http://online.wsj.com/public/article/SB120036645057290423.htmlAt a time when many financial institutions and traders are reeling from the shock of the subprime crisis, one man rose above all to become the big winner - his funds posted phenomenal results: the older Paulson credit funds rose 590% last year and the newer one 350%.
So how did John Paulson do it? Like all master strategists, he had a keen eye for details and could see what many others fail to observe. He assessed the battlefield he was in thourougly and adapted his strategies accordingly, unlike the other investors who were blinded by the unbelievable profits to be made from the booming housing market at that time. He realised that the growth of the housing market cannot be sustained and many lending institutions were making risky loans, causing debt collections to be extremely difficult. Also, he was sure that the financial instrument credit-default swaps, a sort of "insurance" against the housing loans, was grossly underpriced and ignored by many traders who were oblivious to the housing risk. By implementing complex debt trades that would pay off if mortgages lost value and buying up the swaps, his funds made tremendous gains when the housing market crashed. Truly ingenious!
In addition, like Sun Tzu, he understood the power of information gathering and most probably he had many informants who kept him updated on the health of the housing market as well as the activity of the big lenders. With the precious information, Paulson was sure that he made the correct bet and patiently waited for his strategy to succeed. He did not have to wait long for results to show; in the fall of 2007, the ABX subprime-mortgage index crashed into the 20s.
Just like Hannibal of Carthage, Sun Tzu, and many other great strategists, John Paulson prevailed when many others crashed and burned.
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2 comments:
Good entry dude. It is extremely hard for any individual, especially an individual representing an established instituition, to go against the crowd in the finance and investment sector.
I'd recommend you the book 'Fooled by Randomness', by Nassim Nicholas, which offer a whole new insight into winning and losing in the investment world. In the author's perspective, chance and randomness sometimes play a bigger role than skill. People like John Paulson, Warren Buffet and George Soros are no doubt winners in the world of investment, but seen in another light, they may simply be the product of randomness going in their favour.
Given a big enough population size, there will almost certainly be people who, in hindsight, act in sheer brilliance in any portfolio management.
In my opinion, having an expert knowledge in the working of the markets, understanding the concepts of strategy and having a good mind merely serve to increase one's odds in emerging as champions in the world of stock markets that is ever random.
In probabilistic sense, it shall come as no surprise that a monkey can outperform a Goldman Sachs top fund manager.
Haha... Monkeys!!! On a serious note, randomness as a factor is based on Clausewitzan strategies, as he believes the battlefield to be clouded by a "fog of war". But that is just one of the many aspects which we can approach a situation. I'm currently still reading On War, so i'll move on to Nassim's book once i'm done. ^^
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