Thursday, December 02, 2010

Takeaways From 'The Greatest Trade Ever'

By Eric Jackson
RealMoney Contributor

12/2/2010 12:00 PM EST
Click here for more stories by Eric Jackson

It was an interesting exercise to reflect on what book has had the biggest impact on me as a trader or investor. I'm picking a recent book that recounts the history of John Paulson's bet on a collapse of subprime housing in 2006-2008: Greg Zuckerman's The Greatest Trade Ever.

Most people I talk to about the book have been drawn to it because of the money Paulson made -- several billions personally -- and they are amazed that he was able to see in advance what everyone now sees as obvious after the fact: Housing's explosive growth was illusory, built on a sand foundation of easy credit.

As an investor, you can't help but be impressed by the returns that Paulson scored. However, the pearls of the book are the little things you notice about his process of approaching and then executing the trade. These actions are replicable, even though the trade itself is not.

Here are my key takeaways from the book:

1. Don't let others label you, and more importantly, don't label yourself.

John Paulson had been a moderately successful merger arbitrage guy. He raised money from investors with that as his mandate. People expected him to keep using that strategy. Most hedge-fund managers at that stage of their careers would be on auto-pilot. After all, he could have kept making good money doing just that. Even though he had no housing experience, he wasn't afraid to jump in when he saw the opportunity. Many of his longtime investors weren't happy. This wasn't what they signed up for when they gave him their money. Paulson didn't care. He saw the opportunity and didn't let others, or his own reservations, get in the way.

2. The biggest trades require planning and a refutation of conventional wisdom.

I have never been drawn to momentum trading or studying charts. I know lots of people who do it and are fantastically successful.


[*** This post is an excerpt of the full article, available by clicking here to go to Note: subscription required. ***]

Sphere: Related Content
blog comments powered by Disqus