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Paulson Gold Losses


Uccmal
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http://www.bloomberg.com/news/2013-04-15/paulson-gold-bet-loses-almost-1-billion-chart-of-day.html

 

The longer I am in the business of investing the more I gravitate toward Buffett's methods.  Paulson has managed to sell Bac ahead of of its run up, buy gold ahead of its run down, on the heels of huge Sino Forest losses.  The CD win is looking more and more like luck.  Over time so many of these high flyers crash while Buffett keeps on keeping on. 

 

 

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Paulson did a lot to make the CDS trade happen and had the conviction to see it through, but based on a book about it that I read a few years ago (can't remember the title right now), it was one of his analysts that brought him the idea and pushed hard to convince him at first. Once he was convinced, he did the right things, but still... I'd be more curious to find out where that guy is now and how *his* record has been since.

 

Quick googling couldn't find his name, but I think it was Italian-sounding...

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Paulson did a lot to make the CDS trade happen and had the conviction to see it through, but based on a book about it that I read a few years ago (can't remember the title right now), it was one of his analysts that brought him the idea and pushed hard to convince him at first. Once he was convinced, he did the right things, but still... I'd be more curious to find out where that guy is now and how *his* record has been since.

 

Quick googling couldn't find his name, but I think it was Italian-sounding...

 

Are you thinking The Greatest Trade Ever by Gregory Zuckerman?

 

Paolo Pellegrini and his firm, PSQR .

 

It looked like Paolo returned all outside money, according to http://dealbreaker.com/tag/paolo-pellegrini/

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Guest valueInv

http://www.bloomberg.com/news/2013-04-15/paulson-gold-bet-loses-almost-1-billion-chart-of-day.html

 

The longer I am in the business of investing the more I gravitate toward Buffett's methods.  Paulson has managed to sell Bac ahead of of its run up, buy gold ahead of its run down, on the heels of huge Sino Forest losses.  The CD win is looking more and more like luck.  Over time so many of these high flyers crash while Buffett keeps on keeping on.

+1 on the Buffet thing. The more I learn about investing, the more I realize the Buffet is in a league of his own.

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Not to knock him at all (I have tremendous respect for him), but remember when Einhorn wrote that op-ed about gold and implied that Warren just didn't get it?

 

Turns Warren and Charlie were right (again), and Paulson, Einhorn, and Grant were wrong. At least for the moment.

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I think position sizing is key. Klarman has precious metals miners. Others like Kyle Bass advocate holding gold. But the key is in what amounts. Its not unlike holding a foreign currency - you don't want all your money in it. I am holding mainly options on silver miners and way out of the money long-term options on silver (the ones which are very far out, I can't believe it, actually went up in value yesterday due to the volatity).

 

Having said that, the large core of any portfolio should be long-term value investing. Even Bass with his big bet on Japan where he thinks he can me 100 to 400x his money. Sounds like that bet is low single (yes low single) digits of his portfolio. So his portfolio will double or triple in value if he's right, and if wrong he will lose a couple percentage points. 90% is invested in US residential structured debt I believe.

 

As Uccmal says, Buffet's approach certainly seems easier / more certain over time. Having said that, the shit hasn't hit the fan yet! Now having said that, being in stocks, conservatively priced, with growth for the long-term as they keep taking share of total corporate profits away relative to other corporations, may not be that bad a place to be relative to other options out there when the shit does hit the fan.)

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I think position sizing is key. Klarman has precious metals miners. Others like Kyle Bass advocate holding gold. But the key is in what amounts. Its not like holding a foreign currency - you don't want all your money in it. I am holding mainly options on silver miners and way out of the money long-term options on silver (the ones which are very far out, I can't believe it, actually went up in value yesterday due to the volatity).

