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.

Intangibles of Building a Great Hedge Fund: Ken Griffin, Alex Klabin, Jason Karp (Milken Institute Panel)

At the Milken Institute conference recently, numerous prominent hedge fund managers gathered on a panel entitled: The Intangibles of Building a Great Hedge Fund: People as an Asset Class.

Ken Griffin of Citadel, Alex Klabin of Senator Investment Group, Jason Karp of Tourbillon Capital, and Gideon Berger of Blackstone all took part in the discussion on investing and the hedge fund industry.


Milken Institute Panel: Intangibles of Building a Great Hedge Fund

Here are some select quotes from the panel and the full video is below:

Alex Klabin on what makes a great investor:  "Great investors, in my view, are able to distill complicated ideas / complicated situations down to the one or two things that really matter. And then make an analogy in their head to distill what the core of the investment is."

Ken Griffin on science versus art in investing:  "In every one of our businesses, there's a science and there's an art.  The science is usually caps in the process and hard work that goes behind driving an investment decision.  We'll do thousands of meetings a year, it's as unglamorous as it can be.  But you use it to assimilate information about how a company's progressing, how a business is unfolding or developing.  And if you're really good, you have an idea of what guidance is going to look like, what the quarter's going to look like.  The art comes down to not how well you can do all that work, but how well you can differentiate your idea from what other people perceive reality to be.  And you're successful in this business when you have a differentiated point of view and the market agrees with you when the information that you have becomes known by all ... You need to have the ability to understand: how will other investors respond to this information when it becomes known.  That's the art in the business, and it's a tough art."

Jason Karp on people as an asset class:  "In our industry, people spend more time on stocks than they do on people.  In my 17 years, what I've discovered is that people, if you train them properly, if you invest in them properly, have more duration, yield, and optionality than any stock I've ever purchased."

Jason Karp on what he looks for in hiring:  "One of the things that we screen for is a variable called openness to change.  And it's the single most important variable that we screen for.  It's basically how well you're able to quickly change your mind when you're presented with conflicting information."

Gideon Berger on what he looks for when investing in managers: "Some people are trying to become lifestyle hedge fund managers, and some people are just trying to get rich, and some people love investing.  What are you actually trying to do?  The two things that we focus on the most: 1. the commitment to building the organization and 2. character that suggests we think they can withstand adversity."

Gideon Berger on what they do before investing:  "What we try very hard to do is be very explicit and write down our investment thesis going in.  Why are we making this investment?  Where do we think the edge or opportunity is coming from? If the thesis is playing out, but the investment isn't playing out, that's an opportunity to add to the position.  But if the thesis isn't playing out but you're making money, that's good luck.  Separating why you're making an investment versus results is very important."

Embedded below is the video of the panel from the Milken Institute:


 

Next Wave Sohn Conference Notes: John Khoury, Jason Karp, Nitin Saigal, Ethan Devine, Will Snellings

The 19th annual Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK, has completed and we've posted notes from the event.  This year though the event featured a new addition: Next Wave Sohn.  This mini-conference was held before the main Sohn event and featured emerging managers pitching their latest investment ideas.  Here are those presentations.


Next Wave Sohn Conference Notes 2014


John Khoury. Long Pond Capital 

Idea: American Homes for Rent (AMH).  REIT, buys houses, fixes them up and rents them out.   Debate is whether it is a good business or not. Bears say it is impossible to manage thousands of homes efficiently. Bull case: 95% occupancy, length of stay 2x that of apartments NOI margins at or higher than apartments. Doing securitization now at L+1.66 Levered up- "you want to own an asset when it begins to be securitized."

Currently 2.7% FCF yield, but with 45% net leverage get 7.0% FCF yield. "REITs do not trade at 7% FCF yields."   Apartment REITS trade at 5%, if this gets there, stock has $23 PT, 40% upside. "Free call option" is consolidation, they could roll up other businesses.  Still only 20% of 1% of the total market. $3T market opportunity.  Founder and management own $1B of the stock. Unlevered now, so limited downside if they are wrong.


Jason Karp.  Tourbillon Capital

Idea: Ctrip (CTRP) - Tourbillon: looks for durable themes, ideas that there is a different way to look at it (he's formerly of SAC). Chinese travel one of the highest probability growth themes on the planet. $7.5B market cap, $800M cash,  $48 now, LT price target $115-170.  Trades at 17-25x p/e.

China is largest global spender on international tourism, but low per capita. Thesis is travel spend per person will catch up with other countries. China is only 50% internet penetration, but already has 600M users, double the US population.  If CTRP just holds share, the revenue goes up 7.7x . They have 40% market share now. People always mismodel or underestimate the upside.

In 2009, sell side thought PCLN would do $9.19 eps in 2013, they actually did $41.00. PCLN went from $5.5B to $61.7B, up 10x in 5 years. CTRP is on similar trajectory, but their core market is growing faster.  Controversy: margins have declined because they are investing in their business in a battle with eLong. Mobile room nights went from 0% to 35% since 2012.  Problem is operating margins from 2007-2011 were 40%.  Now in the 20s, but he says it will expand back up since they will not be able to spend so much on the business simply because the topline is so big.


Ethan Devine. Co-PM of Indus Capital

Idea: Goldcrest. Listed in Japan.  Largest condominium developer in Japan. Trades at 0.50x book.  Condos in Tokyo.  Thesis is stock is cheap, despite how hot real estate is in Tokyo.  He focuses on global special situations.


Nitin Saigal. CIO at Kora Management

Idea: Bharti Infratel.  Originally thought it was a great short:  Unattractive Industry, Regulatory uncertainty, hurdles to scale, capital allocation concerns.   Bull case:   There is competition and was overdevelopment in the past, but supply has rationalized. 900M cell phones in India, only 90M smartphones. Data demand story- like the US, China. India just did a spectrum auction.  $7B market cap, 80k towers, 25% market share- has scale- nationwide tower network. Capital allocation has gotten better- dividend payout increased, disclosure better. Costs $50k to build a tower, one tenant 7.5% ROI, 3 tenants $15,500 annual revenue 25% ROIC.  Thinks it should trade  at 330 rupees/share, trades at 6% FCF yield, growing 15% per year, TEV/EBITDA 11X.  Kora is an emerging markets fund, based in NYC, but offices in China, India, and Sao Paolo  


Will Snellings. Founder of Marianas Fund. 

Idea: Jet Blue (JBLU). Two big changes: consolidation- top 5 players control 85% of capacity.  Cost curve shift- Southwest was destabilizing the industry, taking share because they had a cost advantage- which they no longer have. So industry is still below mid-cycle economics. Jet Blue has youngest fleet in industry- 8 years, low cost position and low ticket prices.  Has 7.5% of industry capacity- small enough to grow without disrupting industry stability.  2013: $758M op cash flow vs $4.5B EV, $2.8B market cap.  JBLU has materially underperformed the industry over last 2 years.  He worked at Ospraie while setting up his own fund.  Likes structural changes in businesses that make a bad industry become a very good one.


We've also now posted up notes from the main Sohn conference as well, featuring David Einhorn, Bill Ackman, Paul Tudor Jones and more.  So be sure to check that out as well.