Rebel Traders 057 : 10 of the Greatest Trades of all Time…

Some of the greatest trades of all time can teach some very valuable lessons and we’re going to blow the lid off these trades and what you can apply to your trading...

In this week’s show, we are going to dive in to 10 of the biggest and ballsiest trades of all time that have netted billions of dollars for traders and can highlight some of the biggest lessons a trader can make. Sean and Phil break it all down and share some of their insights about how these trades actually worked, what lead them to these trades.

So, let’s dive in and take a look at the what is often considered the top 10 greatest trades of all time...

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Sean Donahoe: Let's break down the who, what, and why of the 10 greatest trades of all time. Let's rock.
Automated: Rebel Traders takes you inside the world of two underground master traders, who take an entertaining and contrarian look at the markets, to cut through the noise of Wall Street and help you navigate the trading minefield. Together, Sean Donahoe and Phil Newton are on a mission to give you the unfair advantage of a Rebel Trader. And now, here are your hosts, Sean Donahoe and Mister Phil Newton.
Sean Donahoe: Hey, hey, hey. This is Sean Donahoe and I am joined here by my partner in broadcasting, Mr. Philbert Newton. How are you doing, sir?
Phil Newton: Philbert, I've not been called that in many a moon. It sounded like, you know what, the introduction sounded very much like the Kermit the Frog. It's the marvelous, the magnificent, it's The Muppet Show.
Sean Donahoe: Oh that's awesome. Yeah.
Phil Newton: I thought you were gonna go down that road, but no.
Sean Donahoe: That's funny, no. That puts us, we're more like the two guys in the balcony, I can't remember their names.
Phil Newton: You know I always forget their names, yeah. "What's he saying?"
Sean Donahoe: Exactly. Making the wisecracks at the markets as we go. But, we are gonna be breaking down some of the greatest trades of all time, that could really teach us some valuable lessons. We're gonna blow the lid off of these trades, and kind of reverse engineer what motivated them, what drove them forwards, so that you could apply maybe some of these insights, these ideas in your trading as well.
Phil Newton: We'll also have a few correspondences, dispatches if you like, in our Rebel Trader mailbag. Your trading questions.
Sean Donahoe: Fresh in by pigeon.
Phil Newton: Yes, pigeon carrier. Your trading questions, we're gonna attempt to answer them. Whether you get the answer that you want is a different question.
Sean Donahoe: That's always a challenge, yes.
Phil Newton: It's always a challenge, yeah. Trying to get a serious answer from either of us is always the challenge of the week. We've also got the Bullshit of the Week, while we're calling out about weekly things. We've got the hype behind all the shenanigans of the industry, and somewhere amongst our own amusements and shenanigans, we're gonna answer the core question of, where is the trade?
Sean Donahoe: Or some-
Phil Newton: We've got lots of where's the trade, yeah.
Sean Donahoe: We bloody well have going-
Phil Newton: Looking back in history, it's all a Where's the Trade show.
Sean Donahoe: This really is, because this goes back almost a century. We're going to literally rip down some of the biggest trades, or the most famous biggest trades in history, that are I would say famous. They're used in classrooms, they're used in folklore and mythology of trading.
Phil Newton: Noteworthy.
Sean Donahoe: And they are incredibly noteworthy. But we're gonna break them down and kind of pick them apart. And we're gonna go in descending order. So we're gonna start, it's gonna be like Top of the Pops here, which is a UK kind of ...
Phil Newton: Descending order.
Sean Donahoe: Yeah, we're gonna go in descending order. It's like number 10.
Phil Newton: On the Billboards today.
Sean Donahoe: Yeah, exactly the Billboard Charts, there you go, which is the U.S. version. We are going to start with one of our favorite traders of all time. In fact, the book that is based on this gentleman is one of the recommended, and almost required, reading for our students.
Phil Newton: Everyone who is anyone recommends this book by Jesse Livermore, Reminiscences of a Stock Operator.
Sean Donahoe: Absolutely.
Phil Newton: Yeah, I've got to, before I actually dig deep into one of his specific escapades in the markets, little side note. I think quite possibly he's one of my personal heroes, not just because it's to do with the financial markets, it's a damn good read.
Sean Donahoe: It is.
Phil Newton: It's about the finance and it's, it's timeless in the sense that you don't need to, well, it's timeless. It doesn't matter whether, it was written around 100 years ago, Sean. There's just so much to learn from it beyond the little snippets that we're just about to talk ... Before I go all fanboy, too late for that Sean, best let you introduce the trade.
Sean Donahoe: Okay so we're talking about Jesse Livermore, and again, this was from 1929. He netted himself $100 million. Now, in today's-
Phil Newton: Just repeat the year Sean. I was just going to say, just repeat the year before we pull back the curtain on the numbers.
Sean Donahoe: 1929.
Phil Newton: The trade we're talking about is 1906, is when he kind of really hit his stride as a trader. So 1900s, yeah.
Sean Donahoe: Yeah, so let's start with the first part of this because this is like a multi-part all time record. In terms of what he generated, I mean, $100 million with his big trade, in today's money it's about $1.4 billion, but let's just talk about realized.
Phil Newton: Little pinkie is to the corner of your mouth when you say that? Billion.
Sean Donahoe: Yeah, billion. But his first attempt, it was shorting the market was Union Pacific in 1906, just before the San Francisco earthquake. So, just thinking about that for a second, that's pretty significant. He generated 250 K from that. Then he shorted the market in 1907, took home another $1 million. 1925, the wheat industry was his focus and had another short that generated three million. Now again, this is in money then.
Phil Newton: I want to pause there just, because I can contribute to this a little bit. I've read this book cover to cover, many times. I think the success around the 1925, it allowed him to get the news -- we spoke about this last week -- the news, the sentiment that was being spoken about by the talking heads. You can probably see where I get it from, this notion of the news, the media, the people are the last to know anything. When this sentiment shift happened, it allowed him to exit his position.
This happened a few times in his career, where the markets, the general public, the talking heads provided a means with which with him to unwind positions. And I think you just want to pause and just acknowledge the lesson behind the trade. Because without that, without the news that the reason to, "Okay, this trade's done. It's time to get out," without that news driven trigger, most of these positions might have turned out very, very different.
Sean Donahoe: We've got to give him full credit as well. My trading is very influenced by Jesse Livermore.
Phil Newton: Completely. I agree, yeah. I mean, this is what we're talking about.
Sean Donahoe: There's a lot of-
Phil Newton: There's a lot of principles and lessons that are timeless, to learn about his trading and they're very well documented. And it's such an easy read, as well. It's going to be the best $12 that you'll ever spend in your life.
Sean Donahoe: Yeah, absolutely. And the one thing I was just going to say, it's Reminiscences of a Stock Operator, and I read it two or three times a year. I really-
Phil Newton: Yes, I've got to admit it's a regular read. It's one of those books that's worth digging deep into, rather than just having a cursory, passive read of that book. Sorry, we've gone all fanboy again, Sean.
Sean Donahoe: We have, we have. So let's put the action figures back on the shelf.
Phil Newton: But maybe there's a reason for it.
Sean Donahoe: Absolutely. But anyway, all of this was a warm up for 1929. Now the Dow Jones was up 5X in five years, but he was not happy about it, or he saw the writing on the wall. I mean, can we say bubble? You know, kind of obvious. But this is when he took his biggest short, and he shorted the whole market just before it crashed, cashing in $100 million, which balance in today's money, like I said it's $1.4 billion equivalent. Now that is, again, everyone's on the hype train. I mean, it's just like every bubble we've seen, 2008. We've seen the late 1990s dot com crash. We've seen the crypto bubble right now, and everything else.
I mean, it's bubble territory. Everyone's irrationally exuberant, to use that phrase I love, but he saw the writing on the walls, shorted the entire market. It crashed. I mean, 1929, I wonder what happened, what that was. You know, that led into The Great Depression. Now, again, magnificent story, but there's a sad note to this as well. Unfortunately, he was bankrupt by 1934, just five years later, and banned from the Chicago Board of Trade. No one really knows, and there's a lot of speculation as to let's say, why, what happened, what was going on in his head. And again, it's very sad-
Phil Newton: Who did he annoy?
Sean Donahoe: Yeah, basically. But it's a sad end to what was an amazing career. But yeah, it's-
Phil Newton: He lost and made it many times, as well. He was literally the comeback king when it came to coming back from horrendous losses.
Sean Donahoe: Indeed. So yeah, Jesse Livermore, $100 million in 1929. So, moving on. Paul Tudor Jones of the Tudor Investment Group, his own company, 1987, $100 million. Now 1987, if you know anything about trading history was, in October of 1987 was Black Monday, big crash. And he was quoted as saying, "There will be some sort of decline without question, in the next 10 to 20 months, and it will be earth-shaking, it will be saber-rattling." This is a quote from Paul Tudor Jones, obviously prior to this event.
Now, he cut his teeth on the trading floor in '76, but in 1987, in a seemingly buoyant market, he spotted a significant overvaluation in stocks. Things that we start calling out a lot every now and then, you can see it, you're going to hear a lot of what we echo every now and then with we're seeing, across all of these different stories.
Phil Newton: I was just going to say, I think if you look through some of, do a little search of his name on YouTube you can find, because he had an ego as big as the fund that managed
Sean Donahoe: Oh my Lord, have ... Yeah.
Phil Newton: If there was anyone who ever be described as one of those alpha dominant males, egotistical, psycho, psychopath, whatever, however you qualify and quantify his issues, ego was huge on the top of that list. But you can go back and watch some of the old footage from the 80s on YouTube about his interviews. He's trading as he's in screen, and talking about the trades. It's quite interesting to actually go back, if you can past his self-obsessed nature. It's quite interesting to actually watch and just see, firstly how different trading was back then. And he's literally reading the sentiment of the market, the pulse of the market. How very different trading was back then-
Sean Donahoe: Oh, very much so.
Phil Newton: ... compared to now. And it literally is a very eye-opening experience. Again, for the same reasons as you should go read Reminiscences of a Stock Operator, go back and look at some of the interviews of Paul Tudor Jones as he talking through what he's trading, why he's trading, and how he's trading. You know, it's a very interesting and eye-opening experience.
Sean Donahoe: Yeah. Yeah. None of these trades qualify the individuals as human beings. Okay? I'm just going to say that.
Phil Newton: No, I mean they were very risk averse people. They saw opportunities. And I think it's also worth mentioning, is that while they were very actively trading, they were waiting for the condition ... Most of the time, Paul Tudor Jones designed a stand that was waiting for the conditions for the big one. He was looking and waiting-
Sean Donahoe: He was looking for the home run.
Phil Newton: ... for the swing for the fence opportunity, as we always talk about it. But he was always waiting, poised, ready for that opportunity. And in between time he would be putting trades on and off the market, keeping actively engaged as I would've described it in the past. But he was looking for that, "Okay, here's the conditions. Let's swing for the fence." And he nailed it. He literally did nail it many, many times. I think I've got to also point that he's one of those outliers. That's what makes Paul Tudor Jones exceptional.
You know, the everyday investor like you and me, Sean, we can learn a lot from how to view the opportunities by going back and reading some of the books. It's very well documented, how he trades and what he does. You just go and listen to the guy, from the horse's mouth, in some of these interviews.
Sean Donahoe: Absolutely. So one of his analysts, I'll say Peter Borish, spent hours huddled over graphs, studying the Wall Street crash of '29, which we were just talking about. He was analyzing the historical markets, the sales data and everything else, and noted direct comparisons to the '29 crash. So by the close of business on
Phil Newton: something Sean, history repeats itself.
Sean Donahoe: You know, it might just, yeah. Anyway, they positioned themselves nicely, shorting the markets. By the close of business on the 19th of October the Dow Jones had dropped a whopping 22 percent in one day. And doing that, Tudor Jones walked away with $100 million and a reputation as being one the shrewdest traders around. Now, here's the thing. When you hit a home run of that magnitude it elevates your fame very quickly. But again-
Phil Newton: You always joke, "Do it again." This is a guy that did it again, quite a few times.
Sean Donahoe: Yeah.
Phil Newton: You know, we always ... Again, this is our argument for not swinging for the fence. If you've got the skills to back it up, do it again. And this a guy that did do that again, quite a few times.
Sean Donahoe: Absolutely. He really did build a reputation. His fund manages, at last reports I've heard, about $80 billion or something like that, but quite significant. Now, next one. Andy, and I'm saying, I hope I'm saying his name right, Krieger.
