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John Paulson Needs To Go Austrian
By Jeff Harding of The Daily Capitalist.
John Paulson, the hedge-funder who made a personal fortune of $5 billion in 2010, is now seen as a goat rather than as the “top kid” on the hedge fund block because of recent big losses.
Paulson suffered a huge loss on his firm’s investment in Sino-Forest Corp, a Chinese tree plantation grower. Reports of balance sheet fraud caused the stock to tank. It is difficult to assess the loss, but estimates from the press range from $750 million to $150 million. In a Forbes.com article:
“Paulson initially said it had lost around $750 million as a result of pulling out its 30 million shares from Sino-Forest. That loss may be smaller, maybe closer to $150 million, Paulson said in a conference with investors in Paris this month, based on Sino-Forest’s stock price in 2007, when the firm began buying the shares, according to The New York Times.”
I like Paulson a lot, mainly because he makes big contrarian bets that have performed very well for himself and his investors in the past. He called the bust correctly with bets in subprime securities. He’s also a major investor in gold. But these kinds of comments make you wonder what he’s doing at his $37[?] billion fund. The fact that he got suckered by an accounting scam at Sino-Forest was bad enough, but when he can’t pin down his losses, it raises serious questions about his firm. Here is what they said about it:
“Paulson reviewed both sides’ written materials, asked questions and engaged in further independent research, including conversations with the chairman of the special committee about the scope and process of their investigations. Although Sino-Forest steadfastly denies the Muddy Waters allegations … and maintains that there is no fraud, we believe significant uncertainties exist and we made the determination to sell our full position and await the results of the independent investigation. Even if Sino-Forest’s special committee investigation clears management and supports the public disclosures and financial statement, the stock may remain depressed for an extended period of time.”
The next thing that makes me wonder about him are his big bets on Citigroup (C) and Bank of America (BAC). Last year he wagered on a “V”-shaped economic recovery and loaded up on bank stocks. It was reported Friday that he dumped a large portion of his 124 million shares (1.2% of the float) of BAC, during the past two months, prior to the announced settlement between Bank of America and the customers of Countrywide’s RMBS.
Paulson made it big in 2007 and 2008 on correct bets on subprime securities. Then he had another big year in 2010. This gives him a lot of credibility. In the financial world success is the only measure of credibility. Lose money, and what do you know?
He’s a poster boy for Nassim Taleb’s ideas on randomness in the investment world. The way Mr. Black Swan sees the world is that successful investors are probably lucky. Looking on a scale of probabilities, if you plot the performance of the world of investment advisers on a scatter graph a very few investors are going to be at the upper end of the investment performance scale, but most are right around the middle. The funny thing about the performance scale is that it looks just like any other random pattern of behavior. That is, the performance results of all of the managers in the world on a scatter graph looks like any random event similarly plotted.
What does that mean for Mr. Paulson? It raises the question: is he smart or just lucky?
The answer is that I don’t really know and neither does Mr. Paulson. I’d like to think he’s smart and lucky.
Here is an obvious question with a seemingly obvious answer: if he’s so smart how come he loses money? Well, nobody is always right. If that is the case, then how do you determine whether or not his results were based on luck or brilliance? Please refer to the sidebar.
If he were an adherent of Austrian theory then I would say he is brilliant. Why? Almost all of his investment moves have been based on decisions that an Austrian theory economist/investor would make. For example, in 2007 and in 2008 he correctly shorted subprime securities, foreseeing the bust which many Austrian theory investors/economists saw coming. Others (not Austrian) made this same bet and won and then lost it again (three months later for Peloton Partners; they had luck, and then bad luck)
The acquisition of large positions of gold by Mr. Paulson would also be something an Austrian theory investor would make. He started accumulating gold in 2009, a dead-on call in terms of the gains he made. In the Fall of 2010 he turned negative on the economy and started to pull back on equities. But then, curiously, he turned around and called a V-shaped recovery, and that’s when he bet on the banks... and lost again.
As an Austrian theory investor/economist, I and others like me have been forecasting stagnation and inflation since last year and my forecast has been holding up to this point. It seems logical based on Austrian theory and the actions the Fed and the Administration have taken. I’m not claiming prescience, but rather what a close look at the data tells me in light of Austrian theory. Yes, it works.
I am saying that Mr. Paulson has been mostly lucky in the Mandelbrotian-Talebian sense. He should start reading Mises.
This article originally appeared in The Daily Capitalist.
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My vote is that Paulson is merely lucky.
