Greg Zuckerman of the WSJ has written a book on how hedge fund manager John Paulson made $20 billion in the housing collapse (“The Greatest Trade Ever”).
Here, he condenses Paulson’s thinking into 8 secrets to success.
Nothing revolutionary, sadly:
- Don’t follow the crowd. When everyone else is buying something (housing, mortgage-backed securities), start looking the other way.
- Have an exit strategy. Bubbles burst because everyone exits at the same time.
- Focus on the debt markets. They’re better at predicting the future than the stock market.
- Take the time to figure out how fancy new investment products like CDSs work. Paulson made his bet using credit default swaps.
- Buy insurance. Out of the money puts on the housing market were cheap…and almost no one bought them.
- Remember the past. Some of the big winners in the housing crash were those dismissed as out-of-touch dinosaurs…because they’d seen it all before.
- Remember that no trade lasts forever so don’t fall in love with your investment. After making his $20 billion, Paulson reversed course and went long banks at the bottom.
- Timing is everything and luck helps. Investors had been carried out on stretchers for years by betting against the housing market.