Drive analysis is truly a place to showcase wisdom and diligence. Many people have achieved extraordinary success in this field. Drive analysis is a job that truly lets intelligence shine. It’s not as unpredictable in returns as psychological analysis, nor as simple but ineffective as technical analysis, and certainly not as mechanical as funds management. Therefore, if you put more thought into it, it can produce miraculous effects. Of course, if you just casually look at so-called news reports to see if a piece of news is bearish or bullish, look at the guidance of a forex analyst on the internet to predict the rise or fall of cross currencies. , such basic analysis is meaningless,
Masters of drive analysis are not as famous as masters of technical analysis in the world. Before 2006, more people knew about certain analysts than about Warren Buffett, at least more than George Soros. After the stock market madness of 2007, Buffett and Soros became household names. Technical analysis is very popular; few people read books on value investing, and those who do are experts who want to treat stock trading as a profession. Technical analysis won’t tell you if it’s a major market trend; it says, “Let the market tell you.” But the language of the market is the most obscure.
Below we introduce two impressive figures in drive analysis: John Paulson and George Soros. In 2007, the top ten hedge fund managers by income were (in order of income, name, and company):
- $3.7 billion, John Paulson, Paulson & Co.
- $2.9 billion, George Soros, Soros Fund Management
- $2.8 billion, James Simons, Renaissance Technologies
- $1.7 billion, Philip Falcone, Harbinger Capital Partners
- $1.5 billion, Kenneth Griffin, Citadel Investment Group
- $900 million, Steven Cohen, SAC Capital Advisors
- $750 million, Timothy Barakett, Atticus Capital
- $710 million, Stephen Mandel, Lone Pine Capital
- $625 million, John Griffin, Blue Ridge Capital
- $520 million, Andreas Halvorsen, Viking Global Investors
In Wall Street’s 2008 subprime crisis and the collapse of the real estate market produced many losers. However, there were successful short sellers; the biggest winner was John Paulson, an American hedge fund manager who was relatively unknown before 2007. Growing up in Queens, New York, Paulson was much younger than Soros. In 2005 he keenly sensed the smell of the housing bubble. Due to the sharp drop in U.S. house prices in 2007, he successfully bet on shorting the housing market; his fund made a staggering $15 billion profit that year, earning him an annual salary of over $3 billion—possibly the largest individual income in Wall Street history.
Many market participants believe that Paulson’s short position in subprime mortgages was probably the biggest one-way bet in Wall Street history. Paulson won big because he believed in independent analysis research and was steps ahead of the market in shorting subprime mortgages; his trick in execution was successfully using two new financial derivatives: ABX and CDS.
“He always knew his judgment was correct even when the market went against him; from beginning to end he was clear about what he was doing,” said Armel Leslie, spokesperson for Paulson’s fund.
Investors in Paulson’s fund had full confidence in their fund manager’s investment actions and the fund had a lock-up period so when the market went against them and they faced huge paper losses investors were not allowed to pressure to withdraw from the fund according to their agreement explained further by Leslie.
Paulson’s fund was a medium-sized hedge fund established in 1994; its founder Paulson had worked for Leon Levy at Wall Street legend Odyssey Partners before joining Bear Stearns’ M&A department. Originally focused on merger arbitrage—seeking arbitrage opportunities from asset price fluctuations after merger news—Paulson himself felt that the risks of subprime mortgages becoming crazy were not correctly understood by the market; with an abundance of cheap capital stimulating risk preference investors pressed risk premiums very low while rating agencies did not timely raise default risks for riskiest subprime loans based on interest rate changes; it seemed that once investment risks were “sliced and packaged” by modern financial tools they ceased to exist.
As an unconventional thinker, much like “Oracle of Omaha” Warren Buffett and “King of Bankruptcy” Wilbur Ross, Paulson’s success hinged on his unorthodox approach, and the unyielding passion for trading. In early 2006, the prevailing belief was that housing prices would never fall nationwide, and there should be no significant trouble with the real estate and housing mortgage markets. Many Wall Street heavyweights shared this sentiment. However, Paulson’s unique insight was that housing prices could not only rise but also fall, and there would not be an everlasting bull market, to spot the market reversal.
From the second half of 2005 to 2006, Paulson and his researchers began independent research, selecting thousands of subprime cases to analyze the real value of securities derived from them and using his trading advantage. Their research found that the default behaviour of subprime borrowers who could not repay loans was increasing nationwide in the US, and the intrinsic value of subprime assets was far lower than the market recognized.
Much like panning for gold in the sand, studying and analyzing data from thousands of original loan information databases was not an easy task after subprime home loans were securitized by intermediary agencies. However, Paulson placed great importance on independent research, buying advanced research tools and focusing on studying original data with his team for long periods.
In the summer of 2006, when the market still generally believed that subprime assets guaranteed by rating agencies would remain stable and investors holding bonds related to subprime debt felt secure, Paulson had already begun raising funds for his newly established hedge fund betting against subprime assets, named “Credit Opportunities.”
Paulson raised $150 million for the new fund. His investment strategy was to buy credit default swaps and short mortgage debt. However, the real estate market still looked promising at times. To relieve pressure, Paulson ran five miles every day in Central Park, known as New York’s “backyard,” telling his wife he was waiting for success.
Experienced individuals might retreat entirely to minimize losses, but losses only made Paulson more resolute. By the end of 2006, his newly created Credit Opportunities fund appreciated by 20%. Then he launched a second similar fund. On February 7, 2007, a trader rushed into Paulson’s office with a press release: New Century Financial Corporation, America’s second-largest subprime mortgage company, forecasted quarterly losses. Later, two hedge funds invested in subprime debt by Bear Stearns Companies Inc., America’s fifth-largest investment bank, also collapsed.
In 2007, Paulson’s first credit fund appreciated by 590%, and his second fund also appreciated by 350%. As US housing prices plummeted in 2007, Paulson bet against the real estate market; his managed funds made a staggering $15 billion profit that year, earning him an annual salary of over $3 billion.
