The greatest bargain: How to make $ 20 billion
His firm earned $ 20 billion between 2007 and early 2009, playing against the real estate market and big financial companies. Personal income Paulson make almost $ 4 billion, or more than $ 10 million a day. This is more than the income JK Rowling, Oprah Uinnfri and Tiger Woods combined for the year 2007.
How did he do it? Believing that the approaching collapse of the real estate market, Paulson has spent about $ 1 billion in 2006 to purchase insurance from the fact that he had already identified as high-risk mortgage investments. When the real estate market and mortgages collapsed, the cost of insurance Paulson rocketed. In that year one of his funds grew by 500%. Then, in 2008, he opened a short position on the financial assets of companies or put on the fact that they will fall in price, earning again, when the prices of these companies collapsed.
Is there in this case, some investment skills that can learn to investors, based on the stories of his success? Yes. Of course, no guarantees, but the success of Paulson and several other former unsuccessful investors gives support to people who are trying to compete with the pros on Wall Street.
Below are 8 tips on investment of $ 20 billion Paulson's game, which is the greatest example in financial history:
1. Do not rely on the experts
Many investors lost heavily in 2007 and 2008 on housing construction and collapse of the stock market. But no one lost more than commercial and investment banks, caught in the trap of toxic mortgage securities. These bankers were the ones who have created such investments, and the best analysts on Wall Street vouch for their reliability, just when Paulson and others set against the investment.
Lesson: When Wall Street puts its' latest product is a win-win "- be skeptical.
2. Problems bubbles
Some academics argue that financial markets become more efficient. But the rapid growth of financial bubbles in recent years, including real estate, technology and Asian currencies, confirm that is just hard to navigate, and markets are increasingly inclined to exaggeration. Today, investors of any gauges read the same article, watch the same TV business programs and see this same tips. They invariably take a course on the output simultaneously.
Lesson: Have an exit strategy and cash to cushion any fall.
3. Focus on the debt market
Most investors track the ups and downs of the stock market, but have a vague idea of the movement in the debt market. Is a mistake. Early signs of trouble were seen in markets with high levels of competition that are not in the center of attention, such as the subprime mortgage market bonds. These problems eventually led to collapse the housing market, stock markets and the economy as a whole, that Paulson and his team christened as the "domino principle".
Lesson: Debt markets can play a generally larger role in predicting problems than the stock markets.
4. Development of new investment
Paulson has earned a huge profit on the purchase of credit default swaps (CDS), derivative investments that are insured debt. When the risky mortgage bonds fell in price, insurance Paulson rocketed. However, many experts were confused by the CDS contracts or shied away from the relatively new investments for themselves. Paulson and his team had no experience with CDS contracts, but they spent some time studying them.
Lesson: Learn a variety of trading instruments, some of them can play a valuable role in the portfolio.
5. Insurance premiums
Number of investors worried about an explosion in the housing market, but few do something, even though such CDS contracts at that time sold at extremely low prices. Investing in stock options "not in the money" pays off only when the market falls, at the time they also traded at reasonable levels. Since this insurance was very cheap - many professionals ignore it.
Lesson: Do not underestimate the importance of insurance, such as a put option.
6. The value of experience
Some of the biggest winners during the crisis were middle-aged investors, who was fired for past services. But they have encountered with past market downturns, and some bankers and analysts were caught off guard, because they knew only the good times.
Lesson: A historical perspective can be a valuable tool.
7. Do not forget
In early 2009 Mr. Paulson has become more inclined to bullish trend on the banks and financial companies, against which he set in 2008, as the latter improved their balance sheets. These steps led to profits this year.
Lesson: Even the most successful trade can not last forever.
8. Luck helps
In early 2006, Mr. Paulson decided that the real estate market problems and intended to profit from the coming fall. But some real estate experts have already decided that it was overvalued, while others set against the real estate market, but have not been able to fix their losses. Just months after the historic trade Paulson, real estate prices in the United States again began to fall.
Lesson: Do not get too many chances in one transaction, even if it seems right thing.
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