In 2008, the average stock on the S&P 500 lost 38.5%. John Paulson, no relation to the former Treasury Secretary who is famous for making billions shorting sub prime mortgages in 2007, made almost exactly the same percentage increase as the S&P 500 lost. So in some sense, if you're wondering what happened to your money, ask John. He's got it.
Exactly how well did Paulson do and how did he do it? Paulson Advantage Plus, his largest fund with $7 billion in assets, returned 37.6% net of fees for 2008 -- this means that his pre-fee returns probably topped 40%. Paulson again bet right about the collapse of financial institutions. In early 2008, Paulson shorted Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- betting that they'd become insolvent or need to raise additional capital that would dilute shareholders.
I am happy for Paulson's success because I think this is what capitalism should be all about. What does Paulson want to do in 2009? He sees bargains in distressed debt such as mortgages and leveraged loans as well as in real estate. Paulson was right in 2007 and in 2008. If he he's right three years in a row, he's doing you the favor of telling you his game plan.
All you have to do is figure out how you can buy distressed debt. If you have any ideas, please comment below.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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