Phil Newton: I think that's how you pronounce it.
Sean Donahoe: Yeah. 1987.
Phil Newton: Not trying to sound smarter than I actually am, there.
Sean Donahoe: I do it every day, especially in front of my wife.
Phil Newton: But you can say that I'm smarter than I actually am.
Sean Donahoe: Yeah, there you go. I pretend you're smarter than you actually are. Yeah, there you go.
Phil Newton: I think I was aptly stroked. Thank you.
Sean Donahoe: I'm not touching, I literally am not touching that one.
Phil Newton:
Sean Donahoe: Ba-dum. Yes. Anyway, Andy Krieger, 1987, same scenario, $300 million. After Black Friday many currencies were rallying against the battered dollar. Now this was a ripple of the big Black Monday crash. Okay? So a lot of currencies were rallying against a hammered and battered dollar. Many currencies were getting overvalued, and Phil might comment on this one as a little more of the 4X guy from his previous years, but they were getting overvalued as money moved, and one of them was the New Zealand dollar, the Kiwi as it's affectionately known.
Now he used options to short, by hundreds of millions, some report it as even $1 billion move, but he was shorting what he was seeing as a possibly overvalued New Zealand dollar. Apparently his position was so large it was actually larger than the actual money supply of the New Zealand dollar at the time. And the government saw this giant short, tried to prevent the move, but traders saw that what was going on, and the pressure, and joined in, shorting the New Zealand dollar, making it almost a self-fulfilling prophecy. And then the Kiwi slipped five percent.
Phil Newton: The line of least resistance, yeah?
Sean Donahoe: Indeed, creating a $300 million profit for him.
Phil Newton: In currency terms, five percent doesn't sound much. It just points out the differences. In currency land that's a huge move.
Sean Donahoe: That's a kick in the balls.
Phil Newton: That is a major movement, because normally the movements are measured in fractions of a percentage every day, because you're trading literally, these days down to four and five decimal places is how you make ... You know, fractions and fractions and fractions of a penny. So a five percent move is huge in currency language.
Sean Donahoe: Absolutely. It's insane. However, there's a twist to this story. Although he netted $300 million on that trade, he only got $3 million in commissions. One percent which, as you can imagine, pissed him off no end. He ended up leaving the company he was working with, ended up working with George Soros and their Northbridge Capital Management later on, and everything else. But again-
Phil Newton: Are you trying to tell me, Sean, that the fat cats kept all the cream for themselves?
Sean Donahoe: Oh my Lord.
Phil Newton: And they'd let the workforce ... Are you trying to tell me that there was some inside of, well, "It's my pot of money, not your pot of money," to the employees?
Sean Donahoe: Yeah. And I'll tell you right, if you netted and did that kind of position, $300 million for the company, I'd expect a little more than that. But hey, what can you do?
Phil Newton: Oh, what can you do?
Sean Donahoe: Well, there you go.
Phil Newton: Well, by the sounds of it, what you can do is go work for Soros.
Sean Donahoe: He extended his middle finger on both of them and flipped them the bird, but there you go. Anyway, around the same time a couple years later was a guy called Louis Bacon, 1989, who generated a-
Phil Newton: No relation to Kevin?
Sean Donahoe: No, no relation to Kevin, or Porky Pig. But he generated an 86 percent return for his fund on a massive series of trades, but he'd already been banging against the markets on Black Monday. He can lay claim to being better at predicting the fallout of international politics than the CIA, because he spotted the trends of growing antagonism from Saddam Hussein in Iraq and his regime in 1990 towards Kuwait, who were pretty oil rich and everything else. So what Bacon did, he realized that there was a lot of aggression building there, and he traded macro investments to go long on oil and short on stocks.
What he was doing was basically getting a double position, assuming that there was going to be rallies in certain areas and falls in others, because if Kuwait is a major supplier, and there's a cutoff and instability in, obviously supply, then the price of oil is going to go up accordingly.
Phil Newton: I just want to pause there, Sean. Why would you do that? Why would you essentially get a double fill, if you like? Why not put it all on black, if you like, or in this case oil? When you're playing with this size of position, this size of money, you've got to be able to get the position on with the money that you have available. And this is a consideration for institutional traders. This is what was described as the ocean liner, in the past.
You know, when they're putting these positions on and taking them off, you can't just do it in one position, at one trade, at one time. You've got to build the position up. You've got to unwind the position. And typically you've got to spread it around, where-
Sean Donahoe: You're going to get the liquidity, yes.
Phil Newton: ... exactly, where liquidity is available. Because if you were to do the types of positions that we're talking about, in one trade, the self fulfilling prophecy is there's so much supply or demand because of your size and position, you would move the market. And you don't want that, because you want the best average price that you can get. I'm just kind of interjecting why you would perhaps be long on oil, short on the stocks. So much money's involved, it's just you're trying get a big enough position size and take advantage, full advantage of the opportunity that's presented in front of you. So yeah, that's why you might do that.
Sean Donahoe: Exactly. And at the end of the day that's, I mean, exactly the point I was going to make. It's you've got to get that liquidity. You've gotta get that liquidity.
Phil Newton: This is the problem that you have with the funds. I mean, this is one of the advantages that we regularly talk about as a retail trader. It's the nimble, the fleet of foot, we're like the speed boat in the canal. We can change our position, change our direction, at any time we want within reason, at the price that we want. That's the advantage that we have. Even if you've got a few million in the trading accounts, you're still a small retail trader, by comparison, to these big institutionals and very large, sizeable funds.
To be able to get the positions that we want on, even with deep pockets we're not having much of an impact on the market. You know, we're not moving and influencing it. We might push the price a few pennies either direction, but there's no long lasting effect because of our position size, even if we are trading with a few million. So this is our advantage as a retail trader, by comparison.
Sean Donahoe: Absolutely. That year his company started with a fund of around $100 million. In 1990, when Saddam Hussein kicked off and went into Kuwait, we've got Baghdad Bob over there saying, "There's no invasion. There's no problem. There's nothing over there."
Phil Newton: "No scuds here. No scuds here."
Sean Donahoe: Yeah, exactly. God, I loved that guy. What was his name? I can't remember. They nicknamed him Baghdad Bob when the U.S. actually invaded Iraq. He says, "No, there-
Phil Newton: I can't remember. There was another one, a doctor ... You know what? I'm having major flashbacks here, Sean.
Sean Donahoe: Yeah. The tanks-
Phil Newton: Dipping into all sorts of-
Sean Donahoe: The tanks are rolling into Iraq, and he's like, "No, there is no invasion."
Phil Newton: "Nope, no. Nothing to see here. Keep moving along. Move along."
Sean Donahoe: "Nor the M1 Abrams behind me." Yes, exactly.
Phil Newton: "Oh, those? It's garden decorations, garden decorations." They look remarkably like 300 scuds, there.
Sean Donahoe: Yeah, indeed. Yeah.
Phil Newton: "That's a garden dec, it's our recall-ance of a garden gnome."
Sean Donahoe: Yeah, there you go. But anyway, as that all kicked off, and everything else, in 1990 when they invaded Kuwait obviously the markets reacted accordingly. He needed an unbelievable 86 percent that year for his fund. Now-
Phil Newton: That's phenomenal.
Sean Donahoe: That is.
Phil Newton: Again, I just want to point out the obvious. I mean, these numbers, because we've had a recent financial crash in the last decade we're used to hearing billions being troped around. With Bitcoin we're used to hearing a gazillion percent return. We're talking about the '90s here, where these types of figures, they were unheard of on a regular or consistent basis. So these types of returns ... You know, when you can get a few percentage points from the bank, in a 12 month period, you're lucky to see anywhere from, well a few percentage points. You know, if you get 86 percent from the fund, that's phenomenal. What, do you remember? The average is a little hair over 30 percent, at the high end of a good fund performance.
Sean Donahoe: Yeah, that's considered an amazing fund.
Phil Newton: And that's considered an exceptional fund. But most of them, they're hovering around the 12, 15, 18 percent, again at the upper end of being good. Most of them flirt with plus or minus five to seven percent.
Sean Donahoe: Five, yeah, five.
Phil Newton: But is that a positive return or a negative return? I just want to put it into perspective here. So this 86 percent, it's double the historical average of what the upper end of a good fund looks like. This is a phenomenal performance.
Sean Donahoe: It really is. It really is, when you're considering the numbers involved, as well. I mean, a lot of people are trying to, they're always looking to get alpha compared to the main markets, which just means they're beating the markets. That's what everyone talks about, beating the markets.
Phil Newton: I think what's interesting here is that these ... What I'm hearing so far, the theme that I've got with trades that we're talking about, these are the big headline positions. But the common theme so far is that they're primarily big picture news driven.
Sean Donahoe: They're awareness trades.
Phil Newton: They're not an overnight, "Holy smokes! Something's going on in oil market. Let's get the trade on." This is, to steal your phrase, they're well telegraphed, if you care to look at the information. And this is all public information. It's not from the talking heads, but these are the reports, the media, the reading between the lines. These are situations that are built up, built up, built up. And then suddenly there's enough of a picture to put all the pieces together into a coherent image to say, "Holy smokes! This thing looks like it's going to happen."
And for anyone with their eyes open, this is what the whole movie, The Big Short, was about. For anyone who cared to look ... I mean, for two years I was talking about the collapse of the financial markets. It was going to be horrendous. For two years, and it was almost like I was a naysayer, that weird guy walking around with the sandwich board saying, "The end of the world is nigh." No one would believe it. But if you just cared to open your eyes and look, this is the information. And these are the types of positions that I'm seeing so far, Sean.
Sean Donahoe: Absolutely. I was bearish on the markets in ... I mean, we'll get to this in a little bit, because there's some big, big stories in and around that, but again it's the same thing. If you have the right awareness and sentiment, and you keep an eye on what's happening, you have positions.
Phil Newton: Well, I just think it's interesting, but these are the types of trades that are well known in advance, if you care to look. Me personally, I don't want to. I'm not normally looking for this type of big swing for the fence, home run type of position, but it's there. Again, if you think about the years that we're talking about, they happen once a decade. Again, this is things that we talk about. These trades don't happen every day, is the point that I wanted to kind of bring home here. They don't happen every day, but they do happen once or twice every 10 to 15 years.
Somewhere in the world something like this goes on, something happens that's big enough to go, "Holy smoke," and start writing it down in textbooks and start talking about it in lectures somewhere. That's what these trades are. They happen every sort of every decade or so. And then there's one big one every, absolutely humongous one every 50 years. And this is just the economic cycle that we're talking about. And these are the types of trades that I hear you telling me about, Sean.
And again, the reason why I'm pointing out probably what seems like the obvious is that these trades, what these positions are, these are the ones that the novice trader tries, thinks, and believes that they're getting on board with then they put positions on every day.
Sean Donahoe: Yeah, that's very true.
Phil Newton: This is the mistake. I think this, it's going to be a big move. It's going to huge. It's going to be ... The reality is, it's not. They happen on the magnitude that we're talking about, and the small trader can be involved in them, but they happen every 10, 15 years also.
Sean Donahoe: Absolutely.
Phil Newton: So what makes you think it's going to happen today or tomorrow? You can know about them. You can trade them. And yes, they will be well appetized. It's that ocean liner in the canal. The information, the turnaround is going to happen, it's going to happen slowly. And if you care to look, you'll be able to spot it.
Sean Donahoe: Absolutely.
Phil Newton: But most people aren't looking, which is crazy.
Sean Donahoe: They are not. They are not. And again, one thing with Bacon specifically is, he continues to sit on top of the trading tree. He is still netting 25 to 35 percent a year, for over a decade.
Phil Newton: And this comes back, do-it-again scenario. You know, just do it again. If you're that good, do it again.
Sean Donahoe: And he is.
Phil Newton: And you're the guy that's doing it again. I'm becoming a fanboy with all of these here. I've got to admit Louis, because we're now on first name terms, I didn't know about him until you mentioned him. For some reason, he hadn't come across my radar. So yeah, it's just interesting to hear about these things.
