What Can We Learn From The Best And Worst Trades Ever?

Becoming a successful trader in the financial market takes a lot of experience, skill, planning and either good luck or the ability to make one’s own luck.

On an individual level, every amazing trade requires several diverse skills, from the insight and intuition to see a potentially profitable stock before everyone else does, to the calculation and forethought to know how much money to put into this trade and when to pull it out.

It requires not only technical knowledge of the market, the instruments being bought and sold and how it connects to the wider market but also the emotional intelligence and psychological resilience to know when to trust your instincts.

The latter part is crucial because the volatility of the market and the millions of actors buying and selling every day means that a trader can make the right decision and still lose money, whilst another person can effectively gamble on a whim and make a lot of money one time.

With proprietary trading meaning that a firm’s capital is on the line directly with each trade, it can create a lot of pressure to hit the ground running.

A good way to relieve some of this is to look at some of the most notable trades on the market and look for the lessons that are relevant to funded traders today, both for positive and negative reasons.

With that in mind, here are some of the best and worst trades ever made, and how we can use these events to shape our own trading strategies and philosophies.

Sir John Templeton’s Last Great Short

Arguably the greatest contrarian the stock market has ever seen, Sir John Templeton thrived in chaotic and troubled market conditions, had a much-publicised adoration for unloved stocks and would often aggressively short stocks that his fundamental analysis suggested were overvalued.

His first great trade happened when he bought 100 shares of every company on the New York Stock Exchange trading at penny-stock levels on 3rd September 1939, the day war was declared in Europe.

He believed the inevitability of the Second World War would be a boost for US industry after the Great Depression, and he became a millionaire, and later a billionaire by following this approach.

His last great trade would be just as brilliant but had the opposite approach.

In 2000, he would short several internet-based businesses, selling before the paper millionaires reached the end of their lock-up dates and could actualise their earnings.

He later described it as the “easiest money” he made in his lengthy career and highlighted the value of fundamental analysis, as well as remaining calm and disciplined when fear and greed can so often dominate the market.

The Fall Of Stanley Druckenmiller

The right-hand man of George Soros at Quantum Fund, Stanley Druckenmiller had one of the greatest trading records on the market largely through having the insight to know when to make huge trades and when to use leverage most effectively.

Whilst Mr Soros is the man credited for “breaking the Bank of England” thanks to one of the biggest short plays in the history of forex that culminated in Black Wednesday, Mr Druckenmiller was the person who first spotted the vulnerability in the pound in the European Exchange Rate Mechanism.

This trust in his insight, his commitment and the Quantum Fund capital that allowed him to act as a market maker made Quantum billions on the trade, but the exact opposite would take place six years later, as an irrationally exuberant market made him question his strategy.

In 1999, technology stocks and the Nasdaq were soaring in defiance of most evaluations, which meant either a revolutionary boom or an asset bubble priming itself to burst.

Mr Druckenmiller believed, correctly, that internet-based companies were wildly overvalued and decided to short them to the value of $200m. He lost $600m within a month as the stock kept rising.

He had been correct in his conclusion but ultimately did not time the short correctly, so he changed tactics, hired younger investors with knowledge in technology stocks and turned around his 15 per cent loss on the year and ended with a 35 per cent gain.

He sold all of these stocks in January 2000, still believing a crash was incoming, but made the fatal mistake of entering the market an hour after it peaked in March 2000. This single trade cost Quantum Fund $3bn and cost Mr Druckenmiller his job.

This proved that even the best traders can fall victim to emotional trading habits, fear of missing out and having their analysis called into question by a particularly irrational market.

Jim Chanos and Enron

If Sir John Templeton and Warren Buffet are amongst the greatest examples of long-term value-based investment, notorious short-seller Jim Chanos is perhaps the inverse, taking long-term short positions in businesses or markets with overlooked failings and flaws.

Unlike Mr Druckenmiller’s wavering short position during the dotcom bubble, Mr Chanos often commits heavily to these short positions, to the point that some analysts have described him as much as a whistleblower as a short-seller.

Arguably his biggest success in this regard is Enron, an ostensibly successful energy and commodities company that turned out to be executing one of the single biggest corporate frauds in history.

Mr Chanos had suspicions about Enron as early as 2000, with the company’s previous year’s financial reports suggesting to him and his company Kynikos that the company was not merely overvalued but was not making any money at all despite the profits it reported.

From November 2000, Kynikos shorted Enron stock, intensifying their campaign with each news story until the company finally filed for bankruptcy in 2001.

This highlights the importance of commitment to a particular market philosophy, which in this case was trusting that the market will correct for fundamental flaws.

Whilst in recent years Mr Chanos’ approach has been tested by losses shorting Tesla and the Chinese property market, his approach did net profits on shorting Hertz before it filed for bankruptcy, the similarly infamous fraud Wirecard, Luckin Coffee and Beyond Meat.


Robert Citron And The Bankruptcy Of Orange County

A relatively complex story with a very simple moral, Robert Citron’s tenure as the Treasurer-Tax Collector of Orange County was somewhat infamous, not least because it meant that a local political office filed for bankruptcy.

In the 1980s and early 1990s, the affluent, typically conservative region of Orange County seemingly managed to have both low taxes and extensive public services, something that helped him stay in office for seven elections and 24 years.

However, funding these policies was a web of highly leveraged investments, which at one point totalled 292 per cent, funded through the use of US Treasury bonds as collateral.

When interest rates started to rise, the investment pools consequently fell in value, leading to additional margin payments that created a domino effect that led to Orange County itself filing for bankruptcy and Mr Citron spending time in prison.

The lesson is essentially the opposite of the one we can learn from Stanley Druckenmiller; whilst his correct analysis was thwarted by an irrational market, Mr Citron’s huge profits made from exceedingly risky trades taught him the wrong lesson, led to complacency, and then a major collapse.

John Paulson And The “Greatest Trade Ever”

Typically, most traders tend to avoid the volatility and speculation that comes with “financial events”, such as mergers, acquisitions, earnings publications, economic reports and so on, because of the inherent instability and uncertainty that comes with it.

Hedge fund manager John Paulson is not one of them and specialised in taking advantage of the chaos that often comes with stock market events, such as engaging in merger arbitrage, buying shares in a target company and shorting the stock of the acquirer to earn the difference between the share prices.

However, his greatest success was found in shorting the US housing market during an asset bubble that preceded the subprime mortgage crisis, investing in credit default swaps (CDS) to effectively short against the housing market.

He was not the only one to do this, with Dr Michael Burry (most famously depicted in The Big Short), but Mr Paulson personally made $4bn from the single trade, although not without controversy and potential legal challenges.

This highlights that whilst there is value in sticking with the bubble when you know how to get out of it, ultimately if you believe that a market is too good to be true, you do not have to follow the money.

Long-Term Capital Management And Its Short-Term Collapse

Initially highly profitable, Long-Term Capital Management (LTCM) specialised in arbitrage trading and other relatively safe trading strategies where profits were made using high leverage.

However, as more companies followed their approach, LTCM looked into much riskier trades outside of their sphere of expertise. This strategy was later described as akin to picking up pennies in front of a bulldozer.

The contagion of the 1997 Asian financial crisis caused issues, but the 1998 Russian financial crisis and the flight to quality that ensured led to an effective short-squeeze on a lot of liquid securities that LTCM had shorted.

This led to an infamous bailout involving nearly every major investment firm on Wall Street.

Their ultimate issues were caused by relying on a short-term business model, one that could not factor in rare and extreme events, which is exactly what caused LTCM’s collapse.

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