Thousands of trades take place every day in markets across the world. But only a few end up making headlines. Perhaps luck is partially responsible. But most of these iconic trades are the result of strong convictions, risk taking, and not being afraid to steer away from the herd and bet big.
Here are five extraordinary trades from the past 10 years. Get inspired and continue along your path to making great trades and growing wealth. I've had my own great trade back in 2000 that helped kickstart my wealth.
NETFLIX – Sometimes Dad Doesn’t Know Best
Strike up a conversation about trading Netflix (NFLX) and three names are bound to come up – Carl Icahn, Brett Icahn, and David Schechter. The most renown of these three men is billionaire activist investor Carl Icahn, founder of Icahn Capital management. Even at age 79, Carl Icahn is still trading and has a net worth of $22 billion.
Carl’s son, Brett Icahn, followed in his father’s footsteps and co-manages the Sargon portfolio for the family business. His investing partner is David Schechter. Although Brett shares his father’s love of investing, he and Schechter have had striking differences of opinion to Carl’s on certain investments. Most notable in the last several years is Netflix.
In 2012, Brett and Schechter initiated an investment in Netflix for the firm. But in October 2013, Carl Icahn wanted to sell more than half of the position. Brett and Schecter strongly disagreed with selling because they felt Netflix was still undervalued at $323 per share. Ultimately, they were overruled and Carl Icahn sold 2.99 million shares for roughly $800 million in profits.
After selling, Carl Icahn said, “As a hardened veteran of seven bear markets, I have learned that when you are lucky and/or smart enough to have made a total return of 457 percent in only 14 months it is time to take some of the chips off the table.”
But what’s interesting is that Carl Icahn was so confident he made the right move selling Netflix at the time that he made an intriguing wager with his son. The bet is set to expire in August 2016 and states that Carl Icahn will inject cash or cash equivalents into the Sargon portfolio if Brett and Schechter prove to be right. So far, Carl Icahn is losing the bet by quite a big margin as seen in the price chart below.
Source: Yahoo Finance, January 2013 – June 2015
SUBPRIME HOUSING CRISIS – An Unknown Investor Strikes It Big
Recognized as “a man who made one of the biggest fortunes in Wall Street history,” John Paulson was on the right side of the fence when the financial crisis hit. As a relatively unknown hedge fund manager in 2006, Paulson initiated a fund strategy solely focused on the unsustainable state of the housing market. He utilized credit default swaps to bet against bonds backed by subprime mortgages.
And to the surprise of many, including his investors, Paulson’s predictions proved correct and his investments struck it really big. He made $15 billion in 2007 alone and another subsequent $5 billion in 2008. To help put the incredible profitability of Paulson’s trades into perspective, George Soros’ famous trade against the British Pound made “only” $1 billion in 1992.
(maybe talk about his recent losses in gold since he did lose a lot, but is still rich)
Further reading: Renter Nation vs Housing Recovery
S&P 500 INDEX FUND OR HEDGE FUNDS OF FUNDS? – The Million Dollar Bet
Renown investor Warren Buffett made an intriguing bet for charity in 2008 with Ted Seides, president of a hedge fund firm called Protege Partners. Buffett wagered Seides that an S&P 500 index fund would outperform hedge funds in a ten-year period and he accepted. The pot at stake was $1 million, hence it’s nickname the 1 million dollar bet.
Each of them put $320,000 into a zero-coupon bond that was expected to grow to $1 million by the bet’s 10-year expiration. However, in the fall of 2012, both their zero-coupon bonds investments reached $1 million earlier than anticipated. As a result, they decided to liquidate the zero-coupon bond position and invested the proceeds into Berkshire Hathaway. The funds have since grown to $1.68 million, which is great news for the winning charity.
Buffett’s side of the bet is measuring the Admiral shares of Vanguard’s 500 index fund. Seides’ side is represented by five hedge funds of funds, the names of which haven’t been publicly disclosed. So far, the hedge funds’ performance was above the S&P 500 Index fund only for the first year of the bet. The subsequent six years have all seen higher returns in Buffett’s favor. It was reported in February 2015 that the S&P 500 fund was up 63% versus the hedge funds of funds being up only 20% after fees or 44% before fees.
One of the reasons Buffett believes he can win this bet is the significant impact fees have on hedge fund investments. When he placed this bet he said, “Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested. … A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.”
DISTRESSED FINANCIALS – Buy Low Sell High
The financial crisis was an uncertain time when many investors panicked as they watched the markets tumble. The outlook on banks was unclear and some worried that large banks could be nationalized. Unlike most investors, David Tepper, founder of hedge fund Appaloosa Management, felt positive about the future of financial stocks. Pepper looked past the panic, going long on large positions of distressed financial stocks such as Citigroup (C) and Bank of America (BOA).
The trading strategy paid off well and his fund profited close to $7 billion in 2009, of which Tepper received $4 billion (how is this possible that he took home 55% of the profits? Please clairfy). He continues to manage his fund and was named one of the top 25 highest-earning hedge fund managers in 2014.
Further Reading: Economic Indicators Every Trader Should Know
OIL – Taking More Risks Can Lead To Great Rewards
After the economy recovered following the dot-com crash, oil was trading around $30 a barrel. Andrew Hall, a famous commodities trader and hedge fund manager, was convinced that oil prices would surpass $100 / barrel by 2008. He took action by structuring contracts that would expire worthless in 2008 if oil prices didn’t reach $100. It was a risky move. Fortunately, it turned out he was right and Hall earned a $100 million salary that year from Citigroup, his employer at the time, for his trading successes.
Later on, Hall made another risky and rather unique trade in 2009. Along with his traders, he rented a tanker ship and loaded it with 1 million actual barrels of oil. It’s difficult to even visualize that many barrels. Hall believed that oil was cheap at the time but futures contracts were expensive. On the other hand, renting a tanker was also reasonably affordable at the time since the shipping industry had taken quite a hit from the recession. Hall quickly jumped on the opportunity to purchase a large number of physical oil barrels to store on a tanker offshore. Over time, oil prices came back and Hall profited close to $40 million from that trade.
MAKE YOUR OWN MARK IN HISTORY
Learning about great trades of the past increases your financial knowledge and can inspire you to make your own mark in history.
With about 10% of your money, it's worth trying to pick winners. With the remaining 90% of your money, it's best to buy low cost index funds and automate your investments.
Wealthfront is the best digital wealth advisor that pioneered low cost, customized, automated investing. It's worth checking out what type of customized portfolio they will build for you. The first $5,000 invest is free. The management fee is only 0.25% after, compared to 1% – 2% for traditional wealth managers.
