John Paulson has a problem—his own investors.
As long as it’s his problem, it could be a problem for all of us as well…Unfortunately, in 2009 and 2010, lots of other investors also admired his skills. His funds ballooned with new capital that he deployed into sizable positions in a number of companies—particularly a handful of gold stocks. This was all great on the upside, now his investors are disappointed with his recent performance, and they want their money back. To give them back capital, he has to sell something. The problem is that he has a number of concentrated positions, if he sells, the prices will collapse and his performance will again suffer which will create more redemption pressure and force him to sell more shares. It’s a vicious cycle that isn’t easily broken once it starts. It only ends when it finally runs its course. It sure is annoying to be a shareholder in anything that he owns while it is ongoing.
I had this same situation happen to me in 2008. It’s amazingly frustrating. Not only are you faced with bad performance, but your own investors are the reason for the performance. I will never forget these conversations.
INVESTOR: You’ve had incredible success during the past 5 years—that’s why I invested with you. Now you’re down for 2 quarters in a row and I want all my money back.
ME: So you gave me money last year because I had a great 5-year record, but now you want to redeem me because of 6 months of statistically random noise in the markets?
INVESTOR: Pretty much… My accountant will tell you where to send my money.
ME: But you realize that our fund only owns about 15 positions. 5 positions make up more than half of the fund. In many instances, we own more than 10% of the shares of these companies.
INVESTOR: Not my problem…
…
INVESTOR: What are your biggest positions? I want to hedge them out (investor speak for he wants to short the things he knows we need to sell. He’s trying to game the fund at the disadvantage of the other investors).
ME: Sorry, I’m not disclosing anything that’s not already in our public filings.
INVESTOR: Well, I need to find a way to get out before my own redemption hurts the value of my investment.
ME: You realize that if you just sit tight, everything will be fine.
INVESTOR: …but if everyone else gets out and I don’t, I’ll get fired. Good luck. Nothing personal….
There’s a reason that I no longer accept new investors in my fund. After 2008, I simply had enough of my investors trying to harm other investors through their actions. When your numbers are good, you get a lot of performance hogs, when times are tough, those same investors are the first to leave—but when they leave, it’s a nightmare because they all go at the same time.
Paulson will continue to make denials, but I’m sure he’s facing redemptions. At the end of 2011, a number of his larger positions were heavily pressured into year end. The same thing is happening at the end of this quarter. Guys want out, and he’s forced to sell things that he doesn’t want to sell. If you own these positions, it’s frustrating. You can buy the bargains caused by this selling, but in three months, the whole cycle may start again. Even worse, there are guys with the inside details of who’s redeeming what and what will get sold. These guys are actively shorting these shares. They’re trying to force them lower…
You can count on guys shorting Paulson’s book. Until the redemptions end, you will see continued selling pressure. Be careful owning companies with big potential overhangs. Also remember, forced selling creates opportunities.
Novagold has a good way to drop in a panic situation. Was sub .60 not that long ago.
Paulson&Co also has a 16% stake in Gabriel Resources GBU.to
as at February 17, 2012
from their march 2012 corporate presentation
@geo
That’s a real bummer because gurufocus doesn’t even list Gabriel Resources as a holding of his fund, despite the fact that it seems to have been acquired long before 12/31/2011. I wonder what other companies they’re missing? If anyone can find a more comprehensive source of Paulson’s holdings please share.
Thanks for the link to Harris Kupperman.
I for instance liked this post from his site: http://adventuresincapitalism.com/post/2012/03/26/XAU-to-Gold-Ratio-Beckons.aspx .
Especially these two paragraphs:
“Will they continue to disappoint investors? Of course they will. They’re gold stocks after all, but they’re just too cheap. They’ve finally caught up with depletion. They’ve finally paid off debt. They’ve finally debugged big cap-ex projects and they’ve finally started to produce gold at prices that get them some cash flow. I don’t trust analyst estimates, but most analysts seem to imply that the 5 largest producers trade for around 6-8 times cash flow using about $1600 gold. Even with cost inflation, that just doesn’t seem too expensive. Sure, these things were overvalued when they were valued at 20 times cash flow, back in 2004, but single digit cash flow yields with growing production should finally get some investor attention.
Will the miners continue to overpay for assets? Will they continue to invest in countries that I wouldn’t dare go on vacation (think of my travel schedule—not yours)? Will they continue to invest in projects based on fantasy metrics where paybacks are below their cost of capital? C’mon, these are gold mining stocks. We all know they will. These things are run by some of the stupidest people I have ever met. But they just cannot seem to destroy enough value at these prices to go much lower—no matter how hard they try.”
Here’s to hope for the miningstocks:
“So again, the company has not improved one whit: Same management, same horrendous outlook for potential growth (non-existent), same demoralized employees and same sentiment surrounding the bank’s future (shrinkage). But when it became apparent that it wasn’t going under, the stock looked ridiculous at 5 bucks a share – it just had to work.”
From the reformed broker on BACs +72% quarterly performance. See http://www.thereformedbroker.com/2012/03/31/how-to-make-it-in-bank-of-america/
I’m wondering if we still need to bother with that fundamental analysis stuff….
@Tweetie
Yes, the banking sector’s “overnight” redemption in the market does offer hope for the despised miners. To push things along, maybe we can get a Bernanke look-alike to initiate some producer stress tests and talk up the virtues of hard assets. Start with a little short covering and finish with a lot of price chasing.