In 2007, someone made a huge amount of money betting against the housing market. You might be surprised to learn who it was. Follow the steps below to find out. (Note: this article is intended for educational purposes only. It is not advice on investing or trading, and it is not supposed to replace the advice of a competent professional financial advisor.)
Identify The Major Players
First, you need to identify the major players in the betting. The individuals and organizations that placed the bets and were therefore affected by the outcome of the market movement. In the case of mortgage-backed securities, for example, it was typically the major banks and hedge funds who bet against the housing market. (Note: there are exceptions to this rule. For example, the Federal Housing Administration and many Federal Home Loan Bank presidents made a lot of money by purchasing mortgage-backed securities during the height of the real estate boom in the 2000s. But these are the kinds of players you’re most likely to encounter if you place a bet on the market movements of securities that are tied to a real estate market or a specific industry.)
Track Their Pins
Next, you need to track the pins for these major players. Simply enter the names of the individuals or organizations in the “Who Made Money” box on the CFTC’s website, and the website will provide you with all the information you need about their positions and actions regarding the housing market. (Note: you can also find this data by looking up the traders or positions in a professional stock-picking/investing tool like My Watchlist or Alpha Architect. A good investor/trader should have multiple entries for each individual or organization, in order to track their changes in investment strategy as the market moves.)
Understand The Strategy
Once you have a good understanding of who the major players are and what their strategy is, it’s time to move to the next step. Remember: these are the people or organizations that made a large amount of money by betting on the direction of the housing market. You need to understand what made them so wealthy and determined to make even more money by betting against the market again. (Note: this step is only necessary if you are trying to replicate their strategy. If you are simply watching the market and hoping to profit from short-term movements, you do not need to understand the strategy behind why these people made so much money in the first place. You just need to follow the general rules of investing.)
Examine The Underlying Indicators
Now that you know who made a lot of money betting against the housing market, it’s time to examine the indicators that were used. You want to see what patterns and metrics they used to determine their betting direction. Were they counting down the days to the peak of the market? Were they keeping track of the number of foreclosures and short sales? Were they analyzing the health of the labor market or the employment rate? The answers to these questions will determine how successful or unsuccessful their strategy was. (Note: keep in mind that there are no exact figures for these questions, so you will need to look at trends and patterns rather than comparing exact numbers.)
Determine Whether To Copy Their Strategy
Depending on your own particular situation, you may or may not want to follow their exact strategy. If you are relatively new to investing or trying to decide which direction to take with your existing brokerage account, it may be wise to take the more conservative route and avoid any serious changes to your asset allocation at this time. Sticking to the safe strategy may also help you achieve your long-term financial goals faster than if you adopted a more aggressive approach. (Note: all else being equal, the more aggressive you are with your investments, the more you’ll likely earn. However, this comes with a high degree of risk since you may lose a large percentage of your assets if you’re wrong about the market’s direction. Past performance is no guarantee of future results.)
Consider The Psychology Behind The Trade
Finally, you need to consider the psychology behind the trade. The reason why these people made a fortune by shorting the market is because they had the smarts to realize that the housing market was headed for a correction. They placed bets on this assumption, and when it came true, they made tons of money. (Note: a short sale occurs when an investor or group of investors sells a security that they don’t own, in order to profit from a price drop. In other words, they bet that the price of a security will fall. When a short-seller’s assumption that a security will drop in value is correct, they make a large amount of money. Some financial experts state that short selling is as safe or safer than investing in traditional longer-term options or stocks. Short selling provides some fascinating options for those interested in psychology and how people behave when faced with uncertainty. For example, did the shorts use stop-loss orders or protective stops in order to limit their downside risk? Could they have turned a huge profit if the market had only gone up instead of down? While it’s always interesting to speculate about why people act the way they do, in the end, you can’t control the outcomes of these types of bets. All you can do is follow the rules and utilize the information that’s available to you. (Note: this article is intended for educational purposes only. It is not advice on investing or trading, and it is not supposed to replace the advice of a competent professional financial advisor.)