Sean Donahoe: Absolutely. So, the next one is Jim Chanos. Now, I hope I'm saying his name right, as well. But, 2001, this guy generated $500 million. That's another finger in the corner of the mouth. But-
Phil Newton: I think that's corner ... Yes, I think that's finger worthy.
Sean Donahoe: It really is. Now again, we're coming, a lot of these are more modern trades, but Jim Chanos is perhaps one of the most notorious short sellers. Now again, I'm one of those guys that, I look for a lot of short opportunities because, again, there's a lot of interesting and weird bullshit going on and I always look for these. But this is one of the more famous examples, and you'll understand why in a second. Now, back in and around that time, energy companies were lobbying the SEC to allow what's called, Mark-to-Model and Mark-to-Mark accounting to be used in their business.
Now this basically permitted these companies to take the current value of their future profits and add them to their accounts. Now, I'm not going to get into the micro finance and what exactly this means, but basically it means it's a great way to hide a lot of dodgy shit. Okay? It's a way to basically mask what really is happening and say, "Well, our future profit's going to be this."
Phil Newton: Trying to tell me, Sean, that they found a way to cook the books?
Sean Donahoe: It really is a book cooking scenario, but here's the thing. Jim started looking at a company that we all know and love, Enron.
Phil Newton: Everyone's favorite.
Sean Donahoe: He did it.
Phil Newton: You know, I'm surprised it hasn't come up any sooner, to be honest Sean.
Sean Donahoe: So yes, that was definitely a dun-dun-dun moment. So he noticed several huge red flags.
Phil Newton: Are you trying to tell me, Sean, that it was well telegraphed again, again? The writing was on the wall?
Sean Donahoe: Well, it kind of was, but here's the thing. He started looking at the books, literally what they were publicly putting out there, so it wasn't so much well telegraphed, but because of the scenario ...
Phil Newton: But the information's out there. It's public information.
Sean Donahoe: Exactly.
Phil Newton: That's the point of all this. If you care to look
Sean Donahoe: Oh, it's right there. Yeah, absolutely.
Phil Newton: He cares to look. And that's why his Happening Now report, and the research behind the fundamental side of the markets, it's so valuable because it requires a lot of investigative work, almost like investigative journalism type thing, or forensic accounting.
Sean Donahoe: Indeed.
Phil Newton: But it's all public information. I think that's the thing that I'm getting on my soapbox about.
Sean Donahoe: Absolutely. Abso-bloody-lutely.
Phil Newton: If you care to look, it's all there.
Sean Donahoe: Exactly. So, because he knew ... And again, it was public knowledge at the time. It was very controversial, the Mark-to-Model and Mark-to-Mark. But because they were using Mark-to-Model it raised an awareness to look at the real numbers. So when they saw that they were ... It was all there, but when they start massaging the books and what they're publicly reporting, hiding their actual losses, he saw an opportunity to strike. And when the CEO at the time, Jeff Skilling, stepped down citing family reasons, he saw that as a, "Okay-
Phil Newton: Code words.
Sean Donahoe: ... game on." Yeah, exactly. He made his move. What they did is they initiated a short in November 2000 as Enron stock hit 90, with a predicted target price of like, I believe it was what, about 130 I think it was. So he's positioned, he's started, he's in. And then following one of the most spectacular company collapses in history, because no one has heard of Enron of course-
Phil Newton: Anyone who has just a passing interest in the stock market, or even if you didn't, you would have heard about Enron. I suppose, like Bitcoin, it was then, even if you didn't know anything about finance, the markets, didn't follow it, you could not have not heard of Bitcoin by today's mark. By then standards, 2000-2001, you could not have not heard of Enron.
Sean Donahoe: Exactly.
Phil Newton: It was everywhere. Kids on the street would have been telling you about it.
Sean Donahoe: Yes. Yeah, there'll be little schoolyard chats about Enron, Enron.
Phil Newton: I have to say I'm a little flashback-y. I remember seeing footage of one of the alphabet agencies walking into and out of one of the headquarter buildings, with various brown taped boxes and .
Sean Donahoe: Oh, yeah.
Phil Newton: They literally raided the building. What was the Axelrod, what was the TV show? Where they, you know, to ... Billions, was it?
Sean Donahoe: Oh, yeah-yeah-yeah-yeah. Yeah, very much like that.
Phil Newton: Yeah, I've seen where they go in and raid the offices. You know, that was what I remember seeing on the news media, the talking heads. Back then they actually reported news.
Sean Donahoe: Yeah, there you go. But yeah. So yeah, basically he netted himself around $500 million from shorting specifically Enron, as they had one of the most epic, epic collapses in history.
Phil Newton: It went to nothing in minutes. It went in half a minute. It literally was worthless, pennies. It wasn't even a penny. So I bet he stopped trading on the markets, and then they literally stopped trading physically, as well. It was just a spectacular swan dive.
Sean Donahoe: Absolutely. Now, we mentioned him earlier on, but we got to mention George Soros. And this one is-
Phil Newton: who's a good trader without mentioning ... Again, another guy I'm on first name terms. Me and George are like that. My fingers being crossed. That's me on top.
Sean Donahoe: Oh dear. Oh dear! There's a mental image I didn't need.
Phil Newton: Good friends, me and George.
Sean Donahoe: Yeah. Well, love him or hate him, because he has a reputation, shall we say, that people either love him or hate him, but we're very unbiased and agnostic here, because we have to talk about what he has done. So again, I'm going to defer to some of Phil's knowledge here, because this is where his area of specialty for trading, there's a little bit of currency. And this is one thing that George is very well known for. He was known as the man who broke the Bank of England.
Phil Newton: Yeah. Just to interject, Sean, just having a little flashback here, but this is one of my earlier memories of being interested in the financial markets. Again, this was another kind of news headline that was around the time, sort of early '92, or is it the, part of the Exchange Rate Mechanism, wasn't it?
Sean Donahoe: Mm-hmm (affirmative).
Phil Newton: And essentially it was ... Oh, I'll let you tell that part of the story, but I'm just having a little flashback of seeing it on the news, as it were. It was just my first introduction that, "Hey, there's this thing called the financial markets. And people are making a lot of money when the markets move." At this time I was already, I think I was ... It's around that time I would have been hand drawing charts, or starting to hand draw charts. And you know, I'm just getting, taking a serious interest in the market. And then this happens, the man who broke the Bank of England, George Soros.
Again another, I suppose he must be a hero because he kind of, again, raised my awareness that, "Hey, these things went on. I want to do what he does and make money from the markets." But yeah, the currency trading, maybe it was fate, because I then spent 12 years as a currency trader.
Sean Donahoe: There you go. So anyway, what happened was in 1992 the British economy looked to be performing great, on the surface. Now put that in quotes. As part of the European Exchange Rate Mechanism, which I won't go into all the details of that but, the pound had to remain within six percent-
Phil Newton: I'd just like to thank you on behalf of everyone, Sean. I'd like to thank you for not explaining the ERM.
Sean Donahoe: It was a big European circle jerk. Let's just leave it at that, basically what it was.
Phil Newton: Yeah, it was a way to manipulate the markets.
Sean Donahoe: Yes.
Phil Newton: It was a fancy way of doing it, but yeah. There was fancy buyings and all the rest. Just to put a layer on, the British pound had to be at a certain rate to be a part of this mechanism. And there was lots of money being propping up the markets. As we both know, because we've talked about this in the past, that markets can't be manipulated forever because the money dries up.
Sean Donahoe: Exactly. Everyone who was in the ERM had to be within six percent of the other currencies that operated within the system. So basically, you had to manipulate, or keep things within a certain tight range to balance.
Phil Newton: They were preparing for the single currency, as we now know it. They all had to be within a certain range, and that's what this was preparing for, essentially.
Sean Donahoe: Yeah. Now the Deutsche Mark was performing well, with low inflation, and British inflation was almost triple, but they were still trying to keep it within that range. It was absolutely ridiculous.
Phil Newton: manipulation.
Sean Donahoe: Exactly. So there was a lot of manipulation and everything else to do that, but inflation was a big pressure valve within that. Okay, so you can't have triple inflation and maintain that measuring stick.
Phil Newton: Comparable rates.
Sean Donahoe: In comparable rate. So the Bank of England hoped that, by being in part the ERM it would reduce inflation, and Soros saw an opportunity to strike.
Phil Newton: Let me just translate that. I can translate that.
Sean Donahoe: Absolutely.
Phil Newton: "My prayers are with you. My hopes and prayers go with you, that the markets don't move adversely against us. Please be ..." That's what they did. They wished. They wished that it didn't happen.
Sean Donahoe: Yeah, basically.
Phil Newton: You know what, it makes me laugh. But yeah, I hope and pray, and there was fingers crossed, and everyone was praying to the various deities that they might pray to.
Sean Donahoe: Absolutely.
Phil Newton: Looking back on it, it was a farce from start to finish. And it has been picked apart, years later, as being an absolute farce.
Sean Donahoe: It really was. But the fact that he saw it, he was so confident in his position he put a $4 billion plus position against the Bank of England who, seeing this, and trying to-
Phil Newton: That's a big, "Put your money where your mouth is."
Sean Donahoe: Holy shit, is it! Yes.
Phil Newton: Now, it interests me. This is one of those markets, the currency markets, is it potentially big enough to put a big chunk of change on? Again, you wouldn't do it all at once, but it's got the liquidity there to fill your boots, is what you like to say.
Sean Donahoe: Indeed. So anyway, the BoE, or Bank of England, raised interest rates to try and combat the short position, to try and put people up. But they saw that, or other investors saw that as a big, reactive move that smelled blood in the water, and they jumped on shorting. And again, the inevitable happened.
Phil Newton: An unsustainable measure was implemented, and everyone saw it for what it was.
Sean Donahoe: Yeah. They were even going to raise interest rates to 15 percent. Can you imagine that? But then they never enacted that, but again, before that happened they realized they were in trouble.
Phil Newton: What
Sean Donahoe: Oh my God.
Phil Newton: Reminiscent of the '87 crash and double digit interest rates. It was already killing a lot of people.
Sean Donahoe: Yeah, exactly. So anyway, what happened was, it all collapsed. Britain exited the ERM. The pound fell 25 percent.
Phil Newton: Very polite way of saying it collapsed.
Sean Donahoe: Like a flan in a cupboard under a giant mallet. Okay? So yes, it literally, the pound collapsed and dropped 25 percent on Black Wednesday. Now, here's the thing, and this is one thing that we talk about.
Phil Newton: We talked earlier about the Kiwi currency moving five percent being phenomenal. And just to compare that to that five percent being huge, 25 percent on one day.
Sean Donahoe: That is rubber glove territory with the doctor that you don't want.
Phil Newton: That's, "Oh my God, the world is coming to an end," type of movement. Again, in currency terms, it'd be like the Enron move of the currency world.
Sean Donahoe: Indeed. It's but here's the flip side of this that we talk about a lot, is extremes of movement and recovery. Because while it was considered Black Wednesday in terms of what happened at the time, it's also known as Golden Wednesday because, guess what happened, it recovered relatively quickly, which means there was a 25 percent gain in currencies over the-
Phil Newton: It turned out it was a good thing.
Sean Donahoe: Absolutely.
Phil Newton: Who would have thought? Bad news turns out to be good news.
Sean Donahoe: Absolutely.
Phil Newton: It's something that we've talked about many times before, is that sometimes the news is, or the markets over-respond and overreact because people over-respond and overreact. It turns out that it wasn't as bad as what everyone thought was going to happen.
Sean Donahoe: Business as usual.
Phil Newton: And it turns out Golden Wednesday happens. The dead cat bounced, as it were.
Sean Donahoe: Yes.
Phil Newton: the phrase.
Sean Donahoe: Yeah, the rubber cat, because it bounced pretty bloody hard. And that's exactly it. And again, return to normal operations. Of course it didn't recover as quickly as it dropped.
Phil Newton: The world didn't end, surprisingly.
Sean Donahoe: Indeed. But there you go, the man that broke the Bank of England. Now, we have to go over because-
Phil Newton: I just want to, again, just want to point out he's known as the man who broke the Bank of England. This was going to happen anyway. He didn't cause it. This is my argument for news media. What was going to happen would have happened, and news speeds up the move of what would have happened. That's all it does. This was going to happen anyway.
Sean Donahoe: It was certainly applied pressure.
Phil Newton: Enron was going to happen anyway, as soon as the curtain was pulled back. And him putting the position on -- the earlier trader -- him putting the position on started to make everyone else, "Why is this guy putting a big short on?" And everyone else started looking under the hood as to what could be happening, and then everyone started to see the writing on the wall. Well, it just speeds up what was going to happen anyway.
