Category Archives: Investments

More trouble ahead for John Paulson

I am assuming that John Paulson, one of the most well-known and successful hedge fund managers around, is not a reader of this blog. In a previous post, I questioned his strategy of buying land and expecting the real estate market to recover. If you’ve been following the data lately, you know that the real estate market continues to decline.

But John Paulson may have more pressing losses to deal with:

John Paulson, who holds a significant long position in gold and gold mining stocks, suffered a heavy hit to his portfolio when Sino-Forest (TRE.TSX) plummeted following accusations from Muddy Waters Research that the company overstated its timberland holdings in China’s Yunnan province.

Paulson’s Funds own 34,714,300 shares, or 14% of the outstanding of Sino-Forest. The stock remains halted after sinking 25% yesterday to C$14.46. Shares of Sino-Forest are indicated at C$6.75, off over 50% versus its previous close. The hit to Paulson would be in excess of $500 million.

Oops.

How much does an education really cost?

I thing the 7% expected annual return may too high, but otherwise Mr. Bill Walker has a very good point. Are we really getting our money’s worth with our public schools?

US Education: Show Us the Money!

by Bill Walker

According to the 2009 OECD figures, the US government spends more per pupil than any nation in the world except Switzerland. The US spent an average of $149,000 for the K–12 education of every 2009 public high school graduate. That works out to $11,461 per year or so.

So the solution is obvious: shut down the schools and invest the money instead. Just let the kids stay home and study on the Internet. Let’s even save some money to reduce the deficit, and only invest $11,000 per year. At 7% return, each child would have a $391,000 IRA when they’re 18. That way, even if they spend the next 50 years surfing or hiking the Appalachian Trail, they would all retire at 68 with $12,512,000 (assuming the same 7% average yearly return). This solves not only the education crisis, but the Social Security problem (they wouldn’t need it) AND the health-budget crisis (how much heart disease could there be, if everyone spent their time surfing and hiking?)

Continue reading…

Favorite quotes from the best book every written on investing: “Reminiscences of a Stock Operator”

Even though it was written way back in early 1920s, Reminiscences of a Stock Operator is still the best book ever written about investing/speculation/trading. Here are my favorite quotes:

“The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to.”

“They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.”

“Stocks are never too high to buy or too low to sell.”

“The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear…. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.”

“And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine—that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.”

“A loss never bothers me after I take it. I forget it overnight. But being wrong—not taking the loss—that is what does the damage to the pocketbook and to the soul.”

“The only thing to do when a man is wrong is to be right by ceasing to be wrong.”

“It was very curious how, after suffering tremendous losses from a break of fifteen or twenty points, people who were still hanging on, welcomed a three-point rally and were certain the bottom had been reached and complete recovery begun.”

“Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.”

“Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators to-day differ from yesterday. The game does not change and neither does human nature.”

“A man has to guard against many things, and most of all against himself – that is, against human nature.”  Reminiscences of a Stock Operator

“When I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.”

“Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position.  But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.”

“Among the hazards of speculation the happening of the unexpected–I might even say of the unexpectable–ranks high.”

“The big money was not in the individual fluctuations but in the main movements—that is, not in reading the tape but in sizing up the entire market and its trend.”

“There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily—or sufficient knowledge to make his play an intelligent play.”

“They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.”

 

Yes, that’s quite a few quotes, but it’s such a great book that is full of great lines. (I will have to reread it for the zillionth time once I finish the book I am currently writing.)

Hedge fund guru John Paulson tests his hot hand in the illiquid undeveloped real estate market. Trouble ahead?

Marketwatch reports:

John Paulson, head of hedge-fund giant Paulson & Co., turned bullish on the U.S. housing market in early 2010. Now he’s got a fund that’s betting on a rebound.

One of the firm’s latest projects has taken it into the Sonoran Desert in the American Southwest, in search of empty residential-development lots.

The fund already has put some money to work.

In August, Paulson agreed to pay $42.4 million for 8,277 unstarted lots and 22 model homes in Arizona, Colorado and Nevada from bankrupt home-builder Tousa Inc.

The biggest chunk of land in the portfolio is Red River, a development about 50 miles south of Phoenix in Pinal County, on the eastern side of the Sonoran Desert.

The article goes on about the potential for profit and the risk involved.

I don’t see how this makes sense. Paulson is buying illiquid assets on which he will earn no return until the land is developed but on which he will have to pay property taxes until that time. One of the strengths of great traders is that they realize when their position is not working and getting out quickly. Not every trade will be a winner and great traders realize this. But this position will trap Paulson for years. Yes, he’s locked in his investors for years, but what if the investors are locked in for three years and it takes five years to develop these properties or find a suitable buyer?

Additionally, buying land in the middle of the desert requires a lot more research and work to close the transaction than buying up credit default swaps or gold futures and bullion on the open market, as Paulson has done in the past. Paulson has been a great trader, but you can’t trade real estate like you do stocks, futures, options, and other financial contracts. It will be interesting to see if Paulson succeeds in this new venture or if venturing into a field in which he has little experience will lead to failure.