What John Paulson Can Teach Us

Even his own staff complained that he wasn't taking money off the table. They told him to sell when he was down in his trade and they told him to sell when he was up on the trade after New Century reported its first blown quarter in early 2007. Through it all, Paulson stuck to his guns because he foresaw even bigger profits ahead - and he was proved right.

As a fund manager, I often ponder the challenge of balancing between (1) trusting yourself and your investment thesis completely even when no one else does and (2) being aware enough to know when you're being too stubborn and "not seeing the facts" or when the trade is going against you.

In Paulson's case, every new bit of data which came to light and possibly contradicted his investment thesis was always scrutinized by him and his team to see if they had "missed something." He always stuck with the trade because he felt confident in the depth of research they had invested in understanding the problem/investment opportunity.

For Paulson, it all boiled down to one chart which Pellegrini produced showing the inflation-adjusted growth in housing prices over time divided by wage growth. The data clearly showed a rapid explosion upward away from the general trend starting in 2000. He assumed this trend would not continue indefinitely and revert (even overshoot). He was right.

The Greatest Trade Ever isn't just about John Paulson. It describes some smaller players who also bet against housing. Their stories are also very interesting and some of the characters are really colorful and interesting. Some run into the problem of not having enough capital to implement the trade to the degree they want to. Some wait too long.