Comments on: John Paulson and The Greatest Trade Ever

By: DR. MICHAEL BURRY, the incredible value-investor who predicted the US financial collapse and made billions from credit default swaps « GOLDELYONN GROWTH FUND

Thu, 16 Dec 2010 06:13:58 +0000

[...] bonds in his fund, Scion Capital. He figures prominently in the Gregory Zuckerman’s book, The Greatest Trade Ever, and also in The Big Short, Michael Lewis’s contribution to the sub-prime mortgage bond market [...]

By: Dr. Michael Burry and The Greatest Trade Ever « Greenbackd

Dr. Michael Burry and The Greatest Trade Ever « Greenbackd — Tue, 02 Mar 2010 05:03:23 +0000

By: Sivaram Velauthapillai

Sivaram Velauthapillai — Thu, 05 Nov 2009 01:41:04 +0000

DavidMIT: “People like Einhorn seem to play this by buying long-dated call options on interest rates. That sounds like a good hedge, as inflation will lead to higher interest rates. But how can a retail investor play this? any ideas?”

I’m not too knowledgeable about this and haven’t done anything, but I did think about doing it. But unlike you, I was thinking of doing the opposite bet (i.e. bet on deflation) and have contemplated it. Anyway, you have several choices as a small investor.

You can obviously bet on rising interest rates by shorting government bonds, or buying inverse bond ETFs (for example, TBT for inverse long-term bonds–do note that the path taken by returns matters for inverse and leveraged ETFs.) You won’t get the leverage of derivatives but this is the simplest.

The other alternative I can think of (and this is closer to the leveraged bets of macro speculators) is to buy options on bond ETFs. Since you are bearish on bonds (or bullish on interest rates,) you can buy put options on government bond ETFs. For example, you can buy a Jan 2011 put option on TLT (TLT is a 20 year bond ETF). Conversely, you can buy a call option on an inverse bond ETF but volume for inverse bonds are not good and inverse ETFs depend on the path taken (i.e. it’s possible for you to lose money even if the bond falls.)

Going with put options provides huge leverage but it is complicated (pricing them is not easy), can result in total loss, and is very expensive (depending on the option in question, you may pay as much as 10% for the priviledge of entering into the contract.)

Whatever happens, do keep in mind that macro bets are pretty much speculation and has nothing to do with “value investing.” It is very difficult to “prove” that interest rates must necessarily rise. Similarly, it’s not so easy to justify that gold must necessarily rise.

By: davidmit

davidmit — Tue, 03 Nov 2009 20:51:13 +0000

People like Einhorn seem to play this by buying long-dated call options on interest rates. That sounds like a good hedge, as inflation will lead to higher interest rates. But how can a retail investor play this? any ideas?

By: Nate

Nate — Mon, 02 Nov 2009 20:35:21 +0000

I’ve also seen people buying Swiss Franc instead of gold on the theory it’s more stable.

By: g

Mon, 02 Nov 2009 15:06:49 +0000

I agree with the underlying thesis that the US dollar is going to shit. In my mind, there is no doubt that the US government’s borrowing costs will rise significantly in the near future.

However, I just can’t wrap my head around buying gold. I understand that historically, gold has kept its value or risen when the value of fiat currency comes into question, but aside form gold’s minor worth for aesthetic and production purposes, its just a metal. It is not a security. How can there not be a better way to play this investment thesis??? Julian Robertson’s curve steepeners make much more sense to me.