More Money Than GodThe Best Investors in Human History and How They Did ItFirst presented 13 Oct 2010Further studies available:Swyx on Investing - http://swyxcapital.wordpress.com/
The point of this discussion
• We simply do not get enough opportunities for well-informed debates about investing
• Part of this is the sheer lack of and disorganization of information available
• My activities scour– Books– Trade journals– Academic papers
• for information– the rest is up for discussion
More Money Than God (MMTG)
The Best Investors in History• George Soros• Warren Buffett• Jim Simons• Seth Klarman• Ken Griffin• Paul Tudor Jones• John Paulson• David Tepper
and How They Did It• Macro• Value/Macro• Statistical• Value• Statistical/Value• Technical• Macro• Macro
Why we study themIsn’t it an exaggeration to say they are the best in history?
• No, on risk-for-reward basis• Investing prior to the 20th
century was limited on:– Shorting/Derivatives– Leverage– Liquidity– Data and Statistical Tools
• Only modern investors have full use of these
How on earth do you get MMTG by not MAKING anything?
• Other People’s $ (OPM)– Soros: 32% from 1970-2008– Buffett: 20% from 1968-2000
• S: $21b AUM, $14b NW• B: $131b AUM, $60b NW
– Specifically, institutional $• Pension funds• David Swensen
• Leverage– Paulson’s “Greatest Trade Ever” was
10-12x leveraged• house prices fell ~30% but funds up
350%-590% in 2007– 2-and-20 is a “free call option”
• $4b payout on $12b AUM
George Soros
Bio & Record• Born 1930 in Budapest• BSc in Philosophy at LSE• Started as a trader at 26• 32% from 1970-2008• 35% from 1969-1995• Public predictions in 1987,
1998, 2008. All correct.
Style & Trades• “Reflexivity”• Hiring outstanding people
– Stanley Druckenmiller– Arminio Fraga
• Shorted GBP and Italian lira in 1992
• Shorted Thai baht in 1997
Warren Buffett
Bio & Record• Born 1930 in Omaha• BS Econ at
Wharton/Unebraska• MS Econ at Columbia BSch• Started as investment
salesman at uncle’s brokerage aged 21
• 20% from 1968-2000• 27.7% from 1977-2010
Style & Trades• 15% Phil Fisher• 85% Benjamin Graham• Highly concentrated trades
– Washington Post– CapCities/ABC– Salomon/Goldman– Coke
• But he’s not just a value guy– Shorted USD since 2002– Cornered silver in 2001
Jim Simons
Bio & Record• Born 1938 in MA• BS Math MIT• PhD Math UCBerkeley• Began investing in 1978• AFTER 5-and-44 fees
– 45% from 1988-2000– 40% from 1988-2008– Only lost money in 1Q99
• RIEF = principal-agent problem
Style & Trades• Trades not known• Modeling USD and longterm
interest rate movements• “Learning every predictor
that works”
Seth Klarman
Bio & Record• BS Econ from Cornell• 2 years for Mutual Shares• MBA HBS• Founded Baupost in 1982• 20% from 1982-2002• Writes pretty well.
Style & Trades• Senior Distressed Debt
– Service Corp– Stewart Enterprises– Xerox Credit Corp
• Value + Catalyst• No leverage, <1% of assets in
short positions• Playing with a handicap: Often
has up to 50% AUM in cash• Agnostic on interest rates,
currencies, or economy
Ken Griffin
Bio & Record• Born 1968 in FL• BS Econ at Harvard• Founded Citadel aged 22• 28% from 1990-2008• Blew up in 2008
– Kensington and Wellington - 50%
Style & Trades• Trades
– Convert bond arb– Relative value
• Eating HFs for breakfast– Amaranth– Sowood
Paul Tudor Jones
Bio & Record• Born 1954 in TN• BSc Econ in UVA• 1976 – Clerk for EF Hutton• Dropped HBS• Founded Tudor aged 25• 23% from 1986-2008
– No losing year
Style & Trades• Technical/Macro
– “Prices move first and fundamentals come second”
– “Riding momentum”– “Fakeout trades”
• Shorted Black Monday in 1987 for 201% gain
John Paulson
Bio & Record• Born 1955 in NY• BS Finance from Stern
– Valedictorian
• MBA HBS• Traded at Odyssey/Bear
Stearns• 16% from 1994-2006
– Only lost money in 1998
• 300-590% in 2007• Gold fund doing well
Style & Trades• Merger Arb• Macro
– Shorted ABX, CDOs– Longed CDS, made his own
• Hiring Paolo Pellegrini
David Tepper
Bio & Record• Born 1957 in PA• BA Econ in U Pittsburgh• MBA at CMU• GS High yield head trader at
28• Appaloosa at 36• ~25% from 1993-2006• 132.7% in 2009
– $4b payday
Style & Trades• Buying bonds after default
– Long financial equity and debt in 2009
– Algoma Steel– Argentine bonds– Korean bonds– Russian bonds
• Bought AIG’s CMBS book at $0.09, now at $0.93
• Made money off US Treasury’s Financial Stability Plan – Capital Assistance Program
The “Learning Investing” Conundrum
• Why doesn’t every serious investor just do value investing? Value may not work over the next century– Quantitative funds may seek out value plays faster than you can find them– Institutional Investors want year-after-year results
• Remember importance of OPM• Statistical investing delivers better
– “New Normal”• deleveraging process may mean a multidecade rut for equities
– We do not know how many value investors failed for every Buffet or Klarman• Taleb: “George Soros has 2 million times more statistical evidence that his results are
not chance than Buffett does.”
