Credit: Shutterstock photoWe've talked a lot about the oil trade. And we talked about the clustering of some of the best investors in the world in the energy sector, in the last quarterly SEC filings. As usual, they have been moving into an area that many have been running out of.
Today we want to talk about the power of being in the right place at the right time. And how it's one of the defining attributes of the investors that have the best long term track records in the world, and have amassed the greatest wealth in the process.
Within that group of investors that have been bottom-fishing in the energy sector, billionaire David Tepper had about 12% of his equity portfolio in energy stocks at the end of last year. And he's added two more stocks in the energy sector this year.
Buffett has famously said he wants to be greedy when others are fearful. Tepper says the worse things are, the better they get. He says "when things are bad, they go up."
Tepper has the single greatest track record of any hedge fund manager alive over the past 20 years. He has done 40% annualized since the inception of his hedge fund more than 20 years ago (before fees). To put this performance in perspective, that grows $12,000 to more than $10 million.
What's important to note is that Tepper has faced significant drawdowns through that 20-year period. He was down 40% or more many times. And he achieved his 40% annualized return while losing money in four out of the 20 years his fund has been in existence. In three of those years, he lost more than 25%.
Probably surprising to most, Tepper attributes his success to these drawdowns. He says “we are consistently inconsistent, and it’s one of the cornerstones of our success”.
Given the volatility of Tepper’s returns, many of you are probably find it hard to understand how he is considered the best investor alive over the past 20-year stretch. In fact, by returning an annualized 40% over this period of time, he has personally amassed more than $10 billion, and he’s done so at the relatively young age of 58.
This story of drawdowns goes squarely against the conventional thinking of investing. The standard accepted adage is “take your losses quickly and don’t let a profit turn into a loss.”
This sounds great in theory (as most investment adages do). In practice, it doesn’t work. In fact, most times it works in the exact opposite way. People sell when they should be buying, and they buy when they should be selling.
Tepper is a deep value (with a catalyst) investor. He buys beaten down, depressed stocks, but ONLY when there is a catalyst. And he likes to be the first fund on the street that invests in a sector or asset class when it is down.
He only looks for asymmetric investments. These are investments with limited downside and unlimited upside. And because of this, overtime, he has had many stocks on his books that have doubled, tripled, quadrupled or more.
When you invest this way, deep value and looking for stock that can produce multiples of returns, you might not have the most consistent performance but you are setting yourself up to have the best. Tepper is the perfect example. After every year he lost 22% or more (which occurred in 3 of the 4 years he lost money), he came back with huge returns. Most of this big bounce back came from simple patience.
Let's take a look at these years when Tepper was down, and then the subsequent bounce-back.
One of his worst years came in 1998. He was the first fund to dive into Russian and Emerging Markets after the Russian default. Tepper was too early. And his fund lost 30% in ‘98. The next year, Russia and Emerging Markets recovered and he made 76%.
Another turbulent time for Tepper came in 2002. Again, he was one of the first hedge funds to jump into telecom stocks and bonds after the WorldCom bankruptcy. And again, he was too early. He lost more than 24% in ‘02. Tepper bounced back in 2003 with his biggest return ever – up 180%.
Now, let’s move forward to 2008. Tepper thought the economy was better than it was, and he aggressively purchased tech and financial stocks. Again, he was too early and he lost 26% in 2008. Then in 2009 at the depths of the great recession, he saw a catalyst come in – the Fed and the U.S. government backstopped the banks from falling. The Treasury put out a white paper in early 2009 on this topic. Tepper was the first, and this time the only, fund buying financial and bank stocks in early 2009. And he bet big. The market hit its bottom in March of 2009 and Tepper put up another huge year, a 165% return.
Again, he was long and strong going into 2011, believing that the Fed’s QE would help the economy and drive the stock market higher. Again Tepper was too early and he lost money in 2011.
But of course, he came back in 2012 and in 2013, returning 34% in 2012 and 48% in 2013. Tepper made the bulk of his profits in 2012 and 2013 on beaten down sectors like Airlines, Banks and Insurers, diving into the most depressed sectors where he sees value, and then patiently waiting for these assets to reprice.
Remember, the goal isn’t to have the most consistent returns. The goal is to have the biggest returns and let them compound overtime. That is how the world’s richest billionaire investors became billionaires.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
