Michael Jordan was in the prime of his basketball career when I was a teenager. However, my most enduring memory of watching Jordan play was not one of his show-stopping slam dunks or one of his buzzer-beating fadeaway jump shots. Jordan had plenty of those, but the most distinct memory I have of watching this legend play was one of Jordan’s rare mistakes.
In an otherwise uneventful midseason game, Jordan stole the ball from a Detroit Pistons’ forward and raced across the floor, going coast to coast… only to miss an uncontested dunk. Jordan bricked the ball so hard on the back of the rim that it bounced all the way to the half court line.
Yes, even the great Michael Jordan made the occasional mistake.
I tell this story because 2011 has been a brutal year for everyone. However, some of the best traders in the business are having the roughest time of it on a very public stage.
George Soros—regarded by many, including myself, to be the best global macro trader in history—has had an awful year. His Quantum Fund, which has returned 20% per year for its entire multi-decade history, actually lost 6% in the first half of the year, and that doesn’t include the recent spate of volatility. Perhaps not coincidentally, Soros has also decided to retire as a hedge fund manager. He claims that he doesn’t want to comply with the new regulations that are coming into force, but one has to wonder if the Godfather of hedge funds has simply found a market that he no longer understands. He wouldn’t be the first.
John Paulson—the most successful trader in history who made an absolute fortune shorting subprime mortgage securities in 2008—has done worse than Soros this year. Much worse. His flagship Advantage Plus fund was down 31% for the year through August 5, taking losses far in excess of those taken by the S&P 500 or Dow Industrials. Paulson’s horrid performance is all the more remarkable when you consider that 16% of Paulson’s assets are in gold, which is the only asset besides Treasury bonds that has actually done well this year. (The website Guru Focus tracks Paulson’s current holdings here. )
I report Soros and Paulson’s misfortunes not to gloat—after all, even though our investment themes are basically working as expected, several Sizemore Investment Letter positions have taken a brutal beating in 2011 too—but merely to hammer home an important point:
Given sufficient time, the market has a way of humbling us all.
John Paulson’s undoing was to bet heavily on a recovery in the financial sector. Fully 30% of his fund was invested in financials, and another 23% was in energy and materials. His exposure to telecom—my favorite sector at current prices—is next to zero.