It’s all about location, location and John Paulston
Even when he launched his hedge fund at 37 years old in 1994, John Paulson was a nobody – described by his peers as “run-of-the-mill, nothing special” (Wall Street Journal). And it wasn’t hard to see why: he was investing in corporate mergers that will most likely succeed – perhaps one of the safest blocks any investor can trade on Wall Street.
But decade-plus later in 2007, his firm would be one of the few in the market to cash in $15 billion with Paulson’s personal cut of nearly $4 billion– the largest one-year pay-out in the history of financial markets, all thanks to his speculation on something so out of his ballpark: the housing market.
2006 marked the fourth year in towering housing prices in the States, and upon a closer look, the real estate price tag only climbed a miniscule 1.4% annually between 1975 and 2000 even after inflation. Yet, they have skyrocketed 7% in the subsequent years until 2005, meaning that the US housing prices would have to drop 40% to return to its previous state – a slam that would prove fatal to the market.
After catching these red flags, Paulson stocked up on insurance on risky home mortgage debt so when the housing bubble finally bursts and homeowners go to their mortgages, insurance would hit the roof and the Benjamin’s would come rolling into his firm.
His thesis, like any other gamble, however, wasn’t risk-free: first, if the trade didn’t pay off, the loss will be innumerable; and more importantly, insurance was not a popular commodity during his time, meaning that he may run into trouble selling his investments without slashing his price tags.
As predicted, by 2009, one in 10 Americans were delinquent or in foreclosure on their mortgages as US housing prices sunk more than 30% from their peak three years ago: Miami, Phoenix and Las Vegas even fell more than 40%.
After his big win in real estate, he then stocked up on gold (an area where he’s also a stranger), betting that the American dollar was heading to doom after the financial collapse.
As of 2015, Paulson has a net worth of US$13.7 billion and stands as the 35th richest man on the Forbes 400 list.
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