Very few people can beat the market consistently. Achieving superior returns annually is extremely difficult because the market is constantly changing. Black swan scenarios that should happen once every thousand years occur once every decade or so. Good trades can become too crowded while bad trades can become too illiquid. In short, asking an investor to beat the market every year is pretty much asking the impossible.
The Paulson comeback
Hedge fund manager John Paulson is perhaps the epitome of how hard it is to beat the market consistently. Paulson, who arguably made the greatest trade of all time by shorting subprime assets in 2006 and 2007, incorrectly became bullish on the economy in 2011. As a consequence of being too early, one of his funds fell more than 36% and Paulson's reputation of being a market wizard took a hit.
Lately, however, Paulson has regained some of his former luster. Paulson's most famous fund, the Paulson Recovery fund, returned nearly 65% last year. Paulson's firm was also named hedge fund of the year at the 2013 Absolute Return awards.
One of Paulson's greatest characteristics is his ability to stick with a trade. Many investors knew housing was a bubble in 2005 and 2006 but ended up losing anyway because they couldn't wait out the trade. Those investors who went short home-builders and subprime mortgage companies in 2005 were wrong even though they were 100% fundamentally right.
John Paulson, by contrast, was patient enough to wait out his trade until the very end and made a fortune doing so.
A similar situation
In his gold investment, John Paulson faces a similar situation to what he faced with the subprime trade. His gold investments are not initially panning out the way Paulson had hoped. Rather than rally above $2,000/oz like many bulls expected, gold prices have fallen significantly since 2012.
Still, Paulson is sticking with his gold trade.
According to the latest 13-F, Paulson is long 10.2 million shares of the gold ETF SPDR Gold Trust (NYSEMKT:GLD).
While he did pare his stake in Freeport McMoRan Copper & Gold, Inc (NYSE:FCX) by 34% and AngloGold Ashanti (NYSE:AU) by around 11%, Paulson kept his positions in other gold companies such as Randgold Resources (NASDAQ:GOLD), Agnico Eagle Mines, Allied Nevada Gold, Gold Fields Ltd, and Iamgold Corp.
The bottom line
The fundamental story for gold is still intact. The Federal Reserve has a lot of money in circulation. If the economy picks up and the velocity of money increases, inflation will likely send gold prices higher.
In addition to the Federal Reserve's balance sheet, gold prices may rise because India's newly elected prime minister Narendra Modi may roll back tariffs on gold imports. India made up about one quarter of global gold demand in 2013 so any changes in Indian tariffs will likely affect gold prices.
John Paulson may not be able to beat the market every year, but he is right when it counts. His continual conviction in gold is welcome news for long-term gold bulls.
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Jay Yao has no position in any stocks mentioned. The Motley Fool owns shares of FCX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.