Sean Donahoe: Absolutely. Now I'm going to talk about another trader who was a friend and co-trader with Soros. His name is -- and I hope I'm going to not butcher his name -- Stanley Druckenmiller. Okay? 1992. Again, $1 billion net, in the pocket. Now he mirrored Soros' British pound trade, okay, and his first play happened during the fall of the Berlin Wall. The markets were taking a very dim view of unification.
Phil Newton: 1989?
Sean Donahoe: Yeah.
Phil Newton: Somewhere around those?
Sean Donahoe: Yeah, in and around there.
Phil Newton:
Sean Donahoe: So that was his first big trade, was in and around that. Now a lot of people were very negative of the unification, thinking it was going to collapse the markets, it was going to be all sorts of negative. But he saw a big miscalculation, and again, the fund he was trading for -- which I don't remember off the top of my head -- were again betting on collapse. But he saw that there was real strength in the economy and made a multimillion dollar trade on the Mark to rally hard for unification. Soros backed his play and increased the position.
Phil Newton: The Mark. Just to-
Sean Donahoe: Deutsche Mark.
Phil Newton: It's the Deutsche Mark, yes. The currency of the country.
Sean Donahoe: Absolutely.
Phil Newton: It was going to rally hard. It was going to be a favorable situation.
Sean Donahoe: Absolutely.
Phil Newton: And everyone was nay saying and saying, "No, this is not going to work."
Sean Donahoe: Yeah. Soros backed his play and increased the position to $2 billion, and the play netted a 60 percent return. Not fricking' insignificant when it did rally. But his second big play, also with Soros, paralleled the sentiment of the battered pound. Here's an observation. Like I said, a lot of this is awareness of ripple effects. This is one thing I'm personally very big on, is the ripple effect of big moves and big plays. So. while the sentiment of the ... Soros broke the back. Okay, and he was
Phil Newton: Everybody's crying in their milk over here.
Sean Donahoe: Absolutely.
Phil Newton: Use that to raise your awareness, is what we do. And look over there. And, "Oh my God. There's something shining over there. Let's go play over on that corner."
Sean Donahoe: Exactly.
Phil Newton: That's what he did here.
Sean Donahoe: Exactly. So as the British pound took a big, swift kick in the nuts, he started buying up British stocks that were likely to benefit.
Phil Newton: Who would it be a good thing for? Yeah, because for every ... You know, we spoke about this, but it's kind of like for every action there's an equal and opposite reaction. It's just, it's this pendulum effect. With currencies, one country is being kicked in the guts, but for the opposing currency, let's just say it's the pound against the dollar, they're always paired. So the dollar's really benefiting from that, against the pounds, or against its counterpart currency.
So there's always a counterpoint somewhere, and this is the observation of, "Who is it good for? Okay, bad things are happening over here, but who is that a good thing for?" I think that's the lesson here.
Sean Donahoe: Yeah. So what he did is he realized that because the Great British Pound, GBP, was absolutely decimated, this is going to be great for companies who are exporting to international markets, because that's going to help them grow. So not only did he start investing in British stocks that were going to benefit from exports, but he also followed up by buying German bonds, based on the thought that other investors would follow after the pound collapsed. And between the two, he had himself an extra $1 billion. In other words, what would happen if this event-
Phil Newton: He had a side bet on. Is that what you're trying to tell me?
Sean Donahoe: It's a great side bet. Because this worked, he was swift to take advantage of what had happened and the fallout. So again, it's that big picture awareness that makes all the difference in the world. It's looking at, "Okay, what is the ripple from this big rock dropping in the pond? What effect is that going to have?" And again, it's this level of awareness that we talk about that can lead to these incredible opportunities.
So we talked and skimmed around and referenced the big short. Funnily enough, there is a big movie called The Big Short, but there was two kind of side players in this that I've got to mention. Not the big Michael Burry and Steve Eisman that are often highlighted because of this blockbuster movie and the story that was highlighted by Michael Lewis, who wrote the book, the author of The Big Short: Inside the Doomsday Machine. But we're going to talk about another player, Kyle Bass, now this is in 2008, who netted himself $3-4 billion.
Now, here's a quote from this, The Big Short by Michael Lewis. "The catastrophe was foreseeable, yet only a handful noticed." Now again, we've been talking about it. We saw that this was unsustainable. We talked about this ourselves.
Phil Newton: I had the Trading Room at the time, Sean, didn't I?
Sean Donahoe: Yeah.
Phil Newton: And for two years, literally for two years we were talking about this. And it started off as a joke. I remember having a conversation with one of the students that we had at the time. We were bantering back and forth, kind of like we do, but we were bantering back and forth about the market. Said, "The only thing that we need now is a crash." And then I just thought, "Actually, when you connect all the dots together, why hasn't one happened already?" And then for two years you're waiting for it to happen. Again, it's this ocean liner trying to turn down in the canal scenario.
When you're aware of the possibility and the evidence is in front of you, you're just waiting for it to happen. You're waiting for that tipping point. Again, for two years we were just talking around it. It was almost to the point where, "Why doesn't anyone else see it? Why is the media not talking about it?" Because for everyone else it was like ... For our little group of people, we were like, "Why doesn't anyone see it?" It was ridiculous, absolutely ridiculous.
Sean Donahoe: Exactly. Absolutely. So the funny thing is that Kyle was in Spain, a wedding, and had a chance conversation with an investment banker from New York about subprime CDO markets. That started the ball rolling. It was just, talking about this and, just something didn't quite smell right to him, so he hired a team of private, almost like forensic investigators for finance, to research the U.S. mortgage markets and uncovered which securities were basically-
Phil Newton: Surprisingly, it turned out that giving people 20 times their earnings when they're on minimum wage wasn't a good idea to allow people onto the housing .
Sean Donahoe: Yes. So yeah, it doesn't matter which-
Phil Newton: It turned out that that wasn't a good idea.
Sean Donahoe: Indeed. And the funny thing is, he identified which ones were pretty bad, so he started buying CDSs, which is Credit Default Swaps, as a bet against the multi trillion dollar subprime mortgage market and the entire finance system. So while everyone else-
Phil Newton: Is that a fancy way of saying something, Sean?
Sean Donahoe: Yeah. It's basically-
Phil Newton: It seems like one of those fancy names for something that is probably not what you think it means.
Sean Donahoe: Yeah, Credit Default Swaps, so basically it's the way that they packaged up these, and he started buying, but kind of betted against them.
Phil Newton:
Sean Donahoe: Yeah, basically. It was the bullshit. It was the insurance, if you like, against these CDOs, which are -- I've got to get the actual phrasing right, here -- collateralized debt obligation, which is basically a pooled asset such as mortgages, bonds, and loans, and everything else.
Phil Newton: Yeah, so they'll be getting all the crappy mortgages, the distressed finance, packaging them all together and giving it a triple A rating as a high yield, high risk investment opportunity.
Sean Donahoe: Yeah, so these-
Phil Newton: Something along those lines would be one example of it. A little bit fancy, a fancy CDO and CDS thing.
Sean Donahoe: Yes. And the credit to false swaps was basically the insurance against the CDOs. So he bought, literally, multi billion dollars worth of these, and basically shorted the entire finance system accordingly. Now, he convinced additional investors to join and it resulted in a $4 billion trade and return for his fund, which is not insig-fricking-nificant. So that's pretty good. But that's Part One.
Phil Newton: That wets the whistle.
Sean Donahoe: That wets the whistle. Part Two-
Phil Newton: I'd say it's the foundation.
Sean Donahoe: Yeah, absolutely. But there was another one. Again, kind of an unsung, I would say not so much a hero, an unsung hero, but one that not many people talk about, is John Paulson. Now, his analyst, Paolo Pellegrini I think it was, started looking at the U.S. housing market, as well. Now Paulson was able to get investors to back him, and he got $150 million and persuaded to banks to sell him CDSs, the Credit Default Swaps, and waited.
Now, by the end of the crisis his fund had made $15 billion. And as the markets continued to decline he netted an extra $5 billion by re upping his shorts and everything else for those funds. And he took home, in his personal finances, $4 billion. Now, here's the thing. This-
Phil Newton: That's absolutely nuts. That is, I mean that's crazy money. It really is.
Sean Donahoe: There's a kick in the pants here. At this time, because of the crisis and everything else, he gave a speech at a Bear Stearns lunch, because investors were worried about Bear Stearns. Again, if you've noticed that name, again they're the 2008 housing crash, kind of synonymous with Enron at the time. But anyway, Bear Stearns were a little nervous. They did a lunch for investors where they were trying to reassure investors not to jump ship and everything else.
Phil Newton: "Everything's fine. Don't worry about it."
Sean Donahoe: Indeed, indeed.
Phil Newton: "Let's triple A rate it. It'll be fine."
Sean Donahoe: "That's okay. We're on the Titanic. Keep the band playing."
Phil Newton: Okay. "We didn't hit anything. No, nothing to see here. No-no-no. No icebergs here."
Sean Donahoe: "No, ignore that big white thing floating in the water." Yes. So anyway, what happened was he ended up giving a speech. The idea was, he was meant to give a speech that made everyone a little reassured, but he basically told people about the writing on the wall. What ended up happening is-
Phil Newton: Insurance.
Sean Donahoe: Yeah, indeed. Making investors very much aware that Bear Stearns was in a lot more trouble than they were maybe letting on. So eventually Bear Stearns crashed, and here's the funny thing. The company used to rent him his office for his fund, so he rented his office from Bear Stearns on Wall Street, and then basically he turned around and helped sink the company that rented him the office. So again, little irony there. But
Phil Newton: I think, you know what, again I think that this just reinforces something that ... What is surprising, Sean, that we've spoken about it a few times in the past. A bad company is always a bad company.
Sean Donahoe: Mm-hmm (affirmative).
Phil Newton: You know, good news, bad news, whatever the news is about that's going on in the markets, if it's a shit company it's always going to be a company in shit. And this is what Bear Stearns was. It was a company that was in dire straits. Again, we spoke about it last week. From a strategy point of view, we talked about a business having departments, if it was just one department in the business, then okay it's a write off. We've cocked up somewhere. We've got some losses on the ledger. Let's cut them off and we're just not going to report a profit this year. But a whole company went down the Swanee.
Sean Donahoe: Indeed.
Phil Newton: That's a bad company.
Sean Donahoe: Yeah.
Phil Newton: It's not a bad department. It's not about the trade. It's not one bad decision. It's bad management, rotten to the core, from top to bottom. That's why it sunk. A bad company is always going to be a bad company. Surprise, surprise.
Sean Donahoe: Absolutely. Now, we've got to also talk about David Tepper. Now, 2009, $7 billion. In the midst of the turmoil of the markets and money and trust flowing out of the banking sector, he saw an opportunity. He moved in to the banking sector after seeing how hammered the markets were, and expected a hard rally and recovery, even when everyone else was running to the hills.
Phil Newton: You mean he bought cheap, he saw opportunity, bought value stocks, and gobbled them all up?
Sean Donahoe: Indeed. Now, how unusual is that? Now, here's the thing.
Phil Newton: What a surprise!
Sean Donahoe: Funnily enough, this is, again, a little bit of fundamental, but again, information that's out there and publicly available. But after studying a 2009 government white paper he discovered the government was buying bank stocks, which could be converted into common shares at prices exceeding the current value. Now, to translate, they were grabbing stocks and, again, handling them at very, very cheap prices.
Phil Newton: But this was happening most places around the world as well. Basically governments were propping the institutions up. Too big to go bust is kind of the headline, talking head phrase that was going on about the time. They made a few examples in various countries around the world. What was the U.S. one?
Sean Donahoe: Oh, good example.
Phil Newton: Fannie Mae and Freddie Mac, wasn't it?
Sean Donahoe: Yeah.
Phil Newton: They made a few examples, off-with-their-head type of, you know, we're going to make an example here, but then the government stepped in and started propping up businesses.
Sean Donahoe: Basically. It was part of the prop up, the too big to fail, and the big bailout as they call it over here. But basically he saw what they were doing, and while everyone else-
Phil Newton: They were doing it behind the scenes before it was public knowledge is what you were saying here.
Sean Donahoe: Basically, yes.
Phil Newton: Before it became commonly known this is what they were doing.
Sean Donahoe: Yeah, they were trying to do a soft bailout and behind the scenes-
Phil Newton: You mean to say that the government was involved in inside trading?
