John Paulson

Most of us know who Warren Buffett is, because he is considered the world's best long-term investor, buying undervalued companies with high cash flow, solid balance sheets, and defensible, moat-like market share in their respective industries. In other words, he buys solid companies when they are cheap and under appreciated by the markets.

But the average person knows little of John Paulson. Paulson has been the most successful trader in recent years, making billions of dollars for his hedge fund by betting against subprime mortgage companies and agencies. He went against the crowd in doing so, making the unpopular bet that home values were artificially set too high, and that subprime borrowers would default en masse. He also bet against the banks that were making these reckless loans, and holding toxic assets.

In hindsight, he was a genius for placing these bets. But when he did make them, he would have been considered a lunatic for betting "against America", as most financial pundits, experts, and economists were predicting clear sailing for the economy, despite the looming subprime iceberg ahead. Most didn't see it coming, but he applied logical reasoning and was prescient enough to place huge bets on his investment thesis. The result was billions in profits for him personally and for his clients.

Flash forward to 2009, and John Paulson made another unpopular bet earlier this year. He gobbled up gold mining shares, the GLD ETF, and physical gold. In all, they represent the largest percentage of his holdings. Why did he do that? In his own words:

http://www.goldnewswire.net/gold-%E2%80%93-not-tomorrow-but-5-years-from-now

Once the Fed began directly buying Treasuries and mortgages, I lost faith in the dollar as a reserve currency for my assets... What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-a-vis the dollar one year from now, three years from now, five years from now.

And I think with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go, and the magnitude of that difference also increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point. - John Paulson