In The Greatest Trade Ever, Wall Street Journal columnist Gregory Zuckerman details how Paulson pocketed $6 billion as his firm made $20 billion betting against the boom from mid-2006 through early 2009.

These returns included $4 billion for Paulson personally in 2007, which Zuckerman describes as the single-most lucrative payout in history.

While few, if any, will ever approach Paulson's staggering accumulation of wealth, Zuckerman says there are some timeless lessons for the rest of us, including:

Have the courage of your convictions: Paulson stuck by his thesis even as the trades didn't initially pay off in 2006, myriad housing "experts" told him he was on the road to ruin, and seemingly all of Wall Street's machinery was working against him. And when the bets starting paying off in 2007, Paulson didn't book profits and run as many advised -- and some clients begged. After shorting subprime in 2007, Paulson effectively doubled down in 2008, shifting some of his firepower to bets against Fannie Mae, Freddie Mac and Wall Street firms knee-deep in the MBS market.

See the forest for the trees: As an outsider to the mortgage world, Paulson was able to see the carnage coming that those on the inside missed. The ability to think independently and see beyond what the "experts" are saying is critical for individual investors because more financial bubbles are likely, Zuckerman says.

Hindsight being 20-20...

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"Disregard them," says Barry Ritholtz, CEO of Fusion IQ, who notes the existing home sales number was juiced by sales of cheap condos and various government programs. Meanwhile, the Case-Shiller results were below expectations.

We are "not even close" to a bottom in housing, says Ritholtz, who estimates national house prices remain 15-20% overvalued, based on the traditional metrics of: median income-to-median sales price, the cost of owning vs. renting, and housing stock as a percent of GDP.

"Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels - that's how you know the bottom is in," says the blogger and Bailout Nation author. (Full disclosure: I edited Ritholtz's book and was paid for my contributions.)

The likely best-case-scenario for housing is...

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Are we on the verge of total economic collapse?

Don't laugh. The french firm Societe Generale thinks so.

The brokerage firm has put the fear of God in clients recently by predicting that developed economies and markets are going to collapse under a monster debt load and that gold is going to soar to $6,000 an ounce.

Fortunately, not everyone feels that way.

Many on Wall Street, in fact, have suddenly gotten quite bullish after missing a lot of the extraordinary 65% rally we've had since the lows of March. Hopefully, these folks--the "V-shaped recovery" crowd--are right, and the bad news of the last couple of years will soon be a distant memory.

Aaron and I are skeptical, though. The aftermath of debt-fueled financial crises like the one we went through usually lasts for many years, if not decades. Japan has been struggling to right its ship since its own bubble burst in 1990, and the country still isn't growing strongly again. (Japan's stock market, meanwhile, trades at a fifth of its 1989 high).

A argument broke out this summer when house prices unexpectedly began to rise again.

"Recovery!" shouted the bulls, who declared that the two year housing crash was over and prices would begin a long rise back to old highs. "Head fake!" shouted the bears, who attributed the summer price rise to seasonality and predicted that the housing crash would resume this fall.

Who was right?

We don't know yet. The main house-price index, Case Shiller, appears several months after the fact, so the most recent national data we have is for August. As of then, house prices were still rising.

Our guest Dan Alpert of Westwood Capital sides with the bears.

Why?

From The Business Insider, Nov. 12, 2009:

In the end, bubbles are bubbles no matter where they're blown.

China Daily: Thirty-year-old Luo Yan and her husband raced to complete the purchase of a three-bedroom apartment in Shanghai with the help of an 800,000 yuan ($117,000) mortgage. The amount they borrowed was the maximum they qualified for.

"I am afraid that if we don't do something now, we will certainly miss the boat," Luo said.

More coverage from The Business Insider:

• China Pushes Massive $12 Billion Bond Issue to Cool Asset Bubbles
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Sales of previously owned homes rose 11.4% during the third quarter while median prices fell 11.2%, according to a report released Tuesday by the National Association of Realtors. 

"The market is clearing," says our guest, Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. "In a lot of cases the best sales are coming in areas where the price declines have been the most severe."

Not surprisingly many buyers were lured into the market by falling prices, with so-called distressed sales (foreclosures and short sales) accounting for 30% of activity, according to the NAR. "When the pricing metric gets so enticing, it stimulates demand," she tells Aaron and Henry.