Sean Donahoe: Pretty much. I mean it was-
Phil Newton: Looking back on it, but to be fair, if someone else was doing this they had inside information.
Sean Donahoe: But yeah. It was public knowledge and it was-
Phil Newton:
Sean Donahoe: Indeed. I'm going to be careful what I say here, before some guys with anoraks come through.
Phil Newton:
Sean Donahoe: But yeah, before the windbreaker guys come through the bloody door. But at the end of the day, the government was doing some funny stuff behind the scenes to prop up the markets and the finance markets. So he bought a ton of common stock in Citigroup at about 19 cents to the dollar, Bank of America-
Phil Newton: That's pennies.
Sean Donahoe: Yeah, pennies on the dollar. 12 cents to the dollar. And bought AIG, like $1 billion worth of AIG commercial mortgage securities at nine cents on the dollar. Oh, sorry. Not-
Phil Newton: You should look at the prices now, Sean. They're in the 50s. So they bought them for pennies, literally, 20 cents. And they're now worth low to mid 50s, $50.
Sean Donahoe: Yeah, so he bought them at a huge discount. And then through 2009 he watched his holdings double, triple, and with Bank of America, quadruple, all within 12 months, as all of this bailout and recovery and everyone else were starting to come back into it, yeah, and the rest of it.
Phil Newton: They can't fail, blah-blah-blah.
Sean Donahoe: So by the end of that he made an incredible $7 billion for his funds. Again-
Phil Newton: And that's just in a 12 month period. I mean, that's let alone what, "Here's what you could have had, if you'd held on the other eight years."
Sean Donahoe: Oh my God, yes indeed. And again, he's obviously consistent with .
Phil Newton: You know, in 12 months that's ... You know what? I'll take that. Thanks very much Bob, I'll take that and go and buy an island somewhere and sit on it for the end of my days.
Sean Donahoe: Absolutely. As long as you've got a very fast internet connection, that would be me, I would be very happy.
Phil Newton: I mean, that's that's pocket money for playing with, isn't it? It'll keep you going until you get some real money in your pocket.
Sean Donahoe: Indeed, yeah. Yeah, it's pocket, it's like the paper route.
Phil Newton: It'll keep you going until you have something interesting to play with.
Sean Donahoe: Indeed. So yeah, so there you go. I mean, $7 billion. Again, it's awareness of an opportunity of a discount. Buy low. Again, while sentiment is running the other way, the lions look for a tasty steak. This is a tasty damn steak.
Phil Newton: I think the overall action theme is, Sean, is that while we're always antsy and against the swing for the fence, we're only against it on an everyday basis, because I think what we've illustrated many times, and we've got lots of historical examples as we've been through today, is that these opportunities do happen. They don't happen every day. And when they do present themselves there's usually a lot of information to suggest that actually, maybe you should investigate the opportunity.
And you've got time, weeks, months, sometimes years to investigate the opportunity and think about the best way to get positioned or take advantage of the opportunity. So yeah, you can swing for the fence, but you don't have to panic and get the trade on today. You can take your time. But I mean, that's like what we mentioned the other week, with the Cobalt situation. You know, there was many months to kind of think about it. If you missed the initial drive, now you've got a second opportunity.
There's usually plenty of time to consider even the smaller opportunities, when your awareness is raised. And that's what we keep talking about, every single week. You know, don't panic with the crowd. Don't be a sheeple with the people. Just use it to raise your awareness and you will find those golden opportunities. And while you're waiting for those opportunities then you can be actively engaged in the markets on a short term, which is pretty much what I do. It's what you do, Sean. It's what Andrew does.
We've got strategies that actively engage us on daily basis or a weekly basis, so that we've got our finger on the pulse. And that when a golden opportunity comes around we're prepared for it. We can swing for the fence once every five years, once every 10 years, when the opportunity is there. I think that they're the big lessons that I'm hearing, that are reinforced by hearing us look back and think about historical trading opportunities, because there's lessons to be learned. That's what I'm taking away from this, Sean.
Sean Donahoe: Absolutely. I mean, the way I see it is a lot of these guys are lions in their own right, outside of the personal. I don't know any of them personally, but the one thing I would say is they stand on, like we do, and I like to consider that we do this as well, is they stand on the tall rocky outcrops, looking over the savannah, watching the herd of wildebeest roll by, looking at the rivers, looking at the land, looking at the horizon. They're looking at everything else. The herd-
Phil Newton: Taking the measure of the landscape. Yeah.
Sean Donahoe: Yeah, the wildebeest is looking at the wildebeest's ass in front of it, and which direction it's running. Very short term, myopic view. And honestly-
Phil Newton: Most, I'm getting carried along with the herd.
Sean Donahoe: Yes, and there's a lot of shit flying around.
Phil Newton: Let alone, I don't know which way I'm going, but everyone's going to in this direction.
Sean Donahoe: Exactly.
Phil Newton: That's what the herd does. We just take a step back and, you know, use it to raise your awareness of opportunity. It's not that we constantly, constantly talk about it, but yeah, I think they're the important lessons, Sean. It's been a great eye opener because there's one or two stories that I didn't much know about from the big trades. So from my perspective, it was nice to again, just reinforce the stories and learn the lessons from other people and their trades.
Sean Donahoe: Absolutely. So with that being said, let's rock on.
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Sean Donahoe: Okay, so today has been about some of the biggest plays on the planet, some of the biggest trades. And as we said, these are all outliers, but also home runs. These are awareness opportunities for that big hit. And as they make for great stories ...
Phil Newton: I think the thing as well, just to restate, is they're people that did it again. They weren't one-off people. They didn't do one trade, one time, and we're trying to live the golden age of it. They repeated the ... These are just the headline trades they did. They repeated this formula again and again and again. It was a systematic approach that they followed that purposely looked for, when's the tide shifting? Where's the big economic shift? And they're looking many months, many years ahead and evaluate. These were guys that could do it again, which is what we're always talking about.
That's great. You had one good trick. Do it again. Do it again tomorrow, and then we'll start having a proper conversation about it. But these were guys who could do it again because they took the time to investigate. So yeah, you can get those home runs, but you've got to wait for them. You've got to be patient. Like you were say, you've got to survey the savannah, survey the landscape, survey. You've got to wait for the opportunity to present itself, and when it's right for the taking, it's there.
It doesn't happen every day, but when it does it's golden. I've been on one or two of them myself, and it's just phenomenal when it happens.
Sean Donahoe: Absolutely. And these really do make for great stories, but one thing we always talk about is consistency. Hey, sure you can have the occasional home run. That's fantastic. We've had them. We've been in on multiple opportunities and, again up and filled up our boots where required.
Phil Newton:
Sean Donahoe: But it's consistency that is always key, because that's the one that keeps the money rolling in. It's the thing that happens day after day after day. Because, like Phil said, these opportunities only happen every now and then, or awareness, or a confidence in an awareness of an opportunity where you can leverage that. That's absolutely fantastic when they roll around, but I personally prefer consistent, predictable profits. May not make the headlines, but it keeps-
Phil Newton: It's boring. It's unsexy, but you know what, 20 years under the belt and I'm still in business. Yeah.
Sean Donahoe: ... the profits . Absolutely. I mean, some of these guys have disappeared. Some of these guys that we've talked about, like Jesse Livermore went bankrupt within five years. But-
Phil Newton: But he made and lost his fortune three times, as I understood.
Sean Donahoe: I think it's three times, yeah.
Phil Newton: Three times.
Sean Donahoe: Yeah, yeah.
Phil Newton: Three times . But yeah, I mean the point is he could repeat it. I think even though he made and lost small countries' GDP, he made and lost it a few times, but he repeated it again. You know, he lost it and with a small seed capital was able to regain it. He's done it multiple times. And I think that's the lesson here. It's, even if you are swinging for the fence, you've got to wait for the opportunity. It can be done, but you've got to wait for that opportunity. And that's what most people can't do, especially if you're brand new to it.
Sean Donahoe: The other thing I'd flip in there is, because these guys ... We're talking about wins. We don't really, a lot of people don't talk about the losses, the huge, huge losses. And maybe we'll do a show on the biggest losing trades of all time, and the lessons that could have been learned. But we
Phil Newton: Yeah, that sounds like an interesting follow on, yeah.
Sean Donahoe: Yeah. But at the end of the day, between opportunities I'd like to take advantage on, I'm not going to load up boots and risk my entire capital on a trade. I prefer to do that with chunks of my capital, but it's a small allocation compared to what I will be consistent.
Phil Newton: I was just going to say, it would be an allocation rather than a, "Let's put all your chips on the table."
Sean Donahoe: Yeah, exactly. I don't like to go all-in because I want to be in business, like Phil said, tomorrow, next week, next month, next year.
Phil Newton: Yeah, I know I agree.
Sean Donahoe: So again, consistency is key to maintain a obviously consistent, predictable profits. So, Rebel Trader Tip of the Week, there you go.
Automated: If you've got questions, they've got answers. Sean and Phil dive into their virtual mailbag for this week's Rebel Traders Quick Fire Round.
Sean Donahoe: So, diving into the mailbag after that epic run of storytelling, I got a simple one for you here, dude.
Phil Newton: Fireside stories? I like that, yeah.
Sean Donahoe: Absolutely.
Phil Newton: I liked it. A simple question for the poor farm boy, I like it. Let's go, Sean.
Sean Donahoe: There you go. "What does overbought and oversold actually mean, and what does average down mean?"
Phil Newton: It means you're an idiot. No, you know, I can't give a serious answer. Overbought, oversold, it's a-
Sean Donahoe: Oh, I've got to stop there for a second. You mean you can't give a serious answer?
Phil Newton: I can't give a serious answer, Sean, because the way that-
Sean Donahoe: This is a newsflash.
Phil Newton: Surprise! But the way that I view the market, you know, people are so hung up on, "What does it mean when this thing happens?" Most of time, it doesn't matter. It really doesn't matter. What does overbought or oversold mean? Okay, I'll try a serious answer, but overbought is a perception of your viewpoint that prices moved in one direction, upwards usually, and oversold, downwards, relative to a tool that you're using.
Sean Donahoe: You mean like RSI or CCI or something. Yeah.
Phil Newton: And if you do that . It's usually referred to in terms of an oscillator, which is just a mathematical formula that analyzes historical price movements. Now here's the catch, Sean. The default setting is usually 14, on most of these oscillators. So what that means is over the last 14 days, or 14 candles or bars, whatever you want to call them, but over the last 14 days on a daily chart it's going to give you kind of like a mathematical readout.
And it creates this little oscillator, you know, like if you got your pulse checked on one of those monitors and you get the little blip up and down? It's just one of those lines on the chart, that goes underneath the charts. And it oscillates back and fort, relative to when price is swinging back and forth. Now because it's such a short period, it's only looking at 14 days, how do you know that the current price movement is always going to do 14 day cycles?
I don't know if you get what I'm trying to say here, Sean. You're measuring an overbought and oversold indicator ... Sorry, I'm ending up being a little bit bitchy about the whole subject, here. I'm not really answering the question. It's a pointless measure if you've not accurately got a ...
Sean Donahoe: Enough data.
Phil Newton: Enough data, that's the point I'm trying to get to. Yeah. So you're just looking at a random 14 period default setting to measure the price that's oscillating, and on that basis you're determining whether it's overbought or oversold. And it's an often stupid way of doing it. And because you don't know if it's truly overbought or oversold, you don't know what the cycle . So we're starting to kind of inch into cyclical analysis. I think a far better way than using oscillators on individual instruments is to kind of look at the cycle length, and that's just a fancy way of saying the up moves compared to the down moves, in relation to time. And they use-
Sean Donahoe: Funnily enough, I was going to send this one . Sorry. Didn't want-
Phil Newton: They use that in relation to the setting to use on the indicator. I think that's all I've got to say there. So, yeah. What were you going to interject?
Sean Donahoe: I was going to interject something there. One thing I like to do is I like to ... I'm looking at one oscillating type indicator. I like to look at 20 and 63.
Phil Newton: Yeah, I mean I do use them, but it's a longer period.
