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 go big. Here are five extraordinary trades from the past 10 years.
Netflix: Sometimes Dad Doesn’t Know Best
Strike up a conversation with active traders about Netflix and three names are bound to come up: Carl Icahn, Brett Icahn, and David Schechter. The most renowned 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.1
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 began investing 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. Ultimately, they were overruled and Carl Icahn sold 2.99 million shares for roughly $800 million in profits—in order to unwind a position of that size, he gradually sold off the stock over the course of 12 days.2
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.”3
Carl Icahn was so confident he made the right move by selling Netflix at the time that he made an intriguing wager with his son and wrote it into his employment contract that lasts through August 2016. It states that Carl Icahn will inject cash or the equivalent into the Sargon portfolio if Brett and Schechter prove to be right.4 So far, Carl Icahn is losing the bet by quite a big margin: The stock is trading nearly 157 percent higher since he liquidated.5
Striking it Big on the Subprime Housing Crisis
Recognized as “a man who made one of the biggest fortunes in Wall Street history,” John Paulson, now the head of Paulson & Co. was on the right side of the fence when the financial crisis hit. Back in 2006 when he was relatively unknown, 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.6
And to the surprise of many, including his investors, Paulson’s predictions proved correct: He made $15 billion in 2007 and another $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 $1 billion in 1992.7
Standard & Poor’s 500 Index Fund or Fund of Funds? The Million Dollar Bet
Renowned investor Warren Buffett, chief executive officer of Berkshire Hathaway, 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 Seides accepted. The pot at stake was $1 million, earning it the nickname of the 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, zero-coupon bonds rose and the funds 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.8
Buffett’s side of the bet is based on the performance of the Vanguard 500 Index Fund Admiral Shares. 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 fund only for the first year of the bet. The subsequent six years have all seen higher returns in Buffett’s favor.9 It was reported in February 2015 that the S&P 500 fund was up 63 percent versus the hedge funds of funds being up only 20 percent after fees, or 44 percent before fees.10
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.”11
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 and Bank of America.12
The trading strategy paid off well and his fund profited close to $7 billion in 2009. He continues to manage his fund and was named one of the top 25 highest-earning hedge fund managers in 2014.13
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 who currently is the head of Astenbeck Capital, was convinced that oil prices would surpass $100 a 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.14
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.15
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1 Dolan, Kerry A. and Kroll, Luisa, “The World’s Billionaires,” Forbes, March 2, 2015.
2 Moon, Angela and Ablan, Jennifer, “Carl Icahn Cuts Netflix Stake, Pockets $800 Million Profit,” Reuters, October 22, 2013.
3 Edwards, Cliff, “Carl Icahn Losing Netflix Bet With Son Brett as Shares Rise,” Bloomberg, January 24, 2014.
5 Performance data in the chart spans October 10, 2013 through July 30, 2015.
6 Zuckerman, Gregory, The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History. New York: Crown Publishing Group, 2009.
7 Gross, Daniel, “Hedge-Fund Manager John Paulson’s Greatest Trade Ever,” Newsweek, November 9, 2009.
8 Tuchman, Mitch, “Warren Buffett on Track to Win Hedge-Fund Bet,” MarketWatch, December 4, 2014.
9 Loomis, Carol J., “Warren Buffett Adds to His Lead in $1 Million Hedge Fund Bet,” Fortune, February 3, 2015.
10 Tepper, Taylor, “The Guy Who Made a $1 Million Bet Against Warren Buffett,” Money, February 27, 2015.
12 Mahapatra, Lisa and Lopez, Linette, “The Greatest Trades in Wall Street History,” Business Insider, February 22, 2015.
13 Vardi, Nathan, “The 25 Highest-Earning Hedge Fund Managers And Traders,” Forbes, February 26, 2014.
14 Li, Hao. “Top 10 Greatest Trades of All Time,” International Business Times, January 6, 2011.
15 Gandel, Stephen. “How Citi’s Andrew Hall Made $100 Million Last Year,” Time, October 19, 2009.