 

Having said that, the large core of any portfolio should be long-term value investing. Even Bass with his big bet on Japan where he thinks he can me 100 to 400x his money. Sound like that bet is low single (yes low single) digits of his portfolio. So his portfolio will double or triple in value if he's right, and if wrong he will lose a couple percentage points. 90% is invested in US residential structured debt I believe.

 

+1

 

Unfortunately, when you buy insurance (I think that’s exactly how Mr. Einhorn looks at Gold) and then disaster doesn’t happen, you are going to look foolish to the great majority of people… You might argue that Mr. Buffett never buys insurance, and you would be right… if you don’t look at the $1 billion in free cash BRK’s businesses send to Omaha each month as the very best and most effective of insurance policies!  ;)

So, do learn from Mr. Buffett, but always keep in mind that your situation is not, and probably won’t ever be, even close to his.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

 

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"Paulson & Co. set up the gold share class at an average cost of $950 in April 2009,"

 

I never owned anything related to gold and not too clear about it, what's for sure though that the fat lady hasn't sang yet and bruce berkowitz got similar headlines not too long ago.

 

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I think position sizing is key. Klarman has precious metals miners. Others like Kyle Bass advocate holding gold. But the key is in what amounts. Its not like holding a foreign currency - you don't want all your money in it. I am holding mainly options on silver miners and way out of the money long-term options on silver (the ones which are very far out, I can't believe it, actually went up in value yesterday due to the volatity).

 

Having said that, the large core of any portfolio should be long-term value investing. Even Bass with his big bet on Japan where he thinks he can me 100 to 400x his money. Sound like that bet is low single (yes low single) digits of his portfolio. So his portfolio will double or triple in value if he's right, and if wrong he will lose a couple percentage points. 90% is invested in US residential structured debt I believe.

 

+1

 

Unfortunately, when you buy insurance (I think that’s exactly how Mr. Einhorn looks at Gold) and then disaster doesn’t happen, you are going to look foolish to the great majority of people… You might argue that Mr. Buffett never buys insurance, and you would be right… if you don’t look at the $1 billion in free cash BRK’s businesses send to Omaha each month as the very best and most effective of insurance policies!  ;)

So, do learn from Mr. Buffett, but always keep in mind that your situation is not, and probably won’t ever be, even close to his.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

 

Imo, the real question is: does Gold qualify as an effective insurance policy? On not? If it actually can fluctuate that much, I have come to the conclusion that it doesn’t qualify.

That’s what I have asked Moore, because he undoubtedly knows a lot about the precious metals market and to hear from him would be great! (Though I know he is very busy!)  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

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Paulsons approach is too much like gambling.  He had a big hit with CDS, similar to FFH, and Dr. Burry, and the few others.  Ignoring that hindsight is 20/20 it strikes me the CDS was easier to analyze on a fundamental basis.  The bets were on underlying companies rather than the economy as a whole. 

 

Gold is strictly a hedge against something or other, and therefore a macro bet.

 

Dumping BAC didn't seem to be based on any fundamental analysis.

 

Sino Forest was negligence on the part of Paulson.  It would have cost them a flight and pay checks for a couple of trusted Chinese speakers to check the veracity of Sino's holdings.  Berkowitz makes use of experts for all his purchases. 

 

The Buffett cash flow machine does serve as a macro play.  It is also easily duplicable by others.  Buy great companies at cheap prices, let the dividends come in and grow, and repeat. 

 

 

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The Buffett cash flow machine does serve as a macro play.  It is also easily duplicable by others.  Buy great companies at cheap prices, let the dividends come in and grow, and repeat.

 

I agree. But, as Mr. Buffett has very often repeated, all other things being equal, he much prefer to buy whole businesses than parts of companies through the stock market. And the reason, imo, has much more to do with fcf redeployment than complete control over management (“we won’t provide management. If you need managerial help from us, it means we are both in trouble”, right?).

