A Wet Paper Bag

• Posted by Robert Sinn
• on July 10th, 2012

Two years ago the man couldn’t miss if he tried – since then hedge fund manager John Paulson hasn’t been able to find his way out of a wet paper bag even if he was given a flashlight and handed a map:

“Billionaire hedge fund manager John Paulson has recorded another down month in June as positions against a meltdown in Europe haven’t fared out……One of Paulson & Co.’s largest funds, the Advantage Plus fund, was down 7.9%, bringing the event-driven fund’s losses to 16%, a person familiar with the situation said.” WSJ

Paulson & Co largest holdings as of end of Q1 2

$GLD suffered a nearly 3% reversal from high to low today as it printed a large high volume bearish engulfing candle on the daily chart after failing to get above its falling 50-day simple moving average:

 

Meanwhile, Paulson’s GLD investments look great compared to his motley list of equity holdings which would help comprise a “who’s who” list of bear flags and bearish potential tradable short setups:

 

$GDX Weekly – Goldcorp’s lower production guidance and increased cost guidance which came out after the bell served to confirm the long term downtrend which most gold miners have been mired in since topping out in August 2011:

 

$HIG Weekly:

Caesar’s Palace Daily ($CZR) – a difficult portfolio holding to comprehend given that CZR is a heavily indebted company which faces stiff global competition and a Las Vegas gaming market that is almost certainly in a terminal decline:

 

Regardless of how trite it may sound to some, I believe the Paulson downfall helps to powerfully reemphasize the fact that the market takes no prisoners and couldn’t care less about your past successes or what your analysis says should happen in the future. The market has an uncanny ability to humble anyone and everyone, particularly those who display excessive hubris by arguing with it and proclaiming that they know better than the wisdom of the market. Livermore left us some pearls of wisdom which still rings incredibly true nearly a century later:

“….the market will often go contrary to what speculators have predicted. At these times, successful speculators must abandon their predictions and follow the action of the market. Prudent speculators never argue with the tape. Markets are never wrong, but opinions often are.”

“I never try to predict or anticipate. I only try to react to what the market is telling me by its behavior.”

“Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”

“A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask for reasons or explanations.”

The shrewdest market participants are able to clearly differentiate market time frames and delicately balance Livermore’s speculative wisdom with Howard Marks’ sage investing accumen:

“Risk and uncertainty aren’t the same as loss, but they create the potential for loss when things go wrong. Some of the biggest losses occur when overconfidence regarding predictive ability causes investors to underestimate the range of possibilities, the difficulty of predicting which one will materialize, and the consequences of a surprise.” Marks

From my experience poor results such as those recorded by Paulson & Co. during the last 18 months are the clear product of disregarding and/or confusing both Livermore and Marks – it will be interesting to see if Paulson is able to return to his investment roots and find success once again.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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