Trading, unlike investments, tend to be more dangerous and require a huge risk appetite. Some traders, however, enjoy living life on the edge and making huge and risky trading bets. Genius or pathological? You decide.
There is a fine line separating madness and genius. And this saying is extremely applicable in the tumultuous world of trading, where the difference between a million dollar gain and loss could simply be staying in the markets for an extra hour.
For most people, the actions of the following traders resembled nothing more than foolhardy gambling. Yet, after the dust had settled, their seemingly risky trading bets reaped handsome rewards for the traders who dared to swim against the current. Apparently, there was method to their madness. These are the risky trading bets that paid off.
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The Man Who Broke the Bank of England
On 16 September 1992, the British government at that time withdrew the pound sterling from the European Exchange Rate Mechanism, a system that was introduced by Europe in 1979 as part of an initiative to achieve monetary stability and reduce the variance in exchange rate. It was dubbed Black Wednesday and cost the country close to 3.3 billion pounds. This was because the British pound sterling had fallen below the permitted range and the British government was spending billions to prop the currency up, money that could have been better spent developing the country.
However, amidst the financial chaos, many currency speculators made huge profits, none more so than the feared George Soros who pocketed an incredible US$1 billion after shorting the pound. It wasn’t the decision to short the currency that made him famous since there were other speculators who also believed that the sterling pound was overvalued. Rather, it was the huge size of his wager – he bet more than US$10 billion that the currency would fall.
The Two Shorts That Forged a Legend
David Einhorn is a man of many talents. He’s a decent bridge player, has won millions in poker tournaments in Vegas, and grew a hedge fund that started with just slightly less than a million dollars to one that managed over six billion dollars within 12 years. What Einhorn is most famous for though were his two bets that went against the grain:
- His short call on Lehman Brothers back in 2008, before the firm’s much-publicised bankruptcy filing, that catapulted him to fame
- Another short call on the former Green Mountain Coffee Roasters, now known as Keurig Green Mountain, back in 2011, during a period when the stock was rapidly rising due to the growth of its new item – K-Cup
Notably, at the time of the two calls, the positions he firmly entrenched himself in were vastly different from popular public opinion. Erin Callan, the chief financial officer of Lehman Brothers during that rocky period, regularly appeared in the media to talk up the firm’s financial health, managing to win praise from notable finance folks, while the stock of the coffee company was on a meteoric rise, increasing more than tenfold in a two-year period, and was supposedly rising even higher on the back of new, well-received products.
Einhorn was eventually proven right when Lehman Brothers suffered a spectacular collapse. As for Green Mountain stocks, it lost half of its value after the CEO announced that its earnings had sorely underperformed expectations, a few weeks after Einhorn made public his bold proclamations.
How much money did Einhorn make? He’s never publicly announced his earnings but you can be sure it’s a hefty amount.
The One That Started It All
Today, everyone knows Enron Corporation as the energy company that indulged in accounting fraud to hide billions of dollars in debt from failed deals and projects. Yet, just over a decade ago, the firm was one of the world’s biggest electricity and natural gas companies with more than US$100 billion in annual revenue.
No one saw the fall coming, save for James Chanos. The American hedge fund manager had been looking into Enron since 1993 but became more intrigued in 2000 when he received an article published in the Texas Wall Street Journal from a friend. The piece questioned a new accounting practice that the energy companies had successfully pushed for and got implemented. In a nutshell, these companies could put future profits into the present time, virtually inflating the company’s value. For Chanos, this presented an opportunity for corporate abuse and he began to dig deeper. He found a litany of small irregularities, more than enough evidence for him to start shorting the stock.
A year later, in October 2001, when the Enron scandal erupted and the company’s stock price plunged to less than a dollar from a high of more than US$90, Chanos made a fortune.
Making the Most from an Oily Situation
As everyone knows, the quickest way to make a few million dollars is to start with a billion dollars. But, what if you have to do it the hard way? For Andrew Hall, who was thrust into the unfavourable limelight during the 2008 financial meltdown due to his US$100 million pay package, he did it by pulling off one of the most daring oil trades in history.
The year was 2003 and oil was trading at around US$30 per barrel. The world was just coming out of a recession so virtually nobody thought that oil prices would dramatically rise in the next five years. Well, nobody except Hall. He purchased long-dated oil-futures contracts that would pay off in a big way if oil prices went above US$100 within the next half a decade. Since it was such an impossible scenario at that time, Hall got these contracts cheaply.
In 2008, oil topped US$100. Hall and his trading division Philbro made a bundle and Hall entered the trading hall of fame.
Images of David Einhorn, James Chanos and Andrew Hall are courtesy of Forbes, Business Insider and Bloomberg respectively