Short Term Loans and Debt Can Predict Market

Business post-recession

Businesses are still looking to short term loans as a way to fund debt. Debt has always been around and most likely, always will be. Just ask John Paulson—he’s a hedge fund manager in New York. Back in 2006 his company was like a lot of other investment companies. It was mired in debt with a reasonable amount of income. Its ROI was moderately healthy and its expenses were manageable. Then the recession hit.
While a lot of businesses had a sob story to tell after the recession, Paulson’s never did. Here are his company statistics: His company earned about $20 billion between 2007 and 2009 and he personally earned about $4 billion, which averaged out to $10 million daily. So what was his secret? While other businesses didn’t even make it through the recession, he found a gold mine.

Paulson’s secret

Part of Paulson’s secret was to predict the market correctly. At the onset of 2006 he theorized that the housing market was on the verge of a collapse so he started buying insurance. In fact, he spent more than $1 billion in 2006 to buy insurance on “risky mortgage investments.” That put him in a prime position to recoup his losses, and then some. In fact, one of his funds brought him more than a 500% return in 2006 alone. In retrospect, Paulson noted a few key lessons investors should stick to:

1.   Don’t rely on financial analysts and experts. Back in 2006 bankers were pushing people towards investing. Wall Street directed millions of people into the risky market, knowing full well it was dodgy at best. Paulson knew that analysts and experts were looking in the wrong direction for their indicators and went the opposite route with his investments.

2.  Be aware of debt markets. Paulson and his team knew there was going to be a market crash because they were closely watching smaller issues like the subprime-mortgage bond market. These “little” markets can indicate what’s coming in the near future and give some insight into what the next move should be. Real estate investors need to know what is going on in the short term loan market, the mortgage bond market and the stock price index to adequately predict where bigger chunks of the market are headed.

3.  Insurance works. Paulson used insurance to build his fortune. Although many investors were becoming more and more concerned about the market, few were proactive about managing their futures. That’s where Paulson’s team differed—they used insurance to protect their assets and investments. When the recession hit, they were not only protected, they were able to recoup any losses over and over again.

These are just some of the methods of managing investments. Paulson also noted that good old luck was a big factor to his success. Sure he did what he could, but did he really have any control over the big picture? Probably not, but he did learn to not “risk too much” on any one investment regardless of believing it to be a “sure fire” hit.

Lessons learned

The biggest lesson to learn when looking at John Paulson’s story is to think about investments with a combination of ingenuity, experience and research. For example, his company did its own research into short term loan popularity and subprime-mortgage bond market growth before making the decision to move forward with investments. They were well-versed on their own, so relying on industry experts and analysts wasn’t necessary. Paulson added, “We were never following. We never listened to anyone. We were proactively doing our own research and creating our own indicators to live and invest by…it all paid off in the end.”

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