People who made a fortune by betting the worst would happen
Daniel Coughlin
06 March 2019
The most legendary short sellers of all time
The shrewdest investors possess an almost supernatural sixth sense when it comes to anticipating impending disaster, and are able to profit spectacularly from others' misery by shorting the hell out of stock, currency, futures, and so on that they predict will plummet in value. We take a look at 10 financial seers who made a fortune by speculating that the worst would happen.
What exactly is short selling?
Short selling is the sale of an asset (be it stock, currency, futures, and so on) that the seller has borrowed. The seller offloads the borrowed asset at the market rate and covers the position by buying it once its value has declined. The seller then profits from the price difference. Short selling is the opposite of going long, which is selling an asset that the seller actually owns. Making a profit from going long is reliant on the value of the asset increasing rather than declining.
Jesse Lauriston Livermore
Widely regarded as the most savvy investor of all time, Jesse Lauriston Livermore was a pioneer of shorting the markets. The Massachusetts native, who was born into poverty, relied on his gut instinct to go short when everyone else was going long, which resulted in some of history's most sensational trades.
Jesse Lauriston Livermore
His first major shorting success was in 1906 when he mysteriously took a huge short position the day before the San Francisco earthquake. Shorting Union Pacific railroad stock, he pocketed $250,000 (189k), around $7 million (£5.3m) in today's money. Livermore followed this up by short selling before the Panic of 1907, netting himself $3 million (£2.3m), $84 million (£64m) when adjusted for inflation.
Jesse Lauriston Livermore
Livermore's greatest success though was anticipating the Wall Street Crash of 1929. By secretly using a network of brokers, he pretty much shorted the entire market and cashed in to the tune of $100 million (£76m), the equivalent of $1.5 billion (£1.1bn) today, when the whole thing collapsed. Livermore eventually lost the lot however, and ended up killing himself on 28 November 1940.
Robert W. Wilson
Detroit-born Robert W. Wilson is also considered by many to be the greatest investor of all time. Before his retirement in 1986, the legendary trader managed to turn an initial stake of $15,000 (£11.4k) courtesy of his mother into a humongous fortune, much of which was gleaned from short selling.
Robert W. Wilson
In fact, Wilson was reputed to be Wall Street's number one short seller during his career. Like other famed investors however, Wilson wasn't always successful. In 1978, the daring trader made the mistake of shorting the Resorts International casino company right before its stock skyrocketed in price. Forbes called it “the most catastrophic short play in modern times".
Robert W. Wilson
Nevertheless, Wilson recovered his losses in a big way, and by 2000, he was worth an estimated $800 million (£607m), around $1.2 billion (£910m) in today's money. A dedicated philanthropist, Wilson gave away the bulk of his fortune during his lifetime to charities including the Rainforest Alliance. Shockingly, the investor-turned-benefactor took his own life on 23 December 2013 by leaping from his apartment in Manhattan's San Remo building, mirroring Jesse Livermore's tragic demise.
Paul Tudor Jones II
An economics grad from Tennessee, Paul Tudor Jones II started his career in 1976 working on the trading floor before becoming a broker and establishing his eponymous investment company in 1980. Together with his second-in-command Peter Borish, Jones lucked out when he predicted the Black Monday crash of 1987.
Paul Tudor Jones II
The sharp-witted pair used their technical know-how combined with historical S&P data to map out the conditions proceeding the 1929 Wall Street Crash and noticed the market pre-Black Monday was behaving in a very similar way. Armed with this info, Jones didn't waste any time shorting it to a T.
Paul Tudor Jones II
As the duo correctly predicted, the Dow slumped dramatically on 19 October 1987, and the Tudor Investment Corporation made an estimated $100 million (£76m), which works out around $222 million (£168m) when adjusted for inflation. Philanthropist Jones has followed up this success with many others, and is now worth $5.1 billion (£3.9bn) according to Forbes.
Andy Krieger
Paul Tudor Jones II wasn't the only investor to bag a fortune following the Black Monday crash. Andy Krieger, a currency trader at Bankers Trust, noticed the New Zealand dollar was being enormously overvalued as investors rushed out of the US dollar and put their funds into other more seemingly stable currencies.
Andy Krieger
Using the relatively novel method of options, Krieger entered a short position against the Kiwi worth hundreds of millions of dollars, even surpassing the entire money supply of New Zealand. The position dealt a painful blow to the currency and it dropped in value by up to 5%, delighting Krieger and his bosses, while horrifying the New Zealand government.
Andy Krieger
As a consequence of his audacious short, Krieger made his employer Bankers Trust $300 million (£227m) or $664 million (£504m) in today's money, and was awarded a bonus of $3 million (£2.3m) for his efforts, which is around $6.7 million (£5.1m) when adjusted for inflation. Krieger was unhappy however with the payment and left the firm in 1988 to work for George Soros.
George Soros
Which takes us nicely into the next short-selling triumph. The aforementioned George Soros was riding high in the early 1990s having made a killing from investing and was looking for his next big opportunity. The Hungarian-born money manager identified the flaws in pound sterling's participation in the European Exchange Rate Mechanism (ERM) and decided to act.
