John Paulson's Hedge fund made 20 billion from disaster. 8 tips how you can do that next time. | Investment Moats Skip to Content

John Paulson’s Hedge fund made 20 billion from disaster. 8 tips how you can do that next time.

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”).

It can be thought out as 8 great tips:

  • 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.
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