Friday, May 11, 2018

Hedge Fund Links ~ 5/11/18

Inside the strange odyssey of hedge fund manager Eddie Lampert [Vanity Fair]

Do hedge funds profit from public information? [SSRN]

Hedge funds that do the most research will post the best returns [CNBC]

Activist ValueAct sets sights on Citigroup [WSJ]

At short selling conference, hope springs eternal [Institutional Investor]

More hedge funds closed than opened in 2017 [Bloomberg]

Third Point seeks to launch blank check company [Reuters]

Time to go long David Einhorn [Forbes]

Hedge fund manager reportedly owes $1 billion in taxes [CNBC]

A sidelined Wall St legend bets on bitcoin [New Yorker]

The last days of Whitney Tilson's hedge fund [Institutional Investor]

Wednesday, May 9, 2018

What We're Reading ~ 5/9/18

Factfulness: Ten reasons we're wrong about the world [Hans Rosling]

Retail: is the beauty industry 'Amazon proof?' [FT]

The hyperfragmentation of retail and why the winners are digital ad platforms [Medium]

Attack of the micro brands [Medium]

Big beer struggles to tap into shifting consumer trends [Food Dive]

Morrisons' recovery is underway but is it in the share price? [UK Value Investor]

Behind the rise of activist short sellers [AFR]

Why T. Rowe Price likes Alphabet, Amazon, Facebook [Barrons]

A seed investing framework [Medium]

The Chinese unknown that's making Africa's phones [Bloomberg]

China wants its tech firms back, are CDRs the answer? [Bloomberg]

Why there's a worldwide shortage of vanilla [The Economist]

The Canadian king of New York: inside the rise of Brookfield [Bisnow]

At Uber, new CEO shifts gears [New Yorker]

Mark Zuckerberg on Facebook's hardest year, and what comes next [Vox]

Deep fiber: the next internet battleground [Deloitte]

CRISPR: the gene-editing tool revolutionizing biomedical research [CBS News]

Where's the invisible hand when you need it? [Stanley Druckenmiller]

The importance of high standards [Medium]

Tourbillon's Jason Karp on Invest Like The Best Podcast

Jason Karp, founder of hedge fund Tourbillon Capital recently appeared on Patrick O'Shaughnessy's podcast, Invest Like The Best, and he talked about a range of investing topics.  We posted extensive notes from the conversation with the full audio below.

On The Differences Between Public and Private Investing These Days

Years ago, 40-50% of stock market volume came from fundamental allocators.  Today it's less than 10%, so 90% of trading activity is coming from passive, quant, CTAs, risk premium captures, etc.  The vast majority of trading then is not coming from people who are concerned with 'what does this company do?' etc.  This leads to multi-day or even multiyear dislocations.

"The time for convergence between cashflows and the fundamentals of a business and stock price is usually 3-5 years at worst."

He said private companies tapping venture capital can now gain massive scale (i.e. Uber) without even going public.  Over the past 5 years there's been an 'explosion' of capital via VC's etc. 

"I believe the trends of why people allocating so aggressively privates is because the public markets have gotten harder. And people don't want to deal with daily, monthly mark-to-market."

He thinks there's a lot of edge left in private equity and a "more linear relationship between effort and outcome."  While that's applicable to public market investing, your time horizon has to be around 5 years.  But if you or your investors have a shorter horizon, it's less so.

On His Investment Style

"If I can find deep value, where the cashflows are growing, which is extremely rare, then that's the best case scenario.  My primary first variable is: 'are the cashflows growing?' Because growth solves a lot of sins."  If cashflows are growing, you can be wrong on the valuation.

They'll take the price today and instead of doing a DCF, he'll do it in reverse and try to figure out what's priced in today's stock and what would have to happen for it to be worth x.

He says that with deep value stocks, most have problems.  "All the cheap stocks have things that are very, very wrong with them.  So you're inherently in an adverse selection pool to try and find the frog that you can kiss that turns into a prince, when most of them are frogs and you're going to get warts on your face.  I just think there's an easier game to play."

On general investment advice he's learned over the years: "It's very important for you to keep your consumer hat on at all times, and remember that your gut instinct about how you feel about the product and experience... is so important."  He compared it a bit to a Peter Lynch-esque approach.  It helps you spot trends much earlier.

Talking Stocks

He thinks Facebook (FB) and Alphabet (GOOG) are surprisingly cheap given how entrenched they are in your everyday life.  He says FB's Instagram specifically is going to grow like crazy with businesses.  There's highly cyclical companies that are trading at around the same valuations, which is kind of crazy.