Come on, Jeff. Paulson knows to the penny what he lost. The fact that he is less than forthcoming and not transparent is b/c he operates in the largely unregulated hedge fund industry, a world with unlimited leverage, without audited financials, legitimate FINRA/SEC compliance concerns, and sheep for investors. They can mislead about losses (just as they have about gains) all day long. In the words of The Wizard of Oz, "Ignore the man behind the curtain!"
Shorting subprime was not Paulson's idea - he was talked into the trade by one of his traders (the italian guy, forgot his name.)
Since that trader quit to start his own fund, Paulson bet 100% on the success of the reflation/QE/Fed bailout/extend-and-pretend policy. I doubt Pulson knew or cared how bad the loan books at C and BAC really were... and now his investors are paying
A thousand monkeys throw darts at a stock listing page. One monkey achieves 45% overall returns for the year. Should he be celebrated as the best investor?
I think they are now.
Mu. While I'd recommend reading Hayek and Mises to just about anyone with a passing interest in economic decision making, it seems that Mr. Econophile is attaching his thesis cart to the Austrian horse as either a means to popularize it, or worse, take advantage of its surging popularity. There isn't much in the way of investment advice to be gained from perusing Austrian economic thought outside of understanding the credit cycle and the nature of fiat currency regimes. There is nothing in the theory that is going to help a soul pinpoint the timing of fads or other persistent relative popularity of asset classes, or help one value a piece of land against a stock or a lump of gold, or quantify how the FOMC is going to vote in the next meeting. Austrian theory can help one understand the difference between money and currency and how this difference has been used as a stealth form of taxation, but it offers no speculative investing panacea.
I beg to differ. It's my main tool of applied economics. OTH no theory ever can give you exact timing.
Outside of the titles by Hazlitt, Mises, Hayek, and Rothbard that I've read which one can reasonably expect others to understand as pertaining to "Austrian Economics", I haven't seen anything directly related to the process of investing. If there is some existent body of "Austrian Investing" work, I'd be excited to be introduced to it. Unfortunately, it rather looks as if you've but coined a marketing slogan, "Austrian Investor", that is not defined by any external literature. Closest thing I find in a cursory literature search of mises.org is the pamphlet "Ludwig von Mises, meet Benjamin Graham: Value Investing from an Austrian Point of View". Even that author doesn't go so far as to describe Austrian Economics as an investing tool, rather a 'compatible view' (between Grahamites and Miseans). That in itself is telling, that the subject matter of "Austrian Economics" is more an economic philosophy, or even epistemology, than it is a system of applied economics, much less applied investing. Have a great respect for the early Austrian thinkers, and while all idols should eventually be toppled, I hardly desire to see the term "Austrian" diluted to merely an amorphous advertising nugget.
Well, that's pretty much it there. Investing.
Once you understand credit, inflation, you understand investing in the current environment. It gives you a very good place to start. I went from sweet fuck all to 15-50% per year based on the understanding of money and the knowledge that yes there really will be a crash and it'll be caused by credit contraction.
Now I go look at what causes credit contractions, how likely is X, Y? Which sectors are most leveraged on credit? Who will be most affected. Which sectors are gaining most bank credit? etc.
It's a tool. Quite a useful one.
Perhaps it's being pendantic, however seems to me that a better term would be philosophy or framework (of understanding). To me, a tool is a methodology such as discounted cash flow analysis, sector financial ratio analysis, market penetration analysis, etc, some set of concrete rules which directly support an investing decision. And no, I'm not trying to be a tool in posting this.
Post Excellente!
"I’d like to think he’s smart and lucky." As would the random Mr. Paulson.
This author seems to forget that Paulson made a fortune not on Austrian economics but on the fact he helped construct Abacus.
Austrians don't reject the idea of an objective reality. The theory of subjective value is an OBJECTIVE observation. All it states is that people's economic decisions are made subjectively, the fact that they do so is clearly objective.
OBJECTIVE is the key word.
I studied under a renowned Austrian Eco Prof, and I still respect him as a great mind, a true thinker.
He believed that the greatest investment you could make was in knowledge, instead of the accumulation of trinkets.
Who was your prof?
Knowledge without execution is like Superman with no interest in saving Lois Lane.
Useless.
Professor was only half right.
Actually, Austrian means there is no objective reality. So any definition works if you can think it.
Actually, you are spouting nonsense and/or lies.
My Austrian karma just ran over your crippled Keynesian dogma --- again.
Ever and always, they experience mean reversion. There is no evidence for a persistent attribute of market outperformance by money managers.