• Every investor has a different style, that happens to do well in their time – How can you confidently pick a style to learn/guru to follow for future?– My hypothesis: You don’t. You study them all. Including the blowups.
The 6 dimensions of the Investment Philosophy space
• Macro – profiting from systemic changes• Value – profiting from intrinsic value• Statistical – profiting from structural inefficiencies• Technical – profiting from other people’s actions• Qualitative – profiting from good ideas• Risk Management – profiting by limiting downside
and going “all-in” when only upside exists
Macro
Discretionary• “Have a hunch, bet a bunch”• Profiting from timing seismic
changes to the status quo• Gerstenhaber (Argonaut)• Touradji (Touradji)• Robertson (Tiger)• Soros (Soros)
Quantitative/Systematic• Statisticians/Modelers• Capturing economic trends• Harding (Winton)• Tropin (Graham)
Macro has been the top HF strategy tracked by CS/T since 1994 inception, gaining >200% in cumulative returns compared to other strategies over the 15 years, and has consistently outperformed equity l/s, event driven, and relative-value, through periods of market dislocation like the Mexican peso crisis, the Asian financial crisis, 9/11, 2008-09.
Macro Investing Resources• Alchemy of Finance• Dalio’s Template
– http://www.cfainstitute.org/learning/products/publications/rf/Pages/rf.v2009.n5.7.aspx?WPID=Topic_List_Tabbed&PageName=All
Value
Types of Value investing• “The asymptotic value of
commodities is $0”• Liquidation value
– Not book equity value
• Pure arbitrage situations e.g. Tepper’s 2009 bond buying
“Value Pretenders”• Investing based on low P/E
ratios is a statistical mean-reversion strategy
• Investing based on growth or GARP is trend-following/macro
Value Investing Resources• The Intelligent Investor• Margin of Safety• Tweedy, Browne – What Has Worked In Investing• http://finviz.com
Statistical
Correlation• Mean reversion to an
observable relative return (i.e. Silver lags Gold)
Co-integration• Mean reversion to an
observable spread or ratio (i.e. XOM vs BP P/E)
Market Timing• Increasing and decreasing
beta due to known seasonal effects
Asset Allocation• Increasing and decreasing
relative portfolio betas due to known cycles
Risk Premiums• Increasing and decreasing
beta due to known seasonal effects
Backtested Technical Rules• Technical Indicators “that
have worked”
Statistical Investing Resources• Beat the Market
– http://www.economics.uci.edu/kassouf/
• What Happened to the Quants?– http://web.mit.edu/alo/www/articles.html
Technical
Price• Trend-following, other
patterns
Volume• High volume usually marks
bottoms
Sentiment• AAII information• Fund-flow information• Trade contrary to “dumb
money”
Positioning• Knowing what most other
people are holding and forcing them to liquidate• Short squeezes• Tudor panics
Technical Investing Resources
• CXO advisory– http://www.cxoadvisory.com/technical-trading/
• Waay too many books– Very high noise-to-signal ratio
• Tudor– http://www.tudou.com/programs/view/XH5W4vffBbY/
Qualitative
What?• Companies that “make their
own trend” instead of just riding macroeconomic trends– Investing in AAPL when Jobs
announced the iPod– Investing in Ford when Ford
rolled out the Model T
Who does that?• VC• Activist Investors• Philip Fisher is a mutual fund
billionaire who has done this• Buffett is a devotee with own
style• Worth further investigation
Qualitative Investing - FisherCSAUP pg 47 - Does the company1. Have products with potential for increase for at least several years?2. Have determination to continue developing products that further increase potential when
current growth potentials have been exploited?3. Have effective R&D efforts?4. Have a good sales organization?5. Have a worthwhile profit margin?6. Have a plan to maintain or improve profit margins?7. Have outstanding labor and personnel relations?8. Have outstanding executive relations?9. Have depth to its management? (key man risk)10. Have good cost analysis and accounting controls?11. Have other industry-specific aspects of business that make it competitive?12. Have long-range outlook regarding profits?13. Require future dilutive equity financing to achieve anticipated growth?14. Only talk freely to investors when things are going well?15. Have management of unquestionable integrity?
Qualitative Investing - BuffettDamodaran pg 8 – Is the company1. Simple and understandable?2. Stable and predictable in its operating history?3. In a business with favorable LT prospects?4. Management candid leaders?
Risk Management
Beyond MVO & Diversification?
• Diversification is “a seat belt that works until it is needed”– It also drags returns from
high-conviction good ideas
• Study how and when to go “all-in”
Who does that?• Aaron Brown is arguably the
most prominent author on “real” risk management– The Poker Face of Wall Street
• Robert Rubin, on the other hand, is not.
Classifying Market ParticipantsPayoff Probability Expected Return Type
X-multiple return if right, 1x loss if wrong
Vanishingly low probability of being right
Highly negative Gambler
X-multiple return if right, 1%x loss if wrong
Low probability of being right
Positive Negative carry (Buying insurance e.g Paulson)
%x return if right, X-multiple loss if wrong
Very high probability of being right
Positive Positive carry(Selling insurance e.g. Merger Arb)
%x return if right, X-multiple loss if wrong
High probability of being right
Negative “Nickels before a steamroller”
X-return if right, X-return if wrong
Cannot be wrong Highly Positive George Soros
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