Michael looks at 7 more of the greatest trades of all time.
In my last article, we looked at the best trades you’ve never heard of.
And now that’ve read it, you have heard of them. But here are seven more…
1. John Templeton’s World War II capitulation trade
Back in 1939, Germany invaded Poland and war in Europe broke out with investors fleeing the market. Templeton went and bought $100 of every NYSE-listed stock that traded under $1 a share.
The reasons for this were simple in his view.
Germany invading Poland meant that a global war was coming.
And global war meant that everything surplus and unprofitable suddenly became scarce and profitable.
It was a risky strategy. But it paid off.
Three years later John had a profit on 100 out of the 104.
And the $10,000 had quadrupled to around $40,000 when he sold near the end of the war.
The beauty of this trade is its simplicity. There’s no fancy discounted cash flow analyses or swathes of suits crunching every transaction.
Just one cause and one consequence. And a stomach prepared to lose everything in search of a higher payoff.
But as great as this trade was, his second one eclipsed it.
2. John Templeton’s Dotcom fade trade
Fifty years on and Templeton was acutely aware that the Dotcom bubble was raging and that eventually it would pop and internet stocks would collapse.
So, he decided to short 80 of the most overvalued NASDAQ stocks.
However, rather than blanket shorting them he timed his positions at a specific point: just before the post-IPO lockups expired.
The thesis here again was simple: he knew that newly-minted millionaires would rush to sell and cash in their stock, and this would cause a selloff in the stock.
By shorting just ahead of this, Templeton was getting in right before a catalyst to spook the market in the stock and drive the price lower. And with the overvaluation, his downside was protected. This meant that he was getting excellent risk/reward on every trade he took in this theme.
Despite being more than 60 years apart, both trades were simple in execution but yielded incredible payoffs. They were timed to perfection.
Of course, these trades are easy to see in hindsight.
But sometimes great trades are simple.
There’s currently a popular company out there with 20% of the market cap in warrants due to expire in October. Guess what I’ll be doing…
3. George Soros and his ‘breaking the Bank of England’ trade
Back in 1990 inflation was running above 10% and the UK decided to join the Exchange Rate Mechanism. This obliged central banks to defend exchange rate pivots through intervention. However, Soros believed the pound was overvalued.
Soros, therefore, shorted the pound, and the Bank of England raised rates to attract investor demand against the selling pressure.
It eventually gave in when it was clear it was losing billions. When Britain left the ERM, the pound collapsed and Soros pocketed at least $1bn in profit from his short.
4. Stanley Druckenmiller’s bet on the Deutschmark
Stanley Druckenmiller (one of Soros’ proteges) also traded at the same time of Soros’ legendary pound short.
Druckenmiller realised that investors would flock to the Deutschmark if the pound collapsed. When other investors cottoned on – he sold and collected a $1bn profit.
This is a great example of having a thesis and trading the same idea through different instruments.
5. John Paulson’s ‘Big Short’ trade
John Paulson wasn’t featured in The Big Short yet saw the 2007 housing crisis coming and timed the market correctly.
Paulson and his fund convinced banks to sell credit default swaps against mortgage-backed securities.
In return for premiums, the banks would pay out any losses on the highly rated loans. However, the MBSs were stuffed full of risky loans to people who could barely afford them, that if defaulted would trigger a snowball collapse.
Paulson cashed in around $3-4bn on this trade.
6. Peter Minuit’s Manhattan purchase
Peter Minuit is credited with buying the island of Manhattan from the Lenape Native Americans.
It’s evidenced in a letter that he paid “60 guilders worth of trade” – $24 in today’s money.
A paper in 2014 estimated Manhattan’s developable land to be worth ~$1.74 trillion.
7. Jesse Livermore’s bet on the 1929 stock market crash
Jesse Livermore was a speculator who made and lost fortunes. He was heavily short the market ahead of the 1929 stock market crash.
The reasoning behind this was simple.
Livermore had seen what had happened in 1907 when the amount of stock bought exceeded the amount of capital available to back those purchases up.
“Whatever happens in the stock market today has happened before and will happen again”.
Jesse made $100m through his exploits.
Michael Taylor
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