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

That is, it worked quite well until it didn’t. Starting around mid-2011, gold started to shudder, and the gravy train slowed markedly. It slowed enough that it’s significantly lagged market indices over the past few years, leaving Paulson-fund investors in the lurch.

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^SPX data by YCharts.

That leaves Paulson today with substantially less of a “master of the universe” reputation than he had coming off his outlandish housing-crash win.

Looking ahead, the real story will be whether Paulson can successfully turn things around. My take is that the turnaround won’t come via a sudden insight into the macro-investing game that will lead to another big-bet win. Instead, it would more likely come from a realization that his forte and alpha-producing potential lie in arbitrage investing, not big-picture bets.

In the stock market, it can be mind-numbingly difficult to separate the true skill of an investor from dumb luck. I won’t pretend to have insight into whether the housing bet was the latter or the former. But what does seem clear to me is that Paulson’s skill seems to lie in the event-arb arena. Sure, it’s a quieter backwater that isn’t typically a media king maker, but for those that can do it well, it’s a steady performer.

To Paulson’s credit, Bloomberg makes it sound as if the fund is gravitating back to that traditional strength.

Since late 2012, Paulson has emphasized to clients his firm’s strength in investments that aim to profit from takeovers, restructurings and spinoffs. The firm’s new website, started last week, portrays Paulson & Co. as a bottom-up, event- driven arbitrage firm that seeks capital preservation and above- average returns, without mentioning gold.

Individual may not think they have much in common with a big shot billionaire like Paulson, but his experience over the years since his big win suggest a lesson that we all can learn from. Process, outcome, skill, and luck play very big roles in investing. That something worked in the past doesn’t mean it was the result of your brilliance, or that a similar approach will work in the future. On the other hand, a positive outcome that was the result of a well-honed process that relies on carefully selected inputs is far more likely to lead to the long-term results you’re looking for.

The article The Ever-Fascinating Plight of Billionaire John Paulson originally appeared on Fool.com.

Matt Koppenheffer owns shares of Bank of America. The Motley Fool owns shares of Bank of America and Citigroup.

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