I recently finished reading the book ‘The Greatest Trade Ever’ by Gregory Zuckerman. I can highly recommend the book. It is about various investors, but mainly John Paulson the hedge fund manager, who shorted the US housing market in the run up to the global financial crisis in 2007/2008.
I am not going to get into the specifics of the trade, mainly because I am not clever enough to understand it, but secondly it is rather complex and boring, but I can sum it up by saying they used derivatives to short pools of risky mortgage bonds. And if that is still confusing you like it did me, they made money when people could not pay their mortgage bonds.
Now this sort of trade is one that I personally would not be comfortable with for a few reasons, but the story reinforced a few things for me.
1.Have the courage of your convictions
This was a risky trade, the US housing market had been booming for so many years, the mantra was that property always goes up, there is a limited supply etc etc. The facts were however that housing prices had far exceeded income growth, and this led to even Ninja’s (ie. No Income No Job) loans being granted. Crazy, and you probably thought I was talking about a Japanese mercenary. A group of investors went against the tide and bet that it could not continue. They were ridiculed and had to wait longer than they thought, but their conviction was right, and many multiplied their capital ten fold or more.
Initially this trade did not work well. Housing did not go bust quickly, and even when house prices did start to fall, the price of the instruments being shorted continued to rise. One of the investors, Michael Burry, almost went insane, many of his investors left or wanted their money back. He would sometimes go to the office and close the door behind him and play heavy metal music for most of the day…Rest assured things have never gotten so intense at Dividend Tycoon HQ, my trades tend to be more of the plain vanilla equity type.
3.Wait for a fat pitch
Warren Buffett talks about waiting for a ‘fat pitch’. This is waiting for an excellent investment idea, not settling for a mediocre investment. He is trying to get across the idea that it is better to wait for an excellent idea, even if you have to wait years for it, than just invest in something mediocre. He likes to remind us that he read the Coca-Cola report for decades before deciding the time was right to invest in the company. You may also like to read my article on punch card investing.
Pursuing ‘The Greatest Trade Ever’
You may be asking what this book has to do with me. Well, I could identify somewhat with the characters in the book because I also have a had a ‘trade’ on the go for seven years, for which I have had to have plenty of patience and have had to have the courage of my convictions.
The company is Grand Parade Investments, which has both gaming assets, and a fledgling food business, mainly QSR restaurants like Burger King and Dunkin Donuts. I am very positive in the long term, but the share price has gone down 60% in the last three years. I have been invested since 2010 and have not lost money yet as bought very cheap, and have received good dividends and special dividends over the seven years, but I really expected more, and sooner. However, reading this book helped me realize that I should follow my own path and not be swayed by market commentators and other investors. The share is trading well under the Net Asset Value of the company, and I believe will be a great long term compounding investment. I believe it could easily multiply 10 times over the long term from here, but nothing is assured of course.(Disclaimer: This is a definite small cap and is risky, do not see this as a recommendation, it could go down as easily as up.)
I have placed nearly 20% of my portfolio into this one stock, so I have a lot riding on it, I know it may not be ‘The Greatest Trade Ever’ in terms of a quick gain to be made, but I have come this far and am confident it will at least be a very good investment. My search for ‘The Greatest Trade Ever’ however continues and I have a few other positions developing with this title in mind, so hurry up Grand Parade Investments, your have some stiff competition for the title..
A change of mindset
My thoughts of late, and reflecting on this book, have changed to thinking of every stock, before I buy it, as potentially being ‘The Greatest Trade Ever’. If I do not think it can earn that title, I should not buy it. I think that if we invest in this way we will do our research thoroughly and avoid mediocre investments.
Let me know if you are pursuing your own ‘The Greatest Trade Ever’ and what you do to keep yourself getting discouraged when things take longer than you thought to play out.
4 thoughts on “In pursuit of my ‘The Greatest Trade Ever’”
Thanx for the post at dividend tycoon. I’m currently challenging “experts” to write about your closing line “ what you do while waiting for things to play out as your analysis says they should.”
I read read read, and read. I’ve been able to get through security analysis (Ben Graham) and fail CTA again while waiting for GPL, Lewis, Putprop, Cognition and Bowler Metcalf to be seen with my loving eyes.
Reading helps me identify my mistakes aswell as strengthen arguements I previously had. It has also enabled me to self criticize in a non threatening medium. Reading provides closure aswell as often an alternative is provided.
Hope I haven’t rewritten another article but I am currently exploring that “waiting period” and appreciate your article.
Hi Chairman M’o
Sorry for the late response. Appreciate the comment. The current market in SA is very frustrating, especially for SA Inc shares which keep sliding. However I think if you have done your homework it will be worth being patient, we could be at the bottom of the cycle for all we know. I think reading would be a great way to keep yourself patient, as it will be beneficial in terms of gaining knowledge, as well as keeping you occupied and feeling the need to shuffle your portfolio. I recall Warren Buffet saying that he spends the majority of his time just reading, so you would be in good company.
With regard to Grand Parade they have improved their EBITA for Burger King at the store level from 3 to 9%. In addition sales were improved overall. At a time when Burger King is profitable, why have you decided to trim your holdings??
Burger King is looking better, I am looking forward to the next results to see what is happening. I am also going to the AGM on 7 December to get an update from the CEO which he usually does as part of the AGM.
GPI is a very big part of my portfolio. I have said I will trim 10%, which will still leave it as by far the biggest %. It is just a small act of risk reduction on my part, as well as the fact that I have a few other shares I want to increase. Having said that, to date I have not sold any. I believe the current price is way too low and will wait for a better price.
Anyway, if I sell I will still have 90% in my ‘great trade’, but even selling 10%, means someone needs to offer me a decent price for my equity.
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