3 types of edge in market:  information edge, which is largely gone.  Analytical edge still exists and it's based on how you process information versus others.  Structural edge is where he sees the most opportunity: being able to stomach volatility via long-term holding etc. 

"There's more opportunity than I've ever seen in my career for duration... ever."  He says there's so many stocks that screen poorly and others that screen extremely well and are getting very crowded.

He thinks quality, safe, low volatility stocks are very overextended and then there's others that are more value and a little hairier... the disconnect between fundamental value and where the price is, is the largest he's seen in his career.

Industries To Watch For The Future

Karp feels health and wellness is one of the most interesting places to be doing research both in public and private markets right now.  The megatrend here is people focusing on less processed foods, not caring about brand, mainly just wanting quality products.  He thinks the trend is here to stay because once people find out about all the chemicals in their food and how it affects test animals or humans, there's no turning back.  And a lot of it will be demographics since millennials are so young and already focused on this.

He also feels cannabis is going to be one of the biggest industries in this country in the next 5-10 years.  He says it's much more valuable to be learning about this than crypto.  Many of these stocks will go to zero but many will also go up ten-fold.  As the tipping point has hit with legalization starting to happen, he thinks there will be alpha there.

On Hiring

He says that knowledge and passion are the two most important factors in hiring people.  The first is easy to find, the second's not.  And it's the more important of the two.  You want the people working for you to actually enjoy what they do. 

The third variable is emotional intelligence and it's the hardest to find.  He thinks it's more important than IQ.  It's about the ability to control yourself, have empathy, see other points of view, and rapidly change your opinion.  In the investment industry, these are crucial. 

He hires a lot of athletes due to the competitive nature (something we've heard from Julian Robertson before), and people from military backgrounds due to training.  He's also found mothers to be spectacular due to their perspective on managing people and conflicts.  Instead of looking at a resume, look at what a person has been through or actually done.

Embedded below is the podcast interview with Tourbillon's Jason Karp:

And if you haven't already, be sure to check out Patrick O'Shaughnessy's podcast: Invest Like The Best.

Third Point's Q1 Letter: United Technologies, DowDuPont, Lennar & Dover

Dan Loeb's hedge fund firm Third Point is out with its first quarter letter.  During Q1, they returned -0.6%.  The letter talks about their new stake in United Technologies (UTX). 

They're pushing for a split-up into 3 companies: Otis, CCS, and an aerospace company.  They see this driving $20 billion of excess value (>20% of market cap) due to the fact that all three standalone companies should trade at higher multiples based on equivalent peers. 

They write, "Otis peers Kone and Schindler trade on average at 15x forward EV/EBITDA.  CCS peers, Allegion, Ingersoll-Rand, and Lennox, trade on average at 13x forward EV/EBITDA.  The remaining aerospace company would be the only liquid, US large-cap aerospace supplier other than TransDigm, which trades at 15x forward EV/EBITDA."  They also note though that management seems 'less open' to a three-way split than shareholders might want. 

Third Point also provide updates on their positions in DowDuPont (DWDP) and Lennar (LEN).  The former is one of their largest positions and they see a discount to intrinsic value that has widened.  The latter they view as the best homebuilder in the industry with the best set of veterans.  They also updated their Dover (DOV) position, noting the event-driven nature of the company now. 

You can read Third Point's full Q1 2018 letter embedded below:

You can download a .pdf copy here.

Tuesday, May 8, 2018

New Graham & Doddsville Issue: Mauboussin, Greenwald & More

A new issue of Columbia Business School's Graham & Doddsville newsletter has been released.  It features interviews with Professor Bruce Greenwald as he retires, and Mark Cooper of First Eagle Management.  It also features a conversation with Michael Mauboussin of Blue Mountain Capital and Tom Digenan of UBS Asset Management.

Lastly, it also interviews upcoming fund launch: Rishi Renjen's ROAM Global.  Prior to launching, he worked at Maverick Capital, TPG-Axon, and Glenview Capital.

This time around, Graham & Doddsville also includes student investment pitches from the Pershing Square Challenge. 

1st place this year was a short of Stericycle (SRCL), 2nd place was a short of Credit Acceptance (CACC), and 3rd place was a short of Spotify (SPOT).  The issue also showcases pitches on short CH Robinson (CHRW), short Harvey Norman, and long Digicel credit.

Embedded below is the latest issue of Graham & Doddsville:

You can download a .pdf copy here.

And if you missed it, be sure to check out the recent past issue that includes interviews with Lee Cooperman, David Poppe, and John Harris.

