How the World's Smartest Investor Lost His Way

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

It appears that yesterday's rebound wasn't enough for investors to shake Monday's jitters, as the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 1.4% and 0.9%, respectively.

Mirroring these ups and downs, the VIX (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, has been on a roller-coaster ride this week; today, it gained 18% to close at 16.51. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.) Some investors are betting the index will continue to rise, with CNBC reporting that VIX call option buying has reached its highest level since Jan. 20120.

John Paulson's reversal of fortune
Yesterday, the Financial Times reported that the fall in the price of gold has cost high-profile hedge fund manager John Paulson at least $1.5 billion personally this year. No need to shed tears over his fate -- when you reach a point at which you can lose $1.5 billion of your wealth, it's unlikely you will ever end up clipping coupons. Still, this reversal of fortune contains some interesting lessons for ordinary investors.

John Paulson joined the elite of the hedge fund world -- investors who notch up single-year personal gains in the hundreds of millions or billions of dollars -- during the housing crisis with a stunning contrarian bet against the subprime market. That trade netted him and his investors tens of billions of dollars.

Once an unknown arbitrageur who bet on the completion of corporate takeovers, Paulson vaulted to prominence. The financial media (including me) began to track his holdings and his views on markets and the economy; investors flocked to his funds, wanting to invest alongside this new Midas.

As his assets under management topped $30 billion, Paulson was forced to stray from his initial circle of competency of merger arbitrage, with concentrated, directional bets on stocks and gold, ultimately becoming the largest shareholder in the SPDR Gold Shares ETF (NYSEMKT: GLD  ) .

Let me be clear: Paulson & Co.'s initial success was no fluke. Anyone who has read Gregory Zuckerman's account of Paulson's short trade against subprime knows it was superbly researched and constructed, and it took extraordinary conviction to execute. However, one does not improvise oneself into becoming a global macro investor; it requires a specific skill set and a lot of experience. Whether or not you're a billionaire, if you want to avoid stinging losses, the same lessons apply: Avoid excessively concentrated positions and stick to your area of expertise.

At The Motley Fool, we never forget our core competency is identifying great businesses and the right price to pay for them. The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (2) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 17, 2013, at 11:00 PM, mchedester wrote:

    Let's see how this all plays out before you say that somebody has lost his way. It's a 2 day drop. People don't get to be rich by playing it safe.

  • Report this Comment On April 18, 2013, at 8:03 AM, TMFAleph1 wrote:


    Thanks for your comment.

    John Paulson's challenges did not begin with the two-day rout in the gold market. His two largest funds, Paulson Advantage and Advantage Plus, lost 36 percent and 52 percent in 2011.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2369554, ~/Articles/ArticleHandler.aspx, 9/26/2016 12:07:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:55 PM
^DJI $18261.45 Down -131.01 -0.71%
^GSPC $2164.69 Down -12.49 -0.57%
S&P 500 INDEX CAPS Rating: No stars
^VIX $12.29 Up +0.27 +2.25%
Volatility S&P 500 CAPS Rating: No stars
GLD $127.65 Up +0.08 +0.06%
SPDR Gold Trust CAPS Rating: **