John Paulson proves the difficulty of timing the markets


Investors are supposed to buy low and sell high, but the psychology of markets often leads them to do the exact opposite, buying just as a stock reaches its peak and selling when it bottoms out.

This is not true for just naive retail investors, as hedge fund magnate John Paulson proved in his latest regulatory filings.

At the beginning of last year, Paulson, who became wildly rich with a bet against the subprime housing market in 2008, was expecting Bank of America stock to hit $30 by the end of 2011. Instead the stock dropped over the course of the year to around $5. Paulson’s big stake in the bank was one of many bad stock picks that helped lead one of his most high-profile funds to a 52.5% plunge last year, DealBook reported.


The regulatory filings Paulson submitted Tuesday show that the pain finally became too much, leading Paulson to bail out of his Bank of America position in the fourth quarter of last year, selling his $400-million stake in the company.

Any frustrated investor can guess what happened next. Yes, Bank of America bottomed out just as Paulson was selling, and shot up in the new year, rising 43% as of Tuesday.

The filings submitted by other hedge funds Tuesday show that several prominent managers had better luck timing the markets. Eric Mindich’s Eton Park fund was buying Bank of America just before it began its surge, Reuters reported. And David Tepper, who correctly timed the bank comeback in 2010, bought a bunch of shares in Apple in the fourth quarter of 2011, just before its jump in the new year.

But Paulson’s experience is a good reminder for every home investor who thinks the simple key to investing is good timing. Last year Paulson wasn’t the only brilliant hedge fund manager who struggled. Hedge funds on the whole lost 4.8% last year, according to Hedge Fund Research, in a year when leading U.S. indexes were up.

It is enough to recall a recent survey by the Initiative on Global Markets in which 0% of economists said that they believe investors can “consistently make accurate predictions about whether the price of an individual stock will rise or fall on a given day.”



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