2
years ago with the intention of hedging against sub-prime:

[http://en.wikipedia.org/wiki/Fairfax_Financial#Subprime_mort...](http://en.wikipedia.org/wiki/Fairfax_Financial#Subprime_mortgage_bubble)

Fairfax was likely the ONLY insurance company to protect its shareholders from
the financial crisis and profited immensely. They were able to use the CDS
investments to profit and then sold and reinvested in equities.

Next time try arguing with better facts than an arbitrary quote.

~~~
codexon
Well if he can't beat them, he joins them.

It doesn't look like he's doing all that well following the latest fad though.

[http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX...](http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX1k9rMDnQ)

~~~
jakarta
oh boy, you're on a losing streak here.

Look at the date of that article, it is from April. Go see what the S&P 500
has done since then (Hint: it is up 22%).

Meaning, the mark to market loss that those derivatives at will have already
narrowed quite a bit. He still has a ways to go, but so far things appear to
be in his favor.

Also, remember that it is a paper loss, he still has not paid anything out. So
he still gets to put those premiums to work in the market, given his recent
performance on his warrants w/ GS and others, he is doing quite well.

~~~
codexon
I don't know why you keep wanting to "win" and talking condescendingly to me
as though you have some personal stake in this argument when its readily
apparent that you are not correct.

Can you go see what the S&P has done since that press release you cited?
(Hint: its down 27%).

Now I'm not saying that you can't make a bunch of money on derivatives. Let's
stop arguing about this.

The fact is that derivatives is about as moral as gambling except that you can
gamble imaginary sums and the government will step in to pay with tax payer
money because Goldman Sachs owns the Fed and the banks are "too big to fail".
Even Warren Buffet has admitted that they are bad, and its not just one random
quote.

Just because he is joining the club doesn't mean that derivatives have stopped
being bad, it only means that he can't fall behind the other investment
vehicles.