Monday, May 7, 2018

Warren Buffett, Charlie Munger & Bill Gates Interview

Today on CNBC, Berkshire Hathaway's Warren Buffett was interviewed by Becky Quick and talked about a range of topics.  Charlie Munger and Bill Gates later joined the conversation.  Here's some takeaways and quotes:

Warren Buffett's Thoughts

On the market: Stocks aren't in a bubble now.  Though said some private deal valuations are getting high and it's harder to find bargains these days.

On the economy:  Thinks the economy has picked up steam. "Yeah, I see a lot of numbers (from all BRK's businesses).  Business is generally pretty strong."  He cited railcar loadings, etc.  Also notes you've seen some inflation.

Says he thinks it's hard for unemployment to really go much lower as they have a ton of jobs available.  "If a resource is scarce, prices go up."  Says certain job lines are much harder to fill these days (construction cited specifically).

On potential trade wars:   "I don't think we will have trade wars of significance."  He thinks there will be trade movements though.  Says a trade war with China would be negative for all involved as they have a common interest.

On Amazon / Jeff Bezos:  Still laments not buying it in the past, says what Bezos has done is incredible.

On moats: Cited iPhones, Costco, and Elmer's glue as examples

On Apple: Says he doesn't have to do anything because the company will buyback so many shares, so his ownership stake will go up naturally.  He recently bought a ton more AAPL shares.  Said he currently owns around 5% of the company but he'd like to own 100% of it.  The consumer behavior was the main driver behind his ownership, as the device has woven itself into consumer's daily lives and minds, and it's a very useful product.

On owning banks:  Has owned one in the past and loves the banking business but doesn't want to now because of the bank holding co act.  Says Wells Fargo (WFC) was slow to act in addressing bad actions but still has a fundamentally solid business.

On bitcoin:  Compared it to the tulip bubble years ago.  Says it's a non-productive asset and just sits there.

On autonomous vehicles: 'Net it will be bad for the car insurance industry if autonomous vehicles become the norm.'  It will be very hard to pick winners in 5 years.

On reading he recommends, Buffett again pointed to Chapter 8 of The Intelligent Investor.  But this time around he also recommended Chapter 4 of Steven Pinker's new book, Enlightenment Now.

Ends his interview by reiterating: "It's very important in life to associate yourself with people that are better than you."

Charlie Munger's Thoughts

On the biggest thing he and Buffett have disagreed on:  Munger wanted to buy the French stake in Costco.  Buffett didn't and says he should have.  "Charlie really wants to wait for the fat pitch."

Munger said, "There's a million ways to be irrational." And while Berkshire makes mistakes, they make them far less frequently than others and he thinks that's their main advantage.

Munger noted: "The Munger family is invested in China substantially.  Since about 14 years ago, and I did it because I respected the man that was going to do the investing (Li Lu) and it looked undervalued and the companies looked very strong."  Today, he says the best companies in China are still cheaper than the best companies in the US.  "I don't think it'd be all that hard for people to find 4 or 5 companies in China to invest in."

He also said he wished Berkshire owned more of Apple.  He likes that it's reasonably priced and strong, a 'very desireable combination' as well as 'very intelligent management.'

On bitcoin, Munger called it worthless artificial gold.  "It's a scumball activity."

On potential trade wars with China: "It would be insane for them not to work together."

On what he's been reading recently:  A book by a Chinese economist, though he didn't mention the name specifically.

Bill Gates' Thoughts

He said that "T-bills set the rules" and he pointed out that since the 10-year yields 3%, you've got that hurdle to get over by taking more risk.  He says asset class returns will be lower over the next 10 years.

On bitcoin: There's some really good technology as far as sharing databases etc, but the coin itself is a speculative thing.  He received some for his birthday a while back but sold it, so doesn't own it now.  Called it a greater fool investment, and said he'd short it if there was an easy way to do so.

Gates says there are tech stocks that are undervalued, but you're going to get very high variance as the winner in some markets gets a high share of the profit pool.

He owns a ton of Microsoft (MSFT) obviously, but revealed he has a 'fantasy stock portfolio' of companies he thinks will do well but doesn't own.  "The top tech companies have a very strong share of the profit pool right now."  He obviously declined to reveal names.

Gates also echoed Munger's China sentiment that it looked attractive.

On tech and data privacy, thinks regulation is inevitable.  But the big companies will handle that.

On Tesla (TSLA): thinks they have a great product but a very high valuation and a lot of competition coming.  Says autonomous and electric vehicles are coming simultaneously and thinks 15 years from now things will be very different.

On what he's been reading recently:  Hans Rosling's book Factfulness.  Says it helps you think about a lot of different things in the world.