Bank of America Corp (BAC), Citigroup Inc (C): Taking A Closer Look At Billionaire John Paulson

If you’re an investing wonk that loves lessons in investing process or behavioral finance, billionaire hedge-fund manager John Paulson is utterly captivating. Of course, if you’re a fan of schadenfreude or are on a warpath against the “one percent” he’s also interesting — but those are stories for another place.

A quote in a recent Bloomberg article from hedge fund advisor Jay Rogers does a great job summarizing the Paulson story:

It’s a bit of ego on his part — ‘I made billions of dollars and did this big trade and I’m a genius,’ … That hubris leads him to make big bets and unfortunately most of them have gone wrong.

All signs point to the view that Paulson had been a very competent and successful manager of an event-driven / arbitrage hedge fund. That is, a fund that bet on specific catalysts, corporate events, and mergers. Then came the housing run-up.

Paulson bet big on the housing bust. And Pauslon bet correctly. The result was billions to the fund’s investors and billions to Paulson himself.

After that, it seems Paulson suddenly fancied his fund a macro-oriented fund and started to construct big-picture bets. In mid-2009, he began building an outsized position in big banks — including billion-dollar-plus positions in Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) — on the view that the banks would turn on the post-recession recovery.

If the bet wasn’t a disaster, it was something very close. As the S&P 500 recovered, the stocks of both B of A and Citi crumpled.

BAC data by YCharts.

By December 2011, he’d zeroed out the positions. And in a sad coda to that trade, both stocks turned around and solidly outperformed the S&P between when he sold and today.

Around the same time, he also started building a large position on gold and gold-related investments. According to S&P’s Capital IQ, by March 2009, the Paulson family of funds already had nearly $3 billion in the SPDR Gold Trust (ETF) (NYSEMKT:GLD). That was accompanied by smaller stakes in Market Vectors Gold Miners ETF (NYSEMKT:GDX), Kinross Gold Corporation (NYSE:KGC), and Gold Fields Limited (ADR) (NYSE:GFI) — among others.

The gold mining companies — Kinross Gold Corporation (NYSE:KGC) in particular — didn’t exactly shoot the lights out. But the overall view — that gold would continue powering higher — worked quite well.

^SPX data by YCharts.