In this article, Michael looks at some of the greatest trades in history.
The markets have always offered opportunities for those who either do the work and think differently.
Most of my trades are systematic, however, every now and again opportunities open up.
It’s important to log your trades in a trading journal (I am building my own to do this – you can sign up for free here at tradesmash.com) to see if your discretionary trades are alpha accretive.
If they’re not… either stop discretionary trading or trade smaller and work out what is going wrong.
Maybe your assumptions were wrong? Maybe you called the market but messed up your execution? Maybe your size was too big and you were stopped out because you didn’t give the position as wide a space?
Understanding your data is key to trading success. If you don’t take the time to improve then your results will stay the same.
However, here are 10 discretionary trades throughout history that are unique and delivered massive payouts.
1. Bill Ackman of Pershing Square’s Coronavirus hedge and rebound
During the early days of the COVID-19 pandemic in March 2020, Bill Ackman publicly advocated for a strict lockdown to contain the virus’s spread, which he believed would help protect both public health and the economy in the long run. He made headlines with interviews and public statements expressing his concerns about the pandemic’s potential impact on the financial markets.
Ackman bought far-out-of-the-money protection against investment grade and high-yield bond indexes. This protected the almost 100% long concentrated stock portfolio.
However, Pershing had built up $50bn of credit default swaps (CDS) and had to stomach huge volatility swings on a position ~ 40% of the firm’s assets. The value of the CDSs dropped by $800m on 13 March 2020. But Ackman closed the positions rapidly and returned a $2.6 billion profit.
Bill Ackman made over 100x returns on this Coronavirus hedge. This was his first great trade.
He then ploughed some of that capital into his holdings into Hilton Worldwide, Lowe’s, and Restaurant Brands (the owner of Burger King).
And at the end of 2020, Bill believed that consumer spending would explode, leading to major inflation.
By buying $177 million of options connected to Treasury Bonds, Bill would profit handsomely if interest rates rose over the next 18 months.
Bill was correct again, earning a profit of $1.25 billion. Not bad.
2. Jim Chanos’s short-selling techniques
Jim Chanos is a well-known hedge fund manager and investor who is primarily known for his expertise in short selling. Short selling is a trading strategy where an investor borrows shares of a stock from a broker, sells those borrowed shares on the open market, and then buys them back later at a (hopefully) lower price, returning the borrowed shares to the broker and pocketing the difference as profit.
Here’s how Jim and his company identify trades:
- Identifying overvalued companies: Chanos and his team at Kynikos Associates, his investment firm, conduct in-depth research and analysis to identify companies that they believe are overvalued or facing significant problems. He looks for businesses with weak fundamentals, questionable accounting practices, or unsustainable business models.
- Building short positions: Once Chanos identifies a company he believes is ripe for a decline, he borrows shares of that company’s stock from brokers and sells them on the market, effectively taking a short position. The goal is to profit when the stock’s price falls.
- Market downturn or specific problems in the stock: The profits from short selling come when the stock’s price declines. This can happen due to broader market downturns, negative news or events specific to the company, or simply because the market eventually realises the company’s weaknesses or overvaluation. This is the catalyst that Jim is looking for.
- Buying back shares: After the stock’s price drops, Chanos buys back the shares at the reduced price to cover the borrowed position. The difference between the price at which he sold the borrowed shares and the price at which he bought them back represents his profit.
One of Chanos’s biggest bets was against Enron, who used off-balance sheet Special Purpose Vehicles to hide debt from investors. Jim realised that Enron’s return on capital was ~7% (despite using “gain-on-sale”). But Enron’s cost of capital was ~9%, meaning Enron wasn’t earning any money at all – despite reporting profits.
Jim shorted Enron in November 2000 when the stock traded around ~$80. It hit $0.26 in bankruptcy.
The exact amount made Jim made isn’t known but this was no doubt a highly lucrative trade.
Fun fact: Andrew Fastow (Enron’s CFO) gave a lecture at one of my old universities. He said he got his “CFO of the Year” trophy and a prison sentence in the same 12 months. He appeared genuinely remorseful but now does the rounds on the after-dinner circuit for a handsome fee. Perhaps he’s doing better than some Enron employees who lost their entire life savings.
3. Paul Tudor Jones and the 1987 Black Monday Crash trade
Paul Tudor Jones was massively short stocks coming into the Black Monday crash in 1987. Why? He saw a huge opportunity because of the way derivatives were in the market.
Paul believed that the portfolio insurance would create more selling because those who had written the derivatives would be forced to sell on every down-tick. That meant if the market went down then selling would increase because of the derivative exposure.
This type of trade is not based on fundamentals but liquidity. If everyone has the same trade on, and something goes wrong, then the lack of liquidity can push prices far beyond the fundamental value.
This is what happened in 2020 when oil went below zero, and people were paying other people to have oil delivered to them in order to avoid having to take delivery of the oil themselves.
By betting on a crash in the United States stock market, this trade returned Paul Tudor Jones 125.9 percent after fees, earning an estimated $100 million. Again, pretty good!
Check out my next article for part II.
Michael Taylor
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