It is hard to believe that five years ago John Paulson was just another obscure hedge fund manager managing a portfolio of a couple billion dollars. I’d certainly never heard of him.
Now his every move is tracked as closely as the moves of Warren Buffett.
What I struggle with is how you know whether a guy like Paulson is capable of repeated genius or if he simply made one successful trade on which he placed a much larger bet than anyone else. Don’t get me wrong, I fully believe that an investor really only needs one big successful bet to outperform over a lifetime of investing. Make that one big fat pitch count when it comes your way and then follow it up by making sure to never lose that big amount of capital you have won. That is all it takes.
In the Big Short Michael Lewis described how when Paulson was sitting on this investment idea and was certain he was correct he kept thinking of George Soros and his advice to “go for the jugular”. It takes some real guts to make a big bet that not many others are seeing but that is how you make outsized returns.
My investing philosophy is similar. My thinking is that if it is worth investing in, then it is worth making sure you make some real money from your investment. I only want situations where 1) the downside risk is minimal 2) the payoff is worth tying up and risking my capital. The important part to investing this way is getting part one correct. My first concern is not losing my money. Do that and over time I think there will be the chance to find a few investment opportunities with limited downside and a much larger upside.
Getting back to Paulson, as you are likely aware John Paulson has gone from being extremely short the housing market to one of the first well known investors to get long it. In 2009 he created the Paulson Real Estate Recovery Fund and in November he finished raising capital for it. The name of the fund gives you a pretty good idea what he is investing in and he has raised about $315 million in commitments from investors. The fund it structured as a Private Equity Fund which means the fund makes capital calls to investors when there are investing opportunities.
Paulson started the fund with his own cash and then brought in Michael Barr who was a private equity real estate specialist at Lehman Brothers. (Insert own joke about Lehman and their expertise on the housing market)
The basic strategy of the fund is to by undeveloped properties that already have permitting for buildings and environment (and perhaps road, sewer and electricity). These will be the first properties that developers come after once real estate starts to recover. This makes sense as much of the timely and expensive start up work has already been completed on these properties.
The Paulson fund is apparently not using any debt to fund these purchases so it has the ability to hold onto this land for an extremely long period of time. And it might have to as a full housing recovery could be several years off.
I like this strategy. While it might take a while to play out, eventually the growing and aging American population will create demand in the warmer Southwest states and that demand will eventually outstrip supply. These undeveloped properties which are currently worth little to anyone could greatly escalate in value once there is a need for them. The key thing about this investment is that it will require a lot of patience. A normal hedge fund certainly couldn’t make this bet as investors who could see no returns for years would likely force a hedge fund to liquidate before the payoff.
We do have details on a specific transaction in the Paulson Real Estate Recovery Fund.
In August, Paulson agreed to pay $42.4 million for 8,277 unstarted lots and 22 model homes in Arizona, Colorado and Nevada from bankrupt home-builder Tousa Inc.
The biggest chunk of land in the portfolio is Red River, a development about 50 miles south of Phoenix in Pinal County, on the eastern side of the Sonoran Desert.
In January, TOUSA sold 5,449 lots in Florida to Starwood Land Ventures LLC for $81 million after an auction in which a Paulson entity also participated.
Paulson isn’t the only big name investors who is bullish on real estate. I documented earlier that Bill Ackman also thinks housing is a good investment at this point: http://www.gurufocus.com/news.php?id=116211