George Soros
The UK joined the ERM in 1990 and sterling was pegged to the Deutschmark at a rate of 2.9 DM to the pound. The idea behind the ERM was to avoid exchange rate fluctuations and harmonise the currencies of Europe, but the sterling/Deutschmark rate was set too high and excessive interest rates in Germany forced the UK government to spend billions propping up the pound in order to maintain the exchange rate.
George Soros
Soros realised this was unsustainable and famously “broke the Bank of England” by shorting sterling on a colossal scale, triggering a marked devaluation. As a result, the UK was forced to pull out of the ERM on Black Wednesday 16 September 1992, with the Treasury losing $4.2 billion (£3.2bn), around $8.9 million (£6.8bn) in today's money. Soros on the other hand made $1 billion (£759m), about $2 billion (£1.5bn) when adjusted for inflation.
John Templeton
Another potential inductee in the investing hall of fame – should such a thing exist – American-born British investor John Templeton was described by Money magazine in 1999 as “arguably the greatest global stock picker of the century,” and was renowned for his short-selling prowess.
John Templeton
A veteran investor by the late 1990s, Templeton, who had a "buy when there's blood in the streets" philosophy and liked to go against the grain, sensed that the internet-based companies that everyone seemed to be buying into at the time were significantly overvalued, so in the year 2000, he shorted a plethora of dotcom stocks.
John Templeton
As the great investor foresaw, the bubble burst not long after he'd shorted the online companies. Templeton – pictured here with Prince Philip – made an estimated $80 million (£61m) in the space of a few weeks, around $117 million (£89m) in today's money. He died in 2008, having donated over $1 billion (£759m) to charitable causes.
Jim Chanos
The fall of energy, commodities and services giant Enron in 2001 shook the foundations of Wall Street and stunned many investors. But it came as no surprise to Jim Chanos, the Milwaukee-born investment manager who anticipated its collapse. Chanos cut his teeth in the early 1980s analysing insurance conglomerate Baldwin-United.
Jim Chanos
The rookie investor exposed serious issues with the group's financials, which contributed to its demise in what became the biggest corporate bankruptcy on record at the time. Almost 20 years later, Chanos smelled a rat and identified similar discrepancies in Enron's accounts.
Jim Chanos
When Enron's stock peaked in November 2000 at a time when almost everyone believed the company was performing brilliantly, Chanos –through his company Kynikos Associates – took a short position. Needless to say, when the stock nosedived the following year and the company filed for bankruptcy, Chanos and his firm cleaned up.
John Paulson
A fairly obscure and relatively unremarkable investor before 2008, New Yorker John Paulson entered into investing history by foreseeing the subprime mortgage crisis, and effectively shorting the US housing market. Paulson picked up on the market's problems as early as 2005, and began to bet against mortgage-backed securities by investing in credit default swaps.
John Paulson
Through his hedge fund Paulson & Co., the money manager amassed a multitude of credit default swaps, and waited patiently for the market to topple. When the whole shebang came crashing down in 2008, the fund made an absolute fortune, with Paulson's personal profit amounting to a cool $4 billion (£3bn), around $4.7 billion (£3.6bn) today.
John Paulson
The coup has been described as the greatest trade in history. Paulson followed it up by breaking a record for hedge fund earnings, making $5 billion (£3.8bn) in 2010 – around $5.8 billion (£4.4bn) today – though like every other investor, Paulson isn't infallible and has lost immense amounts of money since then due to a series of missteps. Still, his current net worth according to Forbes stands at a not-too-shabby $5 billion (£3.8bn).
Michael Burry
As well as John Paulson, several other notable investors predicted the subprime mortgage crisis, including Californian doctor and hedge fund manager Michael Burry, who is the chief protagonist of The Big Short non-fiction book and movie of the same name. Heading up Scion Capital, Burry, like Paulson, invested in credit default swaps to short the US housing market.
Michael Burry
Burry actually cottoned on to the failing market sooner than Paulson. By analysing the market in 2003 and 2004, he predicted it would flounder as early as 2007, and got to work persuading Goldman Sachs and other investment companies to sell him credit default swaps against subprime deals he recognised as shaky.
Michael Burry
Burry had to battle investors who disagreed with his tactics and staged a revolt before the gamble paid off. Luckily, he still managed to make them at least $700 million (£531m) once the market crashed, about $818 million (£621m) when adjusted for inflation, and scored a personal profit of $100 million (£76m) from the bet – $117 million (£88.8m) in today's money.
Jamie Mai
New York investor Jamie Mai, together with his colleagues Charlie Ledley and Ben Hockett, also features in The Big Short book and movie. Mai founded a hedge fund in a shed in 2002 with $100,000 (£76k) called Cornwall Capital that focused on betting on unlikely financial events with the hope of cashing in on the improbable.
Jamie Mai
Cornwall Capital soon homed in on the US subprime mortgage market. Like investors John Paulson and Michael Blurry, Mai and his colleagues shorted subprime mortgage-backed securities through credit default swaps, but they came to the party a little later, starting in 2006.
Jamie Mai
When the market crashed in 2008, their bets paid off handsomely of course, generating a staggering 80 times the initial investment. The hedge fund that started out in a garage with an investment of just $100,000 (£75k) ended up with $120 million (£91m) by 2009, about $140 million (£106m) when adjusted for inflation.
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