Fortunes are often made during crashes, a truth that is paradoxical and rather disturbing. Yet, such is the nature of capitalism. A short seller who recognizes a bearish trend in the market or a particular stock stands to make enormous returns while others face demise.
These five investors have made a living predicting crises, collapses, and crashes. Make sure you check out our list of best long trades in history too.
George Soros Goes All-In Against British Pound
Soros, also known as “The Man Who Broke the Bank of England,” placed one of the largest short trades in history in 1992, making him a legend on Wall Street. Soros recognized several disturbing economic trends in the UK. Notably, he believed that inflation in the UK was too high and interest rates were too low. He also believed that the UK joining the Exchange Rate Mechanism (ERM), an organization to unite the European economies, would hurt the pound in the long run because it artificially supported it. Soros sold $10 billion in British pounds.
Selling pressure from Soros and others pummeled the currency, ultimately forcing the UK to withdraw from the ERM. The pound rebounded shortly after, but Soros had already pocketed $1 billion. The trade was one of many brilliant trades throughout Soros’ career. The legendary investor also gives some of the credit to Stanley Druckenmiller for breaking the Bank of England.
John Paulson Predicts Housing Bubble Burst
American stocks and real estate had been going up for years, and only a handful of brilliant investors recognized why. Banks were giving loans to people who could not afford them, and these faulty mortgages were backed by equally worthless derivative contracts called credit default obligations (CDO’s). John Paulson recognized the fragileness of the American housing economy and figured out a way to bet against it.
Paulson coaxed banks to write credit default swaps (CDS’s), which effectively shorted CDO’s. When housing peaked and sub-prime mortgages went bust, Paulson’s CDS’s were worth a small fortune. When the market crashed, Paulson made billions. His trade bagged his hedge fund $3-4 billion in profits, making it the best performing fund during one of the most difficult economic environments in American history.
Jesse Livermore Predicts Great Depression
Livermore made two short trades that bagged him serious money in the 1920’s when American assets were booming in value. Confident in his trading, he decided to make a living by short selling, and soon later secured one of the greatest profits in the history of the stock market.
Livermore predicted the crash of 1929, shorting almost the entire stock market. The trade cleared approximately $100 million for Livermore, around $1.4 billion in 2014 dollars. With wealth disintegrating during the Depression throughout America, Livermore was one of only a handful of investors to make a killing.
Paul Tudor Jones Goes Short Before Black Monday
Jones shorted the stock market immediately before Black Monday, when the stock market crashed 22% on October 19, 1987, the largest one-day decline of all-time. The crash was triggered for several reasons – stocks had returned over 40% in seven months and were overextended, foreign stock markets were collapsing, portfolio insurance had become too prominent, and computerized trading programs poured gasoline on the fire, sending American equity markets into a selling frenzy.
Paul Tudor Jones, by some method or miracle, predicted the crash. He tripled his money on the trade and earned around $100 million.
Jim Chanos Shorts… Everything
Chanos is a legendary short-seller and is no one trick pony. He is most famous for recognizing Enron’s questionable accounting practices and shorted the stock before its famous collapse. Chanos also made huge returns shorting Baldwin-United, Tyco International (TYC) , and KB Home (KBH) .
Chanos recently disclosed short positions on Caterpillar (CAT) , the Chinese economy, Valeant Pharmaceuticals (VRX) , Sodastream (SODA) and Keurig Green Mountain (GMCR) . His net worth is currently $1.5 billion.
Got a better trade that can top these five? Share it in the comments!