Why is John Paulson’s performance a surprise?

I often quote Po’s line from the movie “Kung Fu Panda”: There is no secret ingredient.

Every time there’s a major market crash, there’s someone out there who called it coming and ended up making a fortune. And inevitably, that person never duplicates the feat. In the 1987 crash, it was Elaine Gazarelli. She called the crash correctly, and for a while, she was hot. Then she wasn’t. Now it’s John Paulson. He made money on the mortgage collapse in 2008. He was hot. Now he isn’t. So we can read lots of news reports about him having losses in gold and outflows of capital and putting his super-fancy Aspen house on the market, like it’s a surprise.

It’s not.

This is exactly what we should expect in an efficient market, with we (mostly) have: the wins and losses average out over time. The people who win big are (mostly) lucky.

Students always ask me about Warren Buffett, and I always say the same thing: if it were easy to replicate his success, we wouldn’t know his name. And, part of his success is his ability to negotiate favorable terms for deals, such as his investment in Goldman Sachs during the 2008 crash. Who else was in a position to sign over that much money at that time? Not me, not any commercial bank, and not any investment bank. Because Buffett could, do you think he was able to cut a good deal?

Heck yeah.

It’s hard enough to match the market, especially when fees are figured in. Beating the market requires luck, clairvoyance, and skill. But if you could really beat the market all the time, would you be getting up and going to work every day? Heck n, not when there are so many lovely beaches in Maui.