Thu Mar 14, 2013, 1:00 am | 1 Comment
While I was doing research for my next post, I came across an article by Gregory Zuckerman over at Wall Street Journal dot Com. The title of the article is “‘Greatest Trade’: How You Can Make $20 Billion”.
It’s an old article in which he states that even as the financial system collapsed in 2008, and millions of investors lost billions of dollars, one unlikely investor was racking up historic profits: John Paulson, a hedge-fund manager in New York City.
Paulson’s firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies.
Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day.
How did he do it?
Believing that a housing-market collapse was coming, Mr. Paulson spent over $1 billion in 2006 to buy insurance on what he then saw as risky mortgage investments.
When the housing market cracked and the mortgages tumbled, the value of Mr. Paulson’s insurance soared.
One of his funds rose more than 500% that year.
Then in 2008, he shorted financial shares, or wagered that they would fall in price, profiting again when these companies collapsed.
Can you follow Mr. Paulson’s strategy to make millions if not billions?
The author of the article Mr. Zuckerman thinks so and has given many points how to do just that. Some points maybe applicable to you and others not. You be the judge.
The author then gives eight investing lessons of Mr. Paulson’s $20 billion gamble, the greatest trade in financial history. But the crust of his lessons can be summed up as follows:
Experts are not always right
When Wall Street is wheeling out its latest can’t-miss product, be skeptical. Experts had been wrong before on various occasions. Don’t always listen to the experts especially the so-called finance gurus talking rubbish on the tube.
Have an exit strategy – and cash to cushion any tumble. It’s easier to buy but kind of hard to sell. If you are gaining, be prepared to sell to make the profit you wanted. If you are losing, be prepared to sell to avoid bigger loss down the road.
Debt markets can do a better job predicting problems than stock markets. Debt market is the market for trading debt instruments.
Educate yourself about the range of exchange-traded funds (ETF) being introduced, some of which can play a valuable role in a portfolio. Not only that, find the best places to invest your hard-earned money.
Don’t underestimate the value of a safety net, such as put options. In addition, you ought to build cash reserve that may just save you in a financial crisis. Three-to-six months worth of living expenses is considered a good financial cushion.
A historical perspective can be a valuable tool in your investment strategy. Do your research for as far back as 5 years if not ten.
Nothing lasts forever
Even the greatest trade doesn’t last forever. Besides, past performance is no guarantee that your investment will do as good if not better.
Don’t risk too much in any one trade, even one that seems like a sure thing. I lost over $27,000 a couple of years ago in just one stock. I should have a diversified strategy in place for that amount.
In a Nutshell
Mr. Paulson made lots of money in hedge fund. That doesn’t mean everyone else can repeat the same strategy and make that much money.
Read the full article “‘Greatest Trade’: How You Can Make $20 Billion“.