Dividends in some cases might account for only 30% - 40% of earnings. And, after being distributed, they are taxed. Vice versa, fcf some years might even be higher than reported net earnings (ask Mr. Malone!), and of course it stays inside the company, so it is not taxed twice. That’s why I said that Mr. Buffett’s situation might not be so easily duplicable by others!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

 

 

 

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Paulsons approach is too much like gambling.  He had a big hit with CDS, similar to FFH, and Dr. Burry, and the few others.  Ignoring that hindsight is 20/20 it strikes me the CDS was easier to analyze on a fundamental basis.  The bets were on underlying companies rather than the economy as a whole. 

 

I would disagree with this.  While some of the CDS were on individual corporate names, the vast majority of the "bet" was on MBS and various other structured products (ABS CDOs, etc.).  It was a macro bet on housing and thus in some ways the economy as a whole. 

 

 

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I would disagree with this.  While some of the CDS were on individual corporate names, the vast majority of the "bet" was on MBS and various other structured products (ABS CDOs, etc.).  It was a macro bet on housing and thus in some ways the economy as a whole. 

 

Perhaps but it was an unusual macro bet because it was tied to specific dates and cashflows. For instance Burry knew when the ARMs would reset on subprime borrowers and Paulson picked out mortgages more likely to default. I don't consider this a pure macro speculation.

 

To me a true macro bet is more like FFH's bet on deflation. There are no individual mortgages or companies to bet on. There are no specific date like ARM resets or cashflows to examine. FFH is betting on what will happen to whole economies based on the collective need to pay down debt. To me this is pretty much speculation.

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Dr. Burry's bet was far from speculation. He not only read the mind-numbingly complex MBS prospectuses, but practically incited Wall Street to create CDS on subprime mortgages. He also clearly explains that his bet wasn't betting on an Armageddon scenario but specific tranches of subprime mortgages that would feel the most stress due to rate resets. For him, it was an incredibly asymmetric bet with a catalyst.

 

As for Paulson, I gotta wonder who's running the show. Paolo Pellegrini was the one who did the original subprime research and then Paulson saw it and approved it. Maybe the best thing for him would be to retire after subprime bet? (Like Andrew Lahde)  ;D

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Guest wellmont

i am sure there were a lot of people counting out PW in June of 2006. Self Made Billionaires have a way of bouncing back. that should be a lesson to those who aren't yet on the Forbe's 400.

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Between 2009 and 2011 Paulson made several charitable donations, including $15 million to the Center for Responsible Lending, $20 million to New York University Stern School of Business, $15 million to build a children's hospital in Guayaquil, Ecuador and £2.5 million to the London School of Economics for the John A Paulson Chair in European Political Economy.[17][18][19] Calling it the largest donation ever to a park in the U.S., on October 23, 2012, Paulson donated $100 million to the nonprofit that maintains New York City's Central Park.

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To me a true macro bet is more like FFH's bet on deflation. There are no individual mortgages or companies to bet on. There are no specific date like ARM resets or cashflows to examine. FFH is betting on what will happen to whole economies based on the collective need to pay down debt. To me this is pretty much speculation.

I feel like deflation is still based on fundamentals though. It's definitely not my game but if the bet is ultimately based on fundamentals, I think it's probably possible to have a roughly correct view on the probabilities from time to time.

 

With everyone focusing on the inflationary impact of the QE's and not the Japanese experience, the probabilities implied by option prices could have gotten way out of whack. Enough out of whack that their was a margin of safety? Definitely too hard for me to say, but is it too hard for anyone to say? E.g., the Fed itself must view the probability of monetary contraction as not negligible, no?

 

In any case, I'm glad they used options instead of swaps! I think the worst case from here is another $3.75 a share in after tax losses (bringing the total to ~$14.60 after tax). Written off in my mind.

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With everyone focusing on the inflationary impact of the QE's and not the Japanese experience, the probabilities implied by option prices could have gotten way out of whack.

