John Paulson was a relatively unknown trader and struggled to raise finance for his deals, to the point he thought he might go under. But, he saw the crisis in the American housing market before it happened and, at just the right moment, he bet against it - and bet big. He bet against the banks who had caused the inflated bubble and, when the homebuyers defaulted on their mortgages and the banks started to falter, he got very rich.
In fact, according to the Sunday Times, his company made $20 billion in a couple of years. It's the biggest financial deal in history - by miles. His nearest 'competitor' is George Soros, who famously bet against the pound on Black Wednesday in 1992 and made $1 billion.
Gregory Zuckerman has written a book about Paulson and, despite themselves, people actually like him. The Times describes him as 'the type of investment guy you would want on your side'. Apparently, the money hasn't changed him and he's still very down to earth. Had he been working for the Wall Street banks, he would probably have tried to talk them out of the silly investments they were making.
He made his call by sticking solidly to research and ignoring the emotion and the exuberance (greed) of the time. Whilst everyone else could only see that house prices would continue to rise, his information told him the opposite. So what were his keys to success?
- Research, research, research - the numbers never lie. Paulson's team analysed 6 million mortgages to calculate how much property prices had diverged from their historical norm and prove the housing market was over-valued by 40%.
- Go your own way - following the crowd (and the emotion) can be dangerous
- The right investment - insuring against the possibility mortgages would turn sour when people defaulted. No-one forecast it, so the insurance was cheap - and he made a fortune when they did default.
- Timing - get in early enough to take advantage of cheap premiums and stay ahead of the crowd
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