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John Paulson’s Paulson & Co had a rough time in the third quarter. The hedge fund, while named a favorite of the exclusive millionaires’ club Tiger 21 (read about it here), posted some less than impressive numbers recently.

Paulson and Timing

Paulson’s largest hedge fund lost 47% in the first nine months of the year and his other funds didn’t fare much better (see more on Paulson’s 2011 Performance). Paulson himself said later that he shouldn’t have “been running so exposed without the proper hedges in place,” but that was in October and the damage had already been done (read about it here).

Paulson’s optimism wasn’t mislaid, it was just mistimed. Unfortunately, he missed out on much of October’s rally after responding too abruptly to the big losses of August and September, selling out of positions like JP Morgan Chase (NYSE:JPM). Paulson had owned 18.7 million shares of the company, in a position worth roughly $252 million, at the end of the second quarter. Paulson sold all of it in the third quarter. Since then, JPM has returned 9.51% through November 15. Paulson also sold out of State Street (NYSE:STT), which has returned 27.49% from the end of September through November 15. He had closed the second quarter with 2 million shares in the company. Paulson sold out of his NYSE Euronext (NYSE:NYX), Comcast (NASDAQ:CMCSA) and BMC Software (NASDAQ:BMC) positions as well.

Paulson Reduces his Position in Gold, Placing Bets on Gold Companies Instead

John Paulson appeared to be less confident in gold as a commodity and more bullish on gold companies in the third quarter. He decreased his position in SPDR Gold Trust (NYSEARCA:GLD), going from 31.5 million shares at the end of the second quarter to just 20.3 million shares at the end of the third quarter. Paulson also decreased his position in Anglogold Ashanti (NYSE:AU), selling 3.2 million of the 39.9 million shares he had in the company at the end of the second quarter. In turn, Paulson increased his holdings in other gold companies – specifically Rangold (NASDAQ:GOLD), Agnico-Eagle (NYSE:AEM) and Iamgold (NYSE:IAG).

Paulson and the Finance Industry

John Paulson also reduced his holdings in several financial companies. Specifically, Paulson cut his holdings in Capital One Financial (NYSE:COF), Citigroup (NYSE:C), Hartford Financial (NYSE:HIG), Wells Fargo (NYSE:WFC) and Suntrust Banks (NYSE:STI), but not enough to dethrone them from the list of top ten holdings in his portfolio.

Paulson’s Bullish Bets

Large purchases by Paulson in the third quarter include Nalco Holding (NYSE:NLC), News Corp (NASDAQ:NWSA), AMC Networks (NASDAQ:AMCX) and Interdigital (NASDAQ:IDCC). Paulson’s most bullish bet in the third quarter was a $340 million stake in Motorola Mobility Holdings (NYSE:MMI), which Google (NASDAQ:GOOG) is currently in the process of acquiring.

We wouldn’t count Paulson out. He hit two homeruns in the past 5 years. He made $5 billion in 2010. We actually like his stock picks. We believe gold miners and financials are undervalued. This may not be the best time for short-term investors to invest in financials, but we believe this is a golden opportunity for long-term investors to buy a portfolio of mega-cap banks at a significant discount.

Disclosure: I am long C.

Source: Billionaire John Paulson Shakes Things Up In The Third Quarter