The hosts discuss 'The Greatest Trade Ever' and reflect on the 2008 financial crisis. They explore investment strategies, Peter Schiff's bearish stance on banks, and Buffet's benefit from the fall in mortgage rates. The chapter also explores merger arbitrage investing, the complexity of trading, and the aversion to investing in financials. They discuss Andrew Ladd's bold move and recognize market inefficiencies and finding opportunities.
01:16:46
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Quick takeaways
Recognize market inefficiencies to capitalize on as an investor.
Using credit default swaps (CDS) as a different format for shorting offers a fixed downside and potential massive upside.
Seize once-in-a-lifetime opportunities and structure investments accordingly.
Having a clear exit strategy and considering liquidity and ease of exiting an investment are essential for success in investing.
Deep dives
Recognizing market inefficiencies
The primary job as investors is to recognize that the market is almost efficient and find the inefficiencies in the market to capitalize on.
Fixed downside and massive upside
The genius of the trade was the ability to have a fixed downside while potentially experiencing a massive upside. This was achieved through using credit default swaps (CDS) as a different format for shorting.
Going for the jugular
John Paulson's willingness to go all-in on the trade and structure a fund around it is a key takeaway. When a once-in-a-lifetime opportunity presents itself, it's important to seize it.
Figuring out exit strategy before entry
Having a clear exit strategy is crucial in investing. Andrew Lahde's mention of figuring out how to get out before getting in serves as a reminder to consider the liquidity and ease of exiting an investment.
Balancing reputation and success
The fear of failure for unconventional success can lead to missed opportunities. It's important to have the courage to pursue unconventionally and succeed rather than conform for the sake of reputation.
Sizing positions and managing risk
Understanding risk management, such as position sizing, is crucial, especially when managing other people's money. This helps address potential risks beyond the portfolio and ensures prudent investment practices.
Paulson's smart presentation and unique fund structure
Paulson presented the complex situation of betting against the housing market in a way that appealed to investors' fear and need for protection. He structured his fund in a way that reduced the true cost of the trade, making it more attractive to potential investors. The fund had an 8% loss guarantee, but Paulson positioned it as a limited downside risk of 7% per year for a specific timeframe. His smart presentation and unique fund structure helped him gain investor confidence.
Greed, fear, and taking advantage of others
The housing bubble and subsequent collapse were driven by greed and fear. Banks were motivated by greed and sold subprime protection to investors while keeping the position for themselves. Mortgage companies dismissed concerns and fueled the bubble. Paulson and other investors capitalized on others' fear and greed to profit from the collapse. Understanding how fear and greed affect decision-making and market prices is crucial when participating in the market.