Sean Donahoe: Yeah. It's more data. I look at 20, which is basically four months, or four weeks -- sorry -- worth of trading days. Okay, so I like to look, "Okay, basically what's it done this month? Where is it compared to a month ago?" And then 63, which is kind of like three months.
Phil Newton: Three months, yeah. I like it.
Sean Donahoe: And that gives me a chunk of data.
Phil Newton: Just to pause you there, trading days excludes the weekends. That's why it's 20-ish and 63, just for a little sidebar. And then everyone that listens to this, "Oh, that's what, one month and three months."
Sean Donahoe: Yeah. So basically I like looking back at that and kind of accounting for, "Okay, where is it in relation to itself over a much wider time frame?" And that can give you a lot more insights, rather than say seven or 14 days.
Phil Newton: It's just arbitrary. It really is arbitrary. Now, I do the same, Sean. I look at the one month and the three month indications, but I don't use indicators. I'm not looking at the indicator and saying, "Oh, it's overbought. It's oversold."
Sean Donahoe: Awareness.
Phil Newton: It's just that the mathematical number it spits out is at a level that I might consider interesting. So on that basis I will then go and look at the charts. And then, guess what I'm doing, Sean. I'm looking at price to say, "Okay, well the indicator said this. Does that confirm what I expect to see from price? Is price ranging? Is it at a level of interest? Is it at a logical stopping point? Could it then be interpreted as overbought or oversold?" I'm not just taking the indicator on face value, as you just pointed out there, Sean. It's to raise your awareness.
This is more of a, I suppose a Tip of the Week as opposed to, what does it actually mean. But don't worry about what it means. Overbought, oversold, don't worry about the moving average, crossover, crossing, up, down, death cross, red cross, blue cross, whatever. It doesn't matter. Don't worry about the traditional interpretations of what the indicator, the isolated interpretation is, in the traditional sense. Just say, "Okay, well this indicator is at this point, and usually that means it's doing some interesting." On that basis, go and look at the charts.
After that, don't worry about the indicator. Ignore it. But I think that's probably better than knowing whether price is overbought or oversold, because I can look at the indicator and say, "It's overbought in the traditional interpretation, and that normally means that price will, it's expected to sell off. It's at a good point to be bearish or start short selling." I use it to potentially find trending stocks. Surprise, surprise, I don't use it in the traditional sense. I use it to raise my awareness, but other things have to be in place before I get there.
It's like, "Okay, it's overbought. Is the stock trending? Great. Is it breaking out of a small consolidation? Yes. Great. Okay, we've got a trend continuation." Because you're considering over ... I'm getting on a bit of a soapbox here, Sean, but it's for a purpose. Overbought, if you have this preconceived notion that something is overbought or, in this case overbought, you'll never consider being a buyer because the indicator's traditional interpretation is that it's overbought and you should be a seller.
You would never consider being a buyer, because of that. And this is why I'm so strongly objecting against the terms and the traditional interpretation. And don't worry about overbought or oversold, or the traditional, just use it to say, "Okay, well here's five stocks that meet this condition in the traditional sense. Okay, well I'll go and look at them, and then I'm going to use my own mind, my own objective nature of looking at the charts and figure out what's going on.
The first thing is always going to be, "What's the chart doing in the last 12 to 18 months? Is it going up? Is it going down? Is it going sideways?" And on that basis I can start to formulate a plan of action, a structure. And we go into great detail about this, don't we Sean? We've got some trade somewhere, but it goes into more detail as to what I'm describing. Don't worry about the indicator. Don't worry about the terms. I truly believe it doesn't matter anymore. Just use the tools to raise your awareness of a potential opportunity, and then go look at the charts. That's more important for me.
Sean Donahoe: Absolutely. And I'll throw one other thing in there, which is kind of a little tip, a little insight. One thing that I like to personally do is refine the awareness to more extremes, because we're extremes. We like looking at stocks that are extremes, that are at extremes, should I be grammatically correct with the English. But one thing I like to do is, say , use that as an example. Traditional levels are 70 and 30. If it's above 70 it's considered overbought.
Phil Newton: Overbought.
Sean Donahoe: If it's below 30, and again little quote in air quotes, it's considered oversold. I like to raise those levels to 80 and 20, or even 90 and 10. Now the reason being is if it's outside of those, that's at a statistical extreme. Now if I'm looking-
Phil Newton: Your wording there, very picky on the wording. I love the way that you just introduced that, and I didn't earlier. It's a statistical extreme. It's not overbought. It's not oversold. The formula that calculates the squiggly little line is saying it's unextreme.
Sean Donahoe: Exactly.
Phil Newton: That's how you should view the indicators, oscillators in this case, that we're talking about. I think that's more important.
Sean Donahoe: Absolutely. But if I raise those levels it filters out a lot of the general noise because, again remember, we talk about a self-fulfilled prophecy.
Phil Newton: Yeah, price can get there on a regular basis.
Sean Donahoe: Absolutely. And if everyone's looking at standard settings, then again, it can be a self-fulfilling prophecy. But if it's a real extreme, that can raise the awareness of an opportunity. And again, we can alert you to something that, with further investigation, could highlight an opportunity. It's not a signal.
Phil Newton: It meets with the criteria.
Sean Donahoe: It's not a signal.
Phil Newton: Yes. The way that we view it, it takes a big list of stocks down to a smaller list of stocks. It's a way to raise your awareness of, "Maybe there's three or four stocks that I'd like to look at today. Okay, I'm going to use this tool in the way that you said. It's a statistical extreme. And okay, I've got five stocks to look at today." They're the only five stocks that you look at, relative to that. Let's call it a scan, shall we Sean? "Relative to that scan, these stocks are at an extreme. Okay, great. I'll go look at them today, and don't worry about anything else."
Sean Donahoe: Exactly. And again, as actually ... You know, I might start releasing some of my indicators I've developed in and around these kind of things, which are awareness things. But we'll see about that maybe in the future. I am actually a indicator developer.
Phil Newton: You're a code nerd, aren't you?
Sean Donahoe: I am a code nerd.
Phil Newton: I'm not. I have to get someone else to do it for me.
Sean Donahoe: I like building algorithms in and around this, and I do it for my own research, my own benefits and everything else, so I might release some in the future. But anyway, we got off on a rabbit hole. What was going to be a simple question ...
Phil Newton: And you call one of them The Kraken. And then we can say, "Release The Kraken."
Sean Donahoe: I fricking love that! The Kraken.
Phil Newton: We call it The Kraken Indicator. Release The Kraken.
Sean Donahoe: The Kraken, release The Kraken. I fricking love that. That's absolutely phenomenal. I love that.
Phil Newton: Why has no one called an indicator The Kraken, yet?
Sean Donahoe: Oh, shit. I've got to trademark that.
Phil Newton: We should see if we can get the domain.
Sean Donahoe: The Kraken Indicator, there you go. Love it. Someone's going to go get that right now. In fact I better go do that in a few minutes. But anyway, what else is in the mailbag, before we get off on another tangent?
Phil Newton: Well, Sean, before we go too far off on a tangent ... In fact, I think we've gone so far off on a tangent we've come full circle. And so, "What are the differences between a preferred stock and a common stock?"
Sean Donahoe: Okay. This is more of, again, purchasing stocks. I get that. There's a big difference. There's actually similarities and differences between the two. Basically, you are owning, you've got a piece of a company. Both are tools that investors can use to basically profit from the future successes of the business. Okay? The main difference between the two types of stock is that common stock basically gives you voting privileges. Okay? And again, at shareholder meetings and everything else you actually get a say. Whereas holders of preferred stock may not. And I say may not, sometimes they're given rights, sometimes they're not.
Common stock gives basically the owner one vote per number of shares owned. Okay? It's not always the case, but in general ...
Phil Newton: It's not a one man, one vote scenario, and I've got the vote.
Sean Donahoe: Yes, indeed.
Phil Newton: For every share that you own, you get a vote.
Sean Donahoe: Yes. Now, some preferred stock actually does grant one vote per share, but that's really depending on the Board and everything else, and how they structure and give those out. But one of the big differences, preferred stockholders receive a fixed dividend from the company, while common shareholders may or may not receive one, depending on again, Board of Directors. Now, the other thing is, and this is the ironic thing here, which you would think preferred stockholding, or preferred stocks, is greater than common stocks. And you would think, "Well, why do common stockholders get a vote when preferred stockholders generally don't?"
There's a reason. Preferred stockholders have a greater claim on a companies assets and earnings. In other words, their first to get a slice of the pie. This is true during good times, because there's an excess of cash and they decide to distribute that money in the form of dividends ...
Phil Newton: Then they get preferential treatment, is what you're saying.
Sean Donahoe: Yes, preferential treatment when it comes to money-
Phil Newton: Cool. Okay, cool.
Sean Donahoe: ... and claim to assets. Now, if there is a liquidation, or they've got to pay creditors
Phil Newton: This is an Enron situation.
Sean Donahoe: Yeah. Basically-
Phil Newton: Stay with the theme.
Sean Donahoe: Yeah.
Phil Newton: And they're selling off the assets of the company. It's gone belly up. It's out of business, and they're selling off all the things that they own to try and get some money back.
Sean Donahoe: Absolutely.
Phil Newton: So the preferred stock people are what you're saying, they'll get, if there's any money left over, preferred stock owners will get a little piece of whatever's left, after all the other people have been paid.
Sean Donahoe: Absolutely.
Phil Newton: So they're higher up in the pecking order on the handout scale .
Sean Donahoe: Yeah. Preferred stockholders get paid first. If there's any money left, common stockholders might get some. So basically, preferred stockholders get a slice of the pie before everyone else. Yeah.
Phil Newton: They're first in line, yes.
Sean Donahoe: And that is the main difference. Now there's lots of other things we could go into, but that is the core differences between the two. So that'll give you an idea, because there's a lot of confusion about what the differences are, and why would one do the other. Again, it's whether you want dividends paid.
Phil Newton: There's times when you'd have one over the other, but I think for most people, and the things that we're talking about quite regular, I think it's mostly the other type that are, they're surprised it would be commonly traded.
Sean Donahoe: There you go.
Phil Newton: Hence the phrase.
Sean Donahoe: Ba-bum. Yes, indeed. Okay, so here's another one.
Phil Newton: Using the wording again, Sean, I think.
Sean Donahoe: Absolutely. It is, it is. But the one thing that trips most people up and that gives the scratch of the head is the voting rights, is why do common stockholders get a vote when the preferred people, who've got higher pecking order don't. Well, it's because they're more interested in the money return of preferential.
Phil Newton: It's a trade off, yeah.
Sean Donahoe: It is a trade off.
Phil Newton: Yeah, but they sacrifice that to get a preferred pecking order, as we were just describing.
Sean Donahoe: Absolutely. Okay, so here's one for you, and it's an options question. "What exactly is a butterfly trade?"
Phil Newton: Well, it's where one goes into the local butterfly shop and buys whatever the local ... No, no. A butterfly trade, it's a fancy way of describing buying multiple options and selling multiple options at the same time. So the way that they're constructed gets called a particular type of trade. Just like if you buy one option at a time and nothing else it gets called long put or long call. So you've bought the option, and that's called a single, usually.
If you buy a single put, a single call, and then you sell a single put and a single call, if you put those four things together in a particular way it is often referred to as a butterfly. It's just about how you construct the trade, is the fancy way of saying it. But essentially you're buying an option, selling an option, and then you're buying another option and selling an option. Two on the call side, two on the put side, and you put then together in such a way that, again I'm being a little bit vague on the construction elements, but it's called a butterfly trade.
And you can take those four components and construct them in a different way, two puts, two calls, one buying, one selling, on each side. And depending on how and which strikes that you buy and sell, it might get called an iron condor, or a condor, or you know one of-
Sean Donahoe: There's lots of names for these packages, basically.
Phil Newton: There's lots of exotic ways of describing how you put them together. You see where we're going with this. There's nothing fancy or mystical or complicated about it. It's you're just buying an option, selling an option, then doing it again on the put and the call side. You put them together and it might be called a butterfly if you put them together in such a way that is common for a butterfly trade. Again, hopefully I'm being specifically vague here on the strikes and the actual construction side of it, because I think that's a little bit beyond the question with the time that we've got here.
