5 Worst Wall Street Trades of 2012


The year is not quite over and this will be published before it is, so there is still only one answer to which five trades were Wall Street’s worst of the year: who knows. For example, you might be double short the Mayan prediction that the world will end on December 21. That could still go bad and leave you feeling both stupid and dead.

Or, if you did really well in seventh-grade civics, you might have bet that our elected officials would selflessly put country first and sort out the fiscal cliff. If you are long that trade, you might consider a timely short if one can be purchased at any price. 

But, here are five pretty good candidates for the worst Wall Street trades of 2012:

1) Facebook at the $38 IPO Price. The price today is about $26.70 for only about a 30% loss, which would not make it the worst in financial terms. Why does it deserve the number one ranking? Because you would have boasted to your friends that you had gotten an allocation then hidden in shame for the rest of the year. At one point, it was down more than 50% and that is a lot of stupid.

2) The World is a Risky Place I. You're saying to yourself ... It is an election year and we could end up with anyone from Michelle Bachmann to Barack Obama. Plus the whole fiscal cliff thing. No risk to be taken in my portfolio. Long the GMO Treasury Bond Fund (up only 0.08% YTD) and short the GMO Emerging Debt Country Fund (up 23.8%) for a loss of about 11.5% in what is supposed to be the safe part of the portfolio. Whoops, the Federal Reserve Board bought almost all the Treasuries keeping rates low and yield-hungry pension plans bought even Mongolian bonds bringing those rates down. Write it on your hand: if rates go down bond values go up and vice versa.

3) The World Is A Risky Place II. You have to be pretty slick to trade the VIX and, if you are, you probably don’t even know what it measures, but who cares? You feel slick. A bet on high volatility in 2012 has lost you about 80% so far. According to a well-known investment advisor, “the Chicago Board Options Exchange Market Volatility Index (“VIX”) is an often-misinterpreted measure of the implied volatility of S&P 500 index options. The VIX represents the annualized expected movement in the S&P 500 index over the next 30 days. For example, a VIX of 15 implies an expected movement up or down of 4.33% (15% when annualized) in the S&P 500 Index over the next 30 days. The long-term average for the VIX is slightly above 20 and the VIX traded above 20 for 88% of the trading days in the second half of 2011. Going into 2012, many traders thought heightened volatility would persist in 2012. However, the VIX closed above 20 only 20% of the days in 2012, which was also the first year since 2006 when the VIX never closed above 30.” Now you won’t get it wrong next year.

4) What Could Possibly be Worse than a Small Greek Bank? Hard to imagine any investment much worse than mismanaged, corrupt banks in mismanaged, corrupt countries, right? And smaller ones have to be worse than almost anything, right? I am going to short those. Wrong! Small cap Greek banks are up 85% since June 1, bringing the YTD return to 29%.

5) Long Latté, Short Houses. We have been in a housing crunch for what seems like ever and it nearly took the whole world down with it. Definitely short that. No brainer. And where does the mortgage money go? A daily latté for sure. I’ll buy coffee beans. Oops, coffee beans are down 37% and home builders are up 73%.

The shared attributes of all these trades are that they sounded good but made you feel really dumb and sometimes feeling dumb is worse than losing a few dollars. Don’t feel too bad though. You are not alone. Hedge fund guru Hank Paulson has gotten it just about this wrong in 2012 and hedge fund managers get paid 2 and 20 (2% management fee and 20% of the profits).

For 2013, try a leveraged long stupidity fund. It works almost every time.

Here is a feel good thought for 2012. You might have made a political contribution to either party that changed no outcome and might end up being stolen. Uh oh, you didn’t do that did you?