Columbia Business School Graham & Doddsville Newsletter: Interview With JANA Partners

The Winter 2013 issue of Columbia Business School's Graham & Doddsville is out and it features interviews with JANA Partners' Barry Rosenstein and Scott Ostfeld, where they talked about their investment style.

Also featured in the newsletter:

Daniel Krueger of Owl Creek gives an intriguing interview on investment process and pitches Leap Wireless (LEAP).

Frank Martin of Martin Capital Management on his top-down approach and the importance of limiting losses.  He also has two books, Speculative Contagion and A Decade of Delusions. 

Russell Glass of RDG Capital on his private equity oriented style and the influence of Carl Icahn.

Jon Friedland of Amici Capital on how he finds investment ideas.



Highlights From JANA Partners' Interview

On important lessons Rosenstein's learned:  "But from Asher (Edelman), I probably learned more important skills.  These had more to do with taking risks while not blinking and remaining fearless.  I give him a lot of credit.  He wasn't the most technically savvy guy, but he had great instincts and he never showed fear, even if he felt it at times.  That was important lesson."

After experience in private equity, Rosenstein founded his hedge fund and his first investor was Lee Cooperman (of Omega Advisors).  JANA started with $17 million and by 2007 it had over $8 billion under management.


On how activist investing impacts portfolio construction:  "Our highest conviction ideas are the ideas where we have the most impact on the outcome. Those are our activist ideas which tend to be our largest and highest returning posi- tions in the portfolio. You’re also, frankly, doing a lot of work on these posi- tions, so you want to bene- fit from that work by mak- ing it a large position. So our portfolio can be a bit more concentrated."


On JANA's approach:  "In our approach, we're extremely disciplined. I don't want to be only an activist because then you force things and the quality of your ideas is diluted. We don't ever have to be an activist here. We can just invest in event-driven situa- tions. For something to be an activist play, all of the criteria have to be present for us. We came up with this rubric we call V-cubed, which is Value, Votes, and Variety of ways to win. Basically, we have to be comfortable buying in at a valuation that provides us with a margin of safety, irre- spective of any activism we will attempt to initiate and that may be unsuccessful. We have to be comfortable that if it really came down to a vote that we would have shareholder support. And variety of ways to win – you want to make sure that there's more than one lever you can pull in case circumstances change.  In my experience, if you have all three of those checked off, you're guaranteed victory.  If you're missing one of them, there's a good chance you're going to lose.  We're extremely judicious."


On mistakes Rosenstein's learned from: "I’ve made so many mistakes I can't even think about it. I'll give you one thing that's not an investing concept, but something that I've come to realize that might be helpful. Being po- lite to people and treating people with respect is good business. It's not just a good thing to do, it actually inures to your benefit as well."


Advice from Ostfeld:  "A hypothetical 'A' in the investing world, the point at which you are performing at the highest level, only requires being right more than half the time. The truth is investing can be very frustrating, diffi- cult, unpredictable, and gru- eling. So you should only pursue the career if you have the passion, if you’re intellectually curious, and if you’re committed to it, be- cause at every turn, you can be very quickly humbled. That’s the nature of the business."


Embedded below is the Winter 2013 issue of Columbia Business School's Graham & Doddsville newsletter:




For past worthwhile interviews from the newsletter, we posted up Joel Greenblatt's interview in Graham & Doddsville as well as interviews with Jim Chanos and Julian Robertson.

Distressed Investing Panel: Dan Loeb & Daniel Krueger (CIMA Conference)

Continuing the series of notes from the CIMA conference (Columbia Investment Management Association), we turn to the distressed investing panel with some featured comments from Third Point's Dan Loeb and Owl Creek Asset Management's Daniel Krueger as well as some answers from Bruce Berkowitz (Fairholme Capital).

Distressed Investing Panel

Dan Loeb's Comments: Distressed investing applies to a process in securities that are not performing, it starts with a valuation of the enterprise- they buy anywhere in the capital structure. When they find one they like, they “jump in with both feet.”

In Q4 last year, it seemed that the concerns about the Europe crisis were well discounted in the market, and the US data was getting better. As January progressed, tail risk appeared off the table, and valuations of stocks were cheap. Administration realized that either beating up on the banks, or allowing them to grow, it was better to let them grow.

He got much more bullish in Jan, especially financials (Third Point has increased net long exposure). Bought Unicredito rights. Tech is ridiculously cheap- owns AAPL, GOOG, CSCO. “I’ve made more money going with the along with the crowd than against it.” Still maintain shorts, exposure went from 20% to 40% net long. Still long-tail hedges in case they’re wrong. Portuguese debt looks cheap. You can see Loeb's rationale for owning UniCredit and more in Third Point's investor letter.


Daniel Krueger's Comments: Besides just valuation, they look at each situation totally differently. Most situations require different skills than just valuation.

In distressed, you don’t need to know what is going to happen, for example, no one would have predicted with certainty that MF global was going to happen. You wait for situations to emerge. WAMU is an example- anyway that was an expert on WAMU the day before it was seized by the FDIC knew nothing now, it was all changed.

Distressed in Europe? 3% default rate vs. 2% in US. US high yield market current prices implies 7% default rate in the US over the next 5 years. (This seems ridiculously high). Europe has different rules than the US Chapter 11 rules. Look at process, not just outcome. Distressed is very binary. Your investment in Fannie for example at 5 cents on the dollar could go to zero. Assuming that is a bad decision may be wrong, if your process is right. The upside to these deals could be 20x, so don’t just look at outcome to decide if it was right or not, win or lose.

Idea: Seat Pagine Gialle SpA in Italy, yellow pages company. Been crushed all year, easy to hate yellow pages business, but has 40% EBITDA margins, no CAPEX, true monopoly, cheap price. Enough FCF over 4 years to repay the entire capital structure.


Bruce Berkowitz's Comments: “Shows you what kind of year I had last year, I didn’t think I WAS a distressed investor!” We often underestimate how important the price you pay for an investment; it may be 50-75% of the investment process, what price you pay for it.


Q&A Session:

1. Chrysler situation does not affect how they invest today.

2. How has Loeb’s process evolved? Started out in a single office, by himself, trying to raise money early, picked stocks during the day, and did bookkeeping at night. Now he has a 60 person staff, he has had to create an organization. Totally transparent, totally collaborative, defined investment framework. Research process defined. Learning turns on his team. He likes “high performance activity” like skiing, surfing, ran a triathlon. Something youthful about it. Had former CIA agents teach them deception detection. Always learning. It will naturally find itself into your investment process.

3. Tail hedges? About 50-100 bp of overall fund, that would have 10-20-30x payoffs if they materialize. Out of money calls on oil, for example, used to hedge against war in Iraq. Australian dollar put options, hedge against things slowing down in China.

4. When do they cut their losses? Berkowitz says if the facts tell you you’re right but the price tells you you’re wrong, you give yourself a lot of time. He basically never uses stops, he goes for years. Ask yourself “what am I missing?” Krueger says same thing – has never cut losses. Loeb: we may realize management is not as good as we thought, in case of YHOO, we try to change their behavior, or we just move on. Earnings misses- when stock falls, is the value impaired or our analysis was wrong. He sells at a loss often.


For the rest of the notes from the CIMA Conference, head to these posts:

- Dan Loeb: Lessons He's Learned as an Investor

- David Einhorn Question & Answer Session

- Bruce Berkowitz's Basic Checklist for Investing & What He's Learned Now

- Long/Short Equity Investing Panel (Whitney Tilson)

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments