Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.
If it wasn't clear already that John Paulson had reached the zenith of his hedge fund profession, one only had to watch how fervently the media and blogosphere digested the news of Paulson & Co.'s quarterly holdings which was released last Friday.
Market commentators immediately pounced on how the one-time housing bear had loaded up on 300 million shares in Citigroup C-N during the quarter, while dumping his entire holdings in Goldman Sachs GS-N. Similar 13-F holdings of other hedge fund managers like David Einhorn and George Soros filed with the Securities and Exchange Commission in recent days have been summarily ignored compared to the reaction to Paulson's. (Citi shares jumped 3.2 per cent the day after Paulson's announcement, far outpacing the S&P and Financial index that day.)
As far as hedge fund managers go today, John Paulson is the man. Ken Griffin, Stevie Cohen, and Eddie Lampert and others are afterthoughts.
In Gregory Zuckerman's new book, The Greatest Trade Ever, the Wall Street Journal reporter chronicles how Paulson mounted his ascent from nobody to this industry's seer of the moment.
Seven years ago, Mr. Paulson was relatively unknown. He was a merger-arbitrage guy running $300-million (U.S.). The former Baker Scholar from Harvard Business School couldn't help but feel that - in his mid-40s - he had under-achieved his career potential.
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.
A key analyst alongside Mr. Paulson was Paolo Pellegrini. A failed Lazard banker with two divorces and zero net worth at the time he joined Paulson, Mr. Pellegrini had to make this last career chance work.
He lived in a one bedroom apartment up in Westchester and would arrive at work at 6:30 am in order to get the cheapest parking lot rate nearby. No one seemed to like him at first. He was a bit of a hot-head and talked too much. Yet, eventually he helped identify the housing bubble that Mr. Paulson would turn into a $16-billion winning trade for his firm and $4-billion for Mr. Paulson.
Beyond the interesting outsider-type characters working at Paulson, Mr. Zuckerman's book offers many lessons for small and large investors. One is the risk, but potential reward, that comes from breaking away from the herd mentality that surrounds Wall Street.
Nobody on Wall Street gave these guys a chance, when they started betting against housing. In fact, Mr. Paulson was routinely laughed at. Because the banking infrastructure was making so much money off of housing in 2004 - 2006, there was no reason for so many people to imagine it would end.
For Mr. Paulson, it all boiled down to one chart which Mr. 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.
Even among hedge funds -- who are paid handsomely to anticipate and invest in where the puck is going, not where it's been -- precious few made this bearish trade. At the time, wise managers saw only the obstacles to the trade working out (like the federal government bailing out sub-prime borrowers and "containing" the problem from other parts of housing) and they clung to a misplaced blind trust in "their models" which showed housing couldn't decrease in value.
For Mr. Paulson, it all boiled down to one chart which Mr. 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.