Just seasonal demand? While some bears argue recent sales gains reflect seasonal warm-weather buying, Sonders doesn't see another giant leg down in prices coming. "It's hard for me to envision a scenario where across the board we're looking at another 25% to 30% drop in housing prices," she says.

Of course the real question here is: What's your real mortgage rate?...

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Will stocks continue to rise like a phoenix from the ashes of the financial crisis? To be honest, your guess is as good as anyone else's.

What is clear: low interest rates around the world seem to be fueling another asset bubble driven by Asian investors, as The Wall Street Journal reports.

Jeff Matthews, founder of hedge fund Ram Partners, says "cheap dollars are going to attract more money" which means U.S. "real estate is a wonderful opportunity."

Unlike the housing bears, Matthews isn't too concerned about the "shadow inventory" of homes for sale and believes there's more-than ample demand for housing, especially with construction remaining at such relatively low levels.

Turning back to the stock market, Matthews says many stock values have gone from deal of the century valuations in March to prohibitively expensive. "Fundamentals have to catch up with valuations," says the value investor and author of Pilgrimage to Warren Buffett's Omaha.

However, "the good news is better than the bad news right now," Matthews declares, citing...

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From The Business Insider, Oct. 29, 2009:

While the exact timing of an extension for the home buyer credit remains to be seen, the extention itself appears to be a done deal and it could come within a week.

First time buyers will continue to enjoy $8,000 credits from the government while buyers who have lived in their house for five years will also be able to receive a $6,500 credit if they buy a new house.

One of the reasons housing bears might turn out wrong is that the game is being rigged in the bull's favor, whatever the undesirable cost to the U.S. taxpayer and financial system. We have to admit that it's politically unpalatable not to support housing, even if we oppose the measure.

Reuters: "There has been general agreement by a significant number of senators, Democrats and Republicans, to get this done," Reid, a Nevada Democrat, said on the Senate floor. Nevada has been hard-hit by the bursting of the housing bubble.

The chamber's top Republican, Senator Mitch McConnell, also said most senators support the measure. "I certainly share his view," McConnell said.

While extending the credit enjoys widespread support, its fate is caught up in a spat between Reid and McConnell over unrelated issues.

Reid wants to attach a bill to extend the homebuyer credit as an amendment to legislation to lengthen insurance benefits for unemployed workers.

The Reid spokeswoman said the unemployment insurance measure could get pushed to next week as lawmakers try to resolve differences over unrelated issues, which would delay consideration of the homebuyer credit extension.

"We will get this extension passed," she said.

More coverage from The Business Insider:

• Why Investors Are Going Wild for Brazil
• Investors Are Losing the Forest for the Trees

The economy is still the pits yet stocks are on a tear.  What's an investor to do in these confusing times?

John Mauldin, president of Millennium Wave Advisors, admits the average investor doesn't "have as many good choices" as in the past.

Contrary to what "experts" have told the public for years, now is not the time for buy and hold, Mauldin says. "You can be a trader. You can ride the wave, I've got no problem with that but I don't think you want to buy something and hold it for five years."

That's because he thinks another correction is coming in the not so distant future.

Mauldin, who writes the Thoughts from the Frontline e-letter, does think there's money to be made in real estate.  With prices so depressed in many markets, he says buying property on the cheap and renting it "is a prescription for making money."

I think we might have heard that one before... 

Are we on track for a repeat of irrational exuberance?

With the stock market up more than 50% since March and the Standard & Poor's Case/Shiller Index on the rise for the last three months, it's a worry, says Yale Professor Robert Shiller. "Somehow we got into this really speculative mentality and I don't think we're out of it yet."

The author of Irrational Exuberance and Animal Spirits characterizes the stock market rally as an "amazing rebound" without much historic precedence, "you have to go back to the Great Depression to see such a turnaround in the stock market."

According to his cyclically adjusted P/E valuation model - stock price divided by average 10-year earnings - stocks are overvalued today, but "not massively overvalued." 

The market's rebound isn't likely to be derailed by valuation in the short term, Shiller says, but if one looks to the classic bear market rally of 1933-1937 as a guide, stocks may eventually crater as they did then.