Wednesday, December 2, 2009

Book Review: The Greatest Trade Ever

The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History

I'd heard a bit about John Paulson before picking this up in Chapters and how he'd made a killing predicting the sub-prime crisis. I'd also seen the name recently in connection to his bullish views on gold and his new gold focused hedge fund. I didn't know many of the details of the story though and thought this book sounded pretty interesting.

Overall it's a pretty good insight into how Paulson's fund managed to turn their bearish views on sub prime housing into a cool $15 billion profit. It highlighted for me how it's not enough to simply predict the future in investing, you also have to get the timing right and figure out a tradable strategy with an attractive risk-reward structure. I'd have liked to see more direct insight from Paulson himself on how he approaches investing and perhaps a little less only-tangentially-relevant biographical detail but the book is still an interesting read. It was also nice to discover a bit more about Andrew Lahde - a name I only previously knew from his notorious (and rather brilliant) f-you farewell letter when he closed his hedge fund after also making massive profits from the sub-prime collapse.

I'm naturally attracted to contrarian investment strategies and there's something beguiling about the story of an outsider whose predictions nobody believes but who goes on to be right and to make a fortune. It's always hard to tell how many of these stories can be put down to a combination of a kind of survivorship bias and the fact that they make for much more interesting reading than more mundane successes but there does seem to be such a common pattern of outsiders achieving great success that I like to think there's a real phenomenon at work here. Of course there's probably more than a bit of wishful thinking at work there too.

Don't expect to come away from this book with any specific tips on how to make your own career-making trade but you can expect an interesting and mostly well written story and some insight into the sort of thought processes that might make you a fortune through contrarian strategies. Or might not.