The Biggest Shorts in Wall Street History

The emergence of COVID-19 in the world in the last few months has resulted in an enormous market reversal that could be sending the United States into another recession. Just over a month ago, the Dow reached a record high 29,551.42 on Feb. 12, 2020. From that high, the DJIA lost almost 20% when it reached the low of 23,851.02 on March 9, 2002, and ended the 11-year bull market that began on March 5, 2009. On Monday, March 16, Wall Street suffered its largest drop since Black Monday in 1987. While this is generally bad for the vast majority of investors and the economy as a whole, a few lucky investors have been able to strike gold by predicting the biggest market drops in Wall Street history through a trading strategy known as short selling.

Typically, an investor makes money from the stock market by buying low and selling high. Short selling allows investors to do the same thing in reverse order: selling high and then buying low. In short selling, an investor basically borrows shares of a stock that they believe will depreciate in value. The investor can then sell these borrowed shares while they are at a high price before they depreciate. Before having to return the borrowed shares, the investor will buy the shares back, essentially betting that the price of the shares will depreciate in value before having to buy them back and return them.  Some of the most profitable trades in history have been made through this strategy in the market crash of 1929 (leading to the great depression), Black Monday in 1987, and the Subprime Mortgage crisis in 2007 that resulted in a nationwide recession between 2007 and 2009. 

In what is regarded by some to be the greatest trade of all time, Jesse Livermore (“The Wolf of Wall Street”) made over $100 million by short selling the Wall Street Crash of 1929, equivalent to about $1.5 billion in 2020. Predicting the 1929 crash led him to be one of the most successful traders of all time, but this fame came at an immense cost. Newspapers labeled him “The Great Bear of Wall Street” and was publicly blamed for the crash and the subsequent recession. While he was an excellent trader, general public hatred and his failure to manage money properly led to him losing his entire fortune in less than 5 years. This, combined with failed marriage and lawsuits from mistresses, had a significant impact on his mental health. He ended up killing himself in 1940. His son and grandson also committed suicide later on. 

Not all trading success, however, results in such a bleak outcome. John Paulson, a hedge fund manager, and Harvard graduate, similarly predicted the market crash in 2008 and made an estimated $4 billion by shorting the U.S. housing market. The collapse of the housing bubble was the principal cause of the market crash. John Paulson was able to see the faults in the U.S. subprime mortgage lending market and effectively used credit default swaps to bet that a crash would occur in the near future. This trade is also sometimes referred to as the greatest trade of all time. 

Lastly, Paul Tudor Jones, a graduate from the University of Virginia, made an estimated $100 million from the stock market crash that occurred in 1987. On this Black Monday of 1987, the DJIA dropped in value by 22.6%: the largest percentage drop in one day in history. Paul Tudor Jones was able to predict this market crash and proceeded to massively short the stock market. After his trading success in 1987, PBS made a documentary about Jones called Trader. Weirdly, Jones has bought up every single copy of the documentary that has surfaced to prevent anyone from seeing it. On top of that, it is also removed anytime a copy emerges online, leading to speculation that it may reveal some insight into his secret trading strategies. 

In conclusion, you can see that throughout the history of our financial markets, people like Livermore, Paulson and Tudor Jones have cashed in some massive returns solely from one simple bet. However, keep in mind that some traders have done the complete opposite and lost massive amounts of money solely from one trade. 

Financial markets are a tricky place, black swan events like COVID-19 can potentially lead to massive opportunity while also leading way to potentially huge failures as well. 

Whether you’re thinking about making your own big trade or not, be sure to stay safe, wash your hands and we’ll see you next time. 

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