Going against the masses rarely pays off in investing. Finding
an opportunity that the rest of the market is completely missing,
identifying the right instruments, calculating the right amount
of leverage and then staying patient while conditions evolve is
one of the most sophisticated moves an investor can make. But
even though contrarian investing is extremely risky, going
against the grain also carries the potential to deliver huge
Without that potential, legendary hedge fund billionaire John
Paulson would have never been able to score a $12 billion profit
in 2007, considered by many to be the greatest trade ever.
John Paulson's Biography
John Paulson was born in the New York borough of Queens in 1955.
From an early age, Paulson displayed an incredible knack for
numbers and academics. In 1978, Paulson graduated from New York
University with a degree in finance, finishing at the top of his
class and earnings the distinction of valedictorian. Paulson
built on that success at Harvard Business School, graduating with
an MBA and finishing in the top 5% of his class.
Paulson's professional career began at consulting firm Boston
Consulting in 1980 before his desire to move into trading and
investing led him a series of positions at investment banks in
the next 14 years.
Although Paulson was plenty successful early in his career, he
was by no means a business or investing celebrity. His path to
word-class wealth and recognition didn't begin in earnest until
1994, when he founded the hedge fund Paulson & Co. with $2
million in capital and one employee.
John Paulson's Invest Strategy
Before scoring an amazing $12 billion profit shorting the housing
market, Paulson was known for an ultra-conservative style of
investing called merger arbitrage. This strategy focuses on
buying shares of companies that are takeover targets below the
stated acquisition price in hopes that the deal will eventually
close and give shares a boost. Merger arbitrage isn't the sexiest
investment style on the Street, but picking up a sting of small
winners with low risk is like consistently hitting singles and
doubles instead of striking out three times before hitting a home
But Paulson is no one-trick pony. His rise to the ranks of the
world's wealthiest people was founded upon his contrarian
instincts. Paulson has displayed an acute ability to buck the
masses and identify hugely profitable opportunities that most of
the market is completely missing.
John Paulson's Big Wins
Paulson's contrarian instincts have led to his biggest victories.
In 2005 the housing market was locked into a red-hot bull market.
Prices were skyrocketing, Mom and Pop felt rich, and speculators
were scoring big gains. The line of the Street was that real
estate was in a new paradigm where prices would never decline.
But Paulson's instinct for numbers and ability to break complex
ideas downs into simple terms led him to a very different
||In 1994, Paulson founded the hedge fund Paulson &
Co. with $2 million in capital and one employee.
After making huge leveraged bets against housing in 2006,
Paulson reportedly scored a profit of $12 billion in 2007 when
the overheated market finally crashed. Paulson's staggering
victory in housing immediately made him a hedge fund legend,
spawned a cult following and led to a book and widespread
sentiment that his housing short was "the greatest trade
Paulson also shorted a basket of financial and bank stocks
ahead of the financial crisis of 2008, leading to another round
of big profits as the financial sector suffered huge losses.
Paulson then pulled a complete reversal in the spring of 2009,
covering his bank shorts and going long on the sector. Once
again, when fear gripped the Street, Paulson's contrarian view
told him it was time to buy, leading to another round of huge
gains that stretched into the hundreds of millions.
At the same time Paulson began buying bank stocks in the
spring of 2009, he also began making huge investments in gold. In
the first quarter of 2009 Paulson dumped $3.7 billion into gold
investments believing that currency devaluation would be the
primary tool of central banks across the world searching for
economic stimulation. That led to a $5 billion gain in 2010 as
gold began a multi-year rally into a new all-time high.
Paulson's string of huge victories from 2007 to 2010 was one
of the most impressive runs in the history of the hedge fund
industry. He nailed four huge trades in a row starting with
shorting housing, shorting bank stocks, reversing and buying bank
stocks, and then buying gold ahead of the biggest rally in 30
years. Paulson's reputation was built upon his uncanny ability to
follow the market's every move through one of its most volatile
and unpredictable periods.
John Paulson's Portfolio: What's He Holding
But like many hedge fund managers with enough wealth to retire
a thousand times over, Paulson's love for the game has him
looking for his next great trade. And right now, that is
According to GuruFocus.com, a website that tracks the holdings
of insiders and hedge fund billionaires, Paulson's has 19% of his
$17.7 billion in assets under management invested in
SPDR Gold Trust (
. His fourth-largest holding is
AngloGold Ashanti (
, with his 3.75% allocation valued at $665 million.
After precious metals, Paulson's second-highest sector
allocation is to financial services, although no bank stocks rank
among his top 10 holdings, showcasing his diversified approach to
Action to Take -->
Gold remains Paulson's highest-conviction investment, with SPDR
Gold Trust representing nearly a fifth of his assets under
management. Paulson is also bullish on bank stocks, and the
financial sector continues to benefit from rising home values.
Although both markets have been plenty volatile, Paulson believes
that just like before, time will prove his investment thesis
correct and produce another round of big gains for himself and
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