 

Maybe part of the problem is I don't buy their deflation bet. I don't believe that United States is similar to Japan. Japan, like Depression Era United States, had a problem with businesses being heavily in debt. This is not the same as consumers being in debt. You can't fire your wife. Consumers don't react the same way to huge debts as businesses do. Business engage in fire sales and fire workers. This causes deflation. Consumers on the other hand just keep consuming or slightly reduce consumption. You don't get deflation.

 

In any case, I'm glad they used options instead of swaps! I think the worst case from here is another $3.75 a share in after tax losses (bringing the total to ~$14.60 after tax). Written off in my mind.

 

The deflation options may be ok but AFAIK they are also completely hedging equities. Or have they altered this policy. I always thought the equity hedge was part of their deflation bet.

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With everyone focusing on the inflationary impact of the QE's and not the Japanese experience, the probabilities implied by option prices could have gotten way out of whack.

 

Maybe part of the problem is I don't buy their deflation bet. I don't believe that United States is similar to Japan. Japan, like Depression Era United States, had a problem with businesses being heavily in debt. This is not the same as consumers being in debt. You can't fire your wife. Consumers don't react the same way to huge debts as businesses do. Business engage in fire sales and fire workers. This causes deflation. Consumers on the other hand just keep consuming or slightly reduce consumption. You don't get deflation.

 

In any case, I'm glad they used options instead of swaps! I think the worst case from here is another $3.75 a share in after tax losses (bringing the total to ~$14.60 after tax). Written off in my mind.

 

The deflation options may be ok but AFAIK they are also completely hedging equities. Or have they altered this policy. I always thought the equity hedge was part of their deflation bet.

Sorry I should have been clearer - was playing devil's advocate for second on labeling the deflation bet as speculation by virtue of being related to macro economics. Will definitely leave the specifics of deflation itself to others more familiar.

 

I had meant the CPI derivatives specifically, but yes the equity portfolio is still hedged. They've mentioned they expect unrealized losses on both to reverse when the "grand disconnect" disappears. So you're right in that there's a connection between the two in terms of a possible macro-economic scenario from their standpoint.

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i am sure there were a lot of people counting out PW in June of 2006. Self Made Billionaires have a way of bouncing back. that should be a lesson to those who aren't yet on the Forbe's 400.

--------

Between 2009 and 2011 Paulson made several charitable donations, including $15 million to the Center for Responsible Lending, $20 million to New York University Stern School of Business, $15 million to build a children's hospital in Guayaquil, Ecuador and £2.5 million to the London School of Economics for the John A Paulson Chair in European Political Economy.[17][18][19] Calling it the largest donation ever to a park in the U.S., on October 23, 2012, Paulson donated $100 million to the nonprofit that maintains New York City's Central Park.

 

His social responsibility is certainly admirable.  It doesn't necessarily make him a good consistent investor, which is what my focus on the thread was. 

 

My overall point was/is how few high flyers are able to avoid breaking Rules 1 and 2.  I guess it speaks to my focus these days which is to avoid large losses.  I am spending alot more time focusing on the avoidance of losses than I used to.  Paulson is just an example of what I mean.

 

2011 was a really bad year for me.  At least 25% of my 30 % loss was due to "learning experiences" and has resulted in me having to make 50% returns to get back to where I was, which is easier said than done.  It seems easier to focus on avoiding losses first, before aiming for gains.  Buffett redux. 

 

I dont mind losing temporarily, which is part of the game (BAC), and allows one to average down.  What I am certainly trying to avoid is catastrophic losses due to negligence or excessive gambling, such as Sino Forest, outsized gold bets, or in my case declining smartphone companies.  :P

 

 

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Its a very competitive game. My hats off on the performance of the posters here.

 

I am currently reading Howard Marks book-he indicates that the top investors over a 10 year period will spend 30% of that time in the bottom quartile in performance-so even the best will have some hard patches. The rest of us probably a bit worse. It pays to be patient when you have the right jockey. I have no opinion on Paulson

 

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