Sean Donahoe: Yes.
Phil Newton: But it's just literally a combination of buying options and selling options, in this case, two puts, two calls. And it's often referred to as a butterfly.
Sean Donahoe: Because if you draw a line between them it looks like wings on a butterfly from the central position of the price. That's why it's called that, but it's just a package.
Phil Newton: Well, it's the risk profile and the payouts, and it's how it's constructed. It looks like, it's sometimes referred to as a butterfly, and it's always described. I don't want to go down that road, Sean, because it just over-complicates it. But the reality is, is all these exotically named options just have an exotic name. They sound scary, and they're very off-putting. It's usually one of the big hurdles that most people have to get over. And all you're doing is buying an option and selling an option.
Maybe you're buying two options and selling two options, puts and calls like we've just described. And it depends on how you put them together, like you would have a jigsaw puzzle. If you put the jigsaw pieces all next to each other in a slightly different way, you see a different picture. And it gets a different name, whether it's a butterfly, an iron condor, a credit spread, a debit spread. It's just, in what order you do everything determines what name it gets called.
Sean Donahoe: Yeah, it doesn't matter what the bloody names are, one legged pitcher, whatever it is. It doesn't matter.
Phil Newton: The reality is, is you're just doing, you're just buying an option and selling an option, sometimes singly, separately, sometimes together at the same time, and sometimes multiple components at the same time. And it just gets called something slightly different. You know, when you think about it in those terms, options trading is quite simple.
Sean Donahoe: Absolutely. So, with that being said, let's rock on.
Automated: Don't forget, if you have a question you want to ask Sean and Phil, just go to TradeCanyon.com/rtquestions and your question may be featured on a future show. Uh-oh. What's that smell? It's time to call out the Wall Street shenanigans, mainstream confusion, and outright high jinks and hokum of so-called experts. Yep, it's time for Bullshit of the Week.
Sean Donahoe: Okay, gonna dive into the BS of the Week. This is another one of those times where you can look at the news and shake your head, and walk the hell away.
Phil Newton: Self-censored, I like it.
Sean Donahoe: Indeed. So here's the thing. Okay. I'm not defending nor condoning anything that is related to this story, but Musk got himself in a little bit of trouble.
Phil Newton: Being controversial again? Was he being controversial again, Sean? Was he just saying what was on his mind? Because he has a tendency to do that. And I think I actually like for it, to be honest, because he's not trying to do the, you've got to be the PR department. Fair enough, I agree that you've got to mind your Ps and Qs and all the rest, but I think most people like the fact that he just says what's on his mind, within reason.
Sean Donahoe: Yeah. Now again, he did put out an angry tweet, which was a little over the top. I'm not going to bullshit here.
Phil Newton: I've not seen it. I'll have to go and look at it.
Sean Donahoe: Well basically, long story short, he stopped his development of a lot of stuff and, again, to help those boys, the soccer team or whatever it was, the kids that were trapped in Thailand. He developed, and again, working with the rescuers, developed a quick submarine that could help get them out. Basically he's got an engineering team.
Phil Newton: Yeah, I thought that was quite a quick turnaround.
Sean Donahoe: It was, and he flew it out there, but he was accused, or one of the rescuers, which was British rescuers should I say, accused him of just saying it's a big PR stunt. And I don't really think it was. But anyway, he got really pissed off and offended by this and made a very inappropriate reference.
Phil Newton: I'm going to step up and defend him. If that was the reason, you know what, you're all there on the same mission.
Sean Donahoe: Yeah.
Phil Newton: Worry about the schoolyard pushing and pulling later. Just get ... Well, they're out now, as we've done this, but let's just get the job done. It was a 9-1-1 situation, all hands on deck. He had the means to go and do something about it. And within his realm of expertise, he went and did something about it. Whether it was used or not used is kind of irrelevant, but he had the ability. "Here's an idea. Should we give this a go? Let's go. We're on the clock here. Let's see if this works."
Sean Donahoe: Yeah, and they've turned around and scrambled it pretty quickly.
Phil Newton: In my mind, that's what's going on here. That's just my view, but he goes aside, "Fuck it." Sorry, I have to say it. We've got an emergency situation. The whole world was watching. Let's get something done.
Sean Donahoe: And they built something. And again, it-
Phil Newton: Because they didn't use it, he's now being accused of PR bandwagon.
Sean Donahoe: Yeah, and I really don't think that was the case. And I get he was suitably pissed off.
Phil Newton:
Sean Donahoe: He is a master showman, don't get me wrong. He put a fricking car in space for God's sake. But I don't think this was, and I think the news media made more of it than he was, per se.
Phil Newton: Surprise, surprise.
Sean Donahoe: Surprise. Surprise, surprise. But anyway, they got in a little bit of a spat, and he basically accused, or made a reference to this guy being, to this British rescuer being a bit of a pedo, which just made it a really inappropriate reference. I'm just going to say, A, not cool, but okay, made in anger. And again, this guy was going to then sue him. Anyway, Musk came out and apologized. But here's the bullshit. So I'm not, like I said, not defending or condoning.
Phil Newton: He shouldn't have said that, but again, I wasn't aware of that. As the story's unfolding live, you're getting my exact reaction to it, if I'm going to be truthful, Sean.
Sean Donahoe: Yeah.
Phil Newton: Not cool. Not cool.
Sean Donahoe: Not cool, and you know-
Phil Newton: At least he had the decency to say, "Look, not cool and I'm really sorry for it."
Sean Donahoe: Yeah, and he apologized.
Phil Newton: But I'll bet that apology wasn't covered in the depth that it should have been.
Sean Donahoe: Not as much, obviously, because it doesn't make much headlines.
Phil Newton: Maybe media bias, again?
Sean Donahoe: Oh, what makes for a good story and attention? But here's the thing.
Phil Newton: If it bleeds, it leads, and all the rest of it. Yeah. The apology's not sexy, so it gets no airtime. But yeah, the fact that he had an outrage and said something really inappropriate, which he should never have done in the first place, but most people do have an ego complex, which he does. I wouldn't have apologized. I very much doubt that Donald Trump would have done it, because I don't see him apologizing for anything that has been said inappropriately. Again, nothing that's on Trump, but I just know that he has said things inappropriate in the past and he's ...
Sean Donahoe: Funnily enough, he has backtracked in the last 24 hours. You were saying about Trump. He did backtrack on what happened with Russia, and the meeting with Russia. He literally, it stuns me because he actually came out and said, "You know what? I misspoke. That was a misspeak on my part." I was like, my jaws dropping like
Phil Newton: Maybe you can teach an old dog new tricks.
Sean Donahoe: Absolutely. But anyway, the bullshit-
Phil Newton: Anything, yes. No more rabbit holes.
Sean Donahoe: ... the bullshit is ... Lot of rabbit holes, we're like whack-a-mole here, but the bullshit is this. This is why it's always good to look at the charts. You hear all this controversy. You hear all this, you're thinking, "Oh my God, what's happening with the stock?" Well, the news media is reporting on Monday, three percent drop was sparked by Musk's attack on the British divers, yadda, yadda, yadda. And this is what's been repeated. It a talking point, "Three percent drop on Monday. Three percent drop on Monday." Tell me what you see.
Phil Newton: I'm looking. As I hear that Sean, my knee jerk reaction to that is, again, because this is the first time I'm hearing this, you're getting my blow-by-blow, knee jerk reaction to your comments. I'm looking at the chart and I'm like, "What three percent reaction?"
Sean Donahoe: Yeah, but look what happened yesterday.
Phil Newton: reaction on the charts. No, I am generally looking at what reaction on the charts. I'm looking at the daily charts. There is nothing to warrant the hype or reaction of the stock tumbling, Tesla's tumble. Yeah, yesterday as we recall, it's rallied, it's recovered, it's making new highs.
Sean Donahoe: I don't see the three percent they're talking about. It's absolute bullshit.
Phil Newton: What are they talking about? Really, what are they talking about? I mean, again, this just ... Again, the obvious bullshit segment is, what are they talking about? Okay, he said something inappropriate. He's reacted. He's got in a Twitter argument. Blah-blah-blah, whatever. But the stock doesn't care. doesn't care.
Sean Donahoe: Exactly. It's absolute bullshit.
Phil Newton: It's not news. It is not news. Again, this is the whole argument that we continue to highlight every week, that the mainstream media is talking shite, all the time. Their objective is to sell advertising. Again, they're not necessarily there to report. These days, they sensationalize and over-sensationalize. And yeah, I appreciate their business is to sell papers and advertising, and all the rest of it, but this is the why. And if you want to read it, great. It's great entertainment. Don't get me wrong.
But from a financial trading, as the business of making money from movements in the markets, it's nonsense. It is not relevant to your job as a stock trader or a stock investor. It's of no importance whatsoever, and this is why it's always bullshit.
Sean Donahoe: So yeah, that's the bullshit I wanted to highlight. Outside of the situation, everyone's jumping on that bandwagon to create negative news because it gets your attention. But in reality, if you look at the charts, it's not what they're saying. You know, we're seeing a big run.
Phil Newton: On the bright side, very successful recovery, everyone's out.
Sean Donahoe: Absolutely, absolutely.
Phil Newton: Well done everyone who was involved in getting them out.
Sean Donahoe: Absolutely. At the end of the day, that's the most important thing.
Phil Newton: That's all that should have mattered. I think there's a bit of side bullshit going on here. The news is trying to make something out of nothing. The real story, the feel good is, everyone got out. A tragedy happened, that the world came to support.
Sean Donahoe: Well, one of the rescuers did die. One of the rescuers did die, and that's very sad. One of the rescuers did die, and okay, yeah. Not everyone made it. All the boys and the coach were-
Phil Newton: I actually wasn't aware of that, Sean.
Sean Donahoe: Yeah, that's okay, but yeah. The boys made it out, coach made it out. One of the rescuers did die in the attempt, but-
Phil Newton: All the kids made it out.
Sean Donahoe: Like I said, it is the kids made it out, and that is the main thing.
Phil Newton: That's what should have been the focus of the news, but no, that's not important.
Sean Donahoe: Exactly. So again, I'm not condoning what Musk said, he was out of order. He admits he was out of order, and everything else. And I'm not a fanboy of Musk. I mean, I do respect the man. I think he's got a reputation for pulling out of the fire, and I think it's a well deserved reputation, and as a risk taker, and we could go on about Musk all day long. That's fine. What it doesn't-
Phil Newton: From the stocks point of view, the news ...
Sean Donahoe: Was bullshit.
Phil Newton: Bullshit, absolute bullshit.
Sean Donahoe: Yeah. So again, there you go. That's it for this week's show. Hope you enjoyed that, ladies and gentlemen. But please remember this show is not free. It will cost you a five star review. Just go to TradeCanyon.com/rebeltraders. You can subscribe and review us, and we've also got tons of other resources, training and stuff on there. We mentioned the on-demand training that's on there, as well. And this helps us reach more traders just like you, and investors, who want to take advantage of the stuff that we talk about.
Phil Newton: And this show, it's official, this show does contain nuts.
Sean Donahoe: It does.
Phil Newton: You can also connect with two salty nuts on either Facebook or Twitter at the same link, TradeCanyon.com/rebeltraders. And what have we got coming up in next week's show, Sean?
Sean Donahoe: Well, we're going to do a little bit of Adam and Jamie. We are going to do a little bit of myth busting. I'm going to put on my little funny hat, grow out my mustache a little bit. I guess that makes you Adam.
Phil Newton: I was just going to say, do I have to grow a dodgy mustache? We might be waiting a while.
Sean Donahoe: I think that's me. I've got the dodgy mustache, but I've got the beard as well. But yeah, we're going to have a little bit of fun with this. We're going to be talking about some of the most common myths of trading and investing, pull them apart and actually set some people straight. So, with that being said, I think that's it. Rock on.
Phil Newton: It's a wrap.
Sean Donahoe: Absolutely. We'll do it again next week. Until then, take care.
Phil Newton: Bye for now.
Automated: For more cutting edge trading advice, and a free trader workshop to help you build a personalized trading plan and make smarter trading decisions, go to TradeCanyon.com now.
Automated: Futures, options on futures, stock and stock options trading involves a substantial degree of risk. It may not be suitable for all investors. Past performance is not necessarily indicative of future results. Trade Canyon, Incorporated, provides only training and educational information. If you actually understood and listened to this, then that means you're awesome. Congratulations, and well done. Notice, this product may contain nuts.

