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Jesse Livermore 1929

Livermore was gaining a significant reputation after several great trades, shorting Union Pacific and then the wheat market. However, this next trade overshadowed the ones before. In the early autumn of 1929 the Dow Jones is up five-fold in the last 5 years and the euphoric atmosphere that pervaded the entire floor wasn’t shared by Livermore. As the money flowed in reaching an $8.5B high, it got to the point where the outstanding loans had exceeded the current amount of money in circulation. In September, as the stocks began to level out, Livermore gambled on his biggest short, which took place on that fateful day in 1929. Looking for a bigger haul and seeing what was coming, Livermore shorted the entire market. As the US Financial sector went into meltdown, Livermore earned himself $100M which in today’s market would equate to a $1.4B haul.

George Soros 1992

In 1992 the British economy looked to be performing well to most observers. However, as part of the European Exchange Rate Mechanism (ERM), the Pound had to remain within 6% against other currencies who operated within this system. The issue that The Bank of England had was that appearances can be deceptive and as the German Mark continued to perform strongly with low inflation, Britain’s inflation was almost treble their German counterparts. The Bank of England’s hope that the ERM would reduce inflation was spotted as a fallacy by George Soros and his Quantum Fund.

With this in mind, Soros, seeing through the attempts to disguise a currency in trouble made his move. He began to borrow heavily in order to short the Pound, taking up a position that exceeded $4B in total against the pound. The Bank of England, in an attempt to stave off the inevitable, raised their interest rates to 12%. The move worked against them. A last ditch attempt to raise the interest rate to 15% was aborted and the Bank of England conceded defeat, exiting the ERM and watching as the Pound freefell by 25%, on a day that would be coined “Black Wednesday”. Although later some would refer to it as “Golden Wednesday”, because it signalled the beginning of a stunning resurgence for the Pound. Either way, Soros had pulled off a truly remarkable trade and walked away with $1B for his efforts.

Bill Ackman 2020

Ackman’s success didn’t come in his usual activity of buying and selling stocks but rather in the bond markets. In late February 2020, Ackman grasped the seriousness of Covid, so he purchased $27M of securities that would gain in value if corporate bonds fell, The Journal reported. Pershing Square’s stock positions were falling in sync with the overall market at the time, and Ackman said that the credit position could help compensate for the stock losses.

Several weeks after establishing the holding, Ackman sold it for $2.6B, a profit of almost 100 times his investment. The gain resulted from market fears that companies hurt by the pandemic wouldn’t be able to repay their debts.

Michael Bury 2008

Michael Bury is a popular name after the blockbuster movie “The Big Short” was released. He is best known for being amongst the first investors to predict and profit from the subprime mortgage crisis that occurred between 2007 and 2010.

In 2005, he started to analyse the housing market. This analysis led to an assumption that it would collapse as early as 2007. This led him to short the housing market by persuading Goldman Sachs and other investment firms to sell him credit default swaps against subprime he saw as vulnerable. During his payments toward the credit default swaps, Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry’s analysis proved correct: He made a personal profit of $100M and a profit for his remaining investors of more than $700M.

So what…

Most of us don’t have hundreds of millions lying around to place these type of trades. However, many of the trades that proved the most profitable were in bearish markets. These times often catch the crowd off guard, and prices move quick as sellers trip over themselves.

So, although the market may seem unappealing right now, there may be more opportunities to catch some large moves down. Put options are proving profitable at the moment if you were to use these to hedge your long portfolio.

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