(Click the time stamp to jump directly to that point in the episode.)

[00:07] Show Introduction

[00:01:10] Sean: We are going to be breaking down some of the greatest trades of all time that can really teach us some valuable lessons. We’re going to blow the lid off these trades and try to reverse engineer what they did and what drove them forwards so that you can maybe apply some of these insights in your trades.

[00:02:15] Sean: This goes back almost a century, we’re going to rip down some of the most famous, biggest trades in history.

[00:02:34] Phil: Noteworthy.

[00:02:40] We’re going to go in descending order. We are going to start with one of our favorite trades of all time, in fact, the book that is based on this gentleman is one of the recommended and almost required reading for our students.

[00:03:11] Phil: Everyone, who is anyone recommends this book by Jesse Livermore, stock operator. I think, he’s one of my personal heroes, it’s a damn good read and it’s timeless, it doesn’t matter that it was written almost a hundred years ago.

[00:04:3] Sean: This was from 1929 and he netted himself $100M.

[00:04:24] Phil: 1906 is when he really hit his stride as a trader.

[00:04:33] Sean: In terms of what he generated, in today’s money it’s about $1.4BN. Let’s just talk about dollars realized. His first attempt was shorting the market, it was selling Union Pacific in 1906 just before the San Fransisco earthquake. That’s pretty significant, he generated $250K from that. Then he shorted the market in 1907, took home another $1M. 1925, the wheat industry was his focus and had another short that generated $3M.

[00:05:20] Phil: I’ve read this book cover to cover many times. The talking heads provided a means for him to unwind positions and I want to acknowledge the lesson behind the trade. Without the news-driven trigger, most of these trades might have turned out very, very different.

[00:06:22] Sean: We’ve got to give him full credit as well. My trading is very influenced by Jesse.

[00:07:26] Sean: He shorted the whole market just before it crashed cashing in $100M which balances in today’s money as $1.4BN equivalent. He saw the writing on the wall, shorted the entire market, it crashed in 1929, I wonder what happened, and that led into the Great Depression. Magnificent story but unfortunately he was bankrupt by 1934 just five years leather and banned from the Chicago Board of Trade.

[00:08:48] Phil: He was literally the comeback-King for coming back from horrendous losses.

[00:08:58] Sean: Moving on, Paul Tudor Jones of the Tudor Investment Group, his own company, 1987, $100M. In October of 1987, was Black Monday, big crash and he was quoted as saying, “There will be some type of a decline, without a question, in the next ten, twenty months, and it will be earth-shaking; it will be saber-rattling.” He cut his teeth on the trading floor, but in 1976 in a seemingly buoyant market, he spotted a significant over-valuation in stocks.

[00:10:04] Phil: He had an ego as big as the fund that he managed.

[00:11:18] Phil: They were very risk-averse, they saw opportunities. While they were very actively trading, they were waiting for the conditions for the big one. The everyday investor, we can learn a lot from how to view the opportunities by going back and reading some of the books.

[00:12:24] Sean: One of his analysts, Peter Borish spent hours huddled over graphs of the Wall Street crash of 1929. He was analyzing the historical markets and sales data and noted direct comparisons to the 1929 crash. So, by the close of business on the 19th October, the Dow Jones had dropped a whopping 22% in one day. During that, Tudor Jones walked away with $100M and a reputation as one of the shrewdest traders around. Last reports I’ve heard about put him around $18BN.

[00:13:40] Sean: Next one, Andy Krieger, 1987, same scenario $300m. After Black Friday, many currencies were rallying against the battered dollar. This was a ripple of the big Black Monday crash. Many currencies were getting overvalued as money moved and one of them was the Kiwi (NZD). He used options to short by $100M’s (Some report was it was a $1B move). Reportedly, it’s claimed to have been bigger than the actual money supply of New Zealand. The Government saw this and tried to prevent the move but traders joined in, shorting the NZD making an almost self-fulfilling prophecy. The Kiwi slipped 5% creating a $300M profit for him.

[00:16:22] Sean: However, although he netted $300M on that trade, he only got $3M in commissions. He ended up leaving to work with George Soros and thenNorthbridge Capital Management

[00:] Sean: A couple of years later, a guy called Louis Bacon, 1989 who generated an 86% return for his firm on a massive series of trades. He’dalready betted against the markets on Black Monday and he can lay claim to being better at predicting the fallout of international politics than the C.I.A because he spotted the trends of growing antagonism from Saddam Hussain’s regime in 1990 towards oil-rich neighbor Kuwait. He traded macro investments to go long on oil and short on stocks basically getting a double position.

[00:18:30] Phil: Why would you get essentially a double fill, if you like, why not put it all on oil? When you’re playing with this size of money, you’ve got to be able to get the position on with the money that you have available. You’ve got to build the position up.

[00:20:48] Sean: So that year, his company started with a fund of around $100M in 1990 and by the end of the year had returned a quite unbelievable 86%. The notoriously elusive Bacon continues to sit at the top of the trading tree, returning between 25–35% a year for over a decade.

[00:27:41] Sean: The next One is Jim Chanos, 2001 this guy generated $500M. Jim Chanos is perhaps one of the most notorious ‘short sellers’. Around that time, energy companies were lobbying the SEC to allow Mark to Model and Mark to Mark accounting to be used in their businesses. This essentially permitted these companies to take the current value of their future profits and add them to their accounts. Jim began looking at Enron and noticed several huge red flags.

[00:29:43] Phil: Are you telling me the writing was on the wall?

[00:27:44] Sean: He started looking at the books, literally what they were putting out. When CEO of Jeff Skilling stepped down citing ‘family reasons’ he made his move. So they initiated a short inNovember 2000, as Enrons stock hit $90 with a predicted target price of about $130. Following one of the most spectacular company collapses in history,Chanos didn’t mind, he’d made around $500 million profit.

[00:33:22] Sean: Now, we’ve got to mention George Soros. He was known as the ‘The man whobroke the Bank of England’.

[00:34:46] Phil: It was my first introduction to this thing called the financial markets and people are making a lot of money when the markets move.

[00:37:04] Sean: The Bank of England hoped the ERM would reduce inflation and Soros saw his opportunity to strike. He was so confident in his position, he put a $4B+ position against the BOE who seeing this, raised interest rates to 12% and other investors smelled blood in the water and jumped on shorting and the inevitable happened. Realizing the trouble they were in, Britain exited the ERM and the pound fell 25% on Black Wednesday. Here’s the flip side as we talk about recoveries, it’s also known as ‘Golden Wednesday’ as it recovered relatively quickly.

[00:42:32] Sean: Now, I’m going to talk about someone who was a friend and co-trader with Soros. Stanley Druckenmiller, 1992 - $1B net. He mirroredSoros’ British pound trade. His first play happened during the Fall of the Berlin Wall and the markets were taking a very dim view of the unification. He saw a big miscalculation and the real strength of the economy he made a multi-million dollar trade on the mark to rally hard for unification. Soros backed his play and increased the position to $2B and the play netted 60% return. His second big play (also with Soros) paralleled the sentiment of the battered pound and started buying up British stocks with the expectation that after a crushed GBP that exports would increase.

[00:45:22] Phil: Bad things are happening but who is good for?

[00:47:06] Sean: We’re going to talk about another player, Kyle Bass. This is in 2008 and he netted himself $3-4B. Here’s a quote from this, Big Short: “The catastrophe was foreseeable, yet only a handful noticed.”Michael Lewis, Author of The Big Short: Inside the Doomsday Machine. It was a chance conversation with an investment banker from NY about the Subprime CDO market that started the ball rolling. He hired a team of sort of, forensic investigators to research the US Mortgage Markets and uncovered which securities.He started buying CDSes as a bet against the multi-trillion-dollar Subprime mortgage market and the entire finance system. He convinced additional investors to join in and resulted in a $4B for his fund.

[00:51:07] Sean, That was part one, there was another sort of unsung hero, John Paulson and his analyst Paulo Pellegrini started looking into the US Housing market. Paulson was able to get investors to backing and got $150M and persuaded banks to sell him Credit Default Swaps and waited. By the end of the crisis his fund had made $15B and as the markets continued to decline he netted an extra $5B for the fund and he took home for his personal finance $4B. At this time, he gave a speech he gave at a Bear Sterns lunch he shared his insights and ended up making investors aware that Bear Sterns was in a lot more trouble than they were letting on. Funnily enough, the company that used to rent him his office on Wall Street was the company he helped to sink.

[00:54:44] Sean: Now, we’ve got to talk about David Tepper, 2009, $7B. In the midst of the turmoil of the markets and money and trust flowed OUT of the banking sector. He moved into banking sector after seeing how hammered the markets were and expected a hard rally and recovery even while others were still running to the hills. After studying a 2009 Govt white paper,he discovered the Government was buying bank stocks which would be converted into common shares at prices exceeding the current value. He bought a ton of common stock in Citigroup (19c to the Dollar) and BofA (12c to the dollar) and bought $1B of AIG commercial mortgage security at $9 on the Dollar. Through 2009, he watched his holdings double, triple and with BofA, quadruple all within a year. Tepper made an incredible $7B for his fund.

[00:56:38] Phil: He saw what they were doing!

[01:02:26] Rebel Trader Tip of the Week

[01:02:08] Sean: We’ve been talking about the biggest plays on the planet these are home runs and they make for great stories.

[01:02:53] Phil: I think, to restate, they weren’t one-off people. They didn’t do one trade, onetime and were trying to live the golden age, they repeated this formula again and again, it was a systematic approach that they followed that purposely looked for where is the tide shifting. They’re looking many months, many years ahead, and these are guys who could do this again because they took the time to investigate.

[01:04:55]Sean: Some of these guys have disappeared, some like Jesse Livermore have gone bankrupt within five years.

[01:05:17] Phil: He maybe lost it a few times but he repeated it.

[01:06:24] Sean: Consistency is key to maintain a consistent, maintainable profit.

[01:06:30] Quickfire Round

[01:06:5] Sean: What does over-bought or over-sold mean? What does average down mean?

[01:07:08] Phil: I can’t give a serious answer. People are so hung up on what does it mean when ‘this thing happens’ and it really doesn’t matter. Over-bought is a perception of your viewpoint that price has moved in one direction (upwards usually) and over-sold is downwards relative to a tool that you are using.

[01:11:53] Phil: I’m not just taking the indicator on face value. Don’t worry about what it means, over-bought and over-sold, it doesn’t matter, go look at the charts.

[01:18:04] Phil: What are the differences between preferred and common stocks?

[01:18:18] Sean: There are similarities and differences between the two. Basically, you’ve got a piece of a company and both are tools that investors can use to profit from future successes of the business. The main differences between the two types of stock is that common stock is basically gives you voting privileges, you actually get a say whereas holders of preferred stock may not, sometimes they are given rights, sometimes they’re not. Common stock gives the owner, one vote per shares owned in general. One of the big differences, preferred stockholders receive a fixed dividend from the company while common may or may not receive depending on the board of directors. Preferred stockholders have a greater claim on a company’s assets and earnings, they’re first to get a share of the pie.

[01:20:20] Phil: They get preferential treatment. So they’re higher up on the pecking order on the hand out scale.

[01:21:49] Sean: The one thing that trips people up is the voting rights - why do common stockholders get a vote when the preferred people who’ve got higher pecking order don’t. Well, it’s because, they are more interested in the money and it’s a trade-off.

[01:21:08] Sean: What exactly is a butterfly trade?

[01:22:20] Phil: It’s a fancy way of describing buying multiple options and buying multiple options at the same time. There’s lots of exotic ways of describing how you put them together. It’s just a combination of buying options and selling options.

[01:24:27] Sean: If you draw a line between them it looks like wings on a butterfly from the central position. It’s just a package.

[01:26:02] Bulls**t of the Week

[01:26:35] Sean: Okay, I’m not defending or condition anything but Musk got himself in a little bit of trouble. He put out an angry tweet that was a little over the top, long story short, he stopped his development to help the soccer team that were trapped in Thailand and developed quick submarine to help get them out. He was accused of it being a big PR stunt and he got offended by this and made an inappropriate reference.

[01:29:00] Phil: Because they didn’t use it, he’s been accused of PR bandwagon.

[01:31:18] Sean: The bull**t, the new report is a ‘3% drop was sparked by Musk’s attack on one of the British divers’.

[01:32:26] Phil: What reaction? I’m looking at the charts. It’s rallied and recovered. The mainstream media, they’re objective is to sell advertising, they’re not necessarily there to report. They over-sensationalize because their business to seek newspapers. Well done everyone on getting them out.

[01:34:28] Sean: The kids made it out and that’s the main thing. Not condoning what Musk said he admits he’s was out of order and everything else.

[01:35:14] Sean: Okay, that's it for this week’s show. Thank you for listening to the show!Please remember that this show is not free.It will cost you a five-star review, just go to tradecanyon.com/rebeltraderswhere you can subscribe and review us and we’ve also got tons of other resources and training on there.

[01:35:43] Phil: You can also connect with us on Facebook and on the Twitter also attradecanyon.com/rebeltraders and what we got coming up in next week’s show Sean?

[01:34:52] Sean: We’re going to do a bit of Adam and Jamie - a little bit of myth-busting.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Awareness is a critical aspect of finding prime opportunities in the markets
  • Consistency is more important than hitting a homerun but when you get a homerun, it's always great
  • When big market events happen there are often ripple effects in other sectors that you can take advantage of

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