King Icahn is an unparalleled human drama. It is the story of a man who rose from humble beginnings to emerge as the most powerful, eccentric, galling, pugnacious and successful force in the business world. The Icahn drama is rife with contradictions, juxtapositions, paradoxes and epic power plays. All have led to a reshuffling of the business\financial landscape, to the electric fear on the part of CEOs when they hear the terrorizing words “Carl Icahn is on the phone” and to one of the world’s greatest fortunes. King Icahn is the only book written about Icahn, completely independent but with full access to the man himself. It reveals the back story of the greatest financier/pit bull of his generation, his multi-billion dollar epiphany, his real motive for taking on the CEO elite as well as his loves, feuds, idiosyncrasies and intellectual brilliance. Available on Amazon / Audible.
Finance
A Tiger in the Land of Bulls and Bears | Daniel Strachman
Published in: 2004
Throughout most of the 1960s and the 1970s, the Jones partnership and a handful of others dominated the hedge fund industry. As Alfred Jones slowed down in the late 1970s, three wise men took the torch: George Soros, Michael Steinhardt, and Julian Robertson. This is the story of Julian Robertson and Tiger Management. By the time Roberson had decided to call it quits, the Tiger organization had grown to more than 2,500 times its original size 18 years earlier. Its assets had grown from $8.8 million to almost $25 billion, or 259 000%. The firm’s compound rate of return to partners during its existance, net of all fees, was 31.7%.
BACKGROUND. Julian Robertson was born in 1932 in Salisbury, North Carolina. In 1955, when he was 23, he entered the Navy as an ensign through the Reserve Officers Training Corps and served on a munitions ship. In 1957 he started his career on Wall Street as a sales trainee at Kidder Peabody & Co and spent 22 years at the firm. When colleagues had a little extra money they would ask Robertson to manage it for them. He earned a reputation as someone who could gather information, process it, and figure out ways to make use for his advantage to make money.
LAUNCHING THE HEDGE FUND. Robertson and his then partner Thorpe McKinsey launched Tiger in May 1980 with $8.8 million under management (McKinsey left Tiger in 1980 for personal and professional reasons). Robertson liked the idea of being compensated based on performance. His strategy was built from value investing and Benjamin Graham and David Dodd.
NETWORK OF INFORMATION. Over the years, Robertson built a Rolodex of thousands of people he had met on his travels around the globe. Although processing numbers is clearly a talent, his ability to gather and process information about a company outside of its financial statements is also uncanny.
THE KEY BEHIND ALL INVESTMENTS WAS THE STORY. If the story made sense, then the investment made sense. If there was no story or it was not easily understood, then it had no place in the portfolio. When the story changed, the investment had to change as well. If the story remained the same, the position should get bigger. You also need to have conviction when making investment decisions. Simply put – you must be willing to go for it. If you don’t believe in it or don’t have conviction in the position, you need to forget it and move on.
LESSONS FROM 1987. When it comes to managing money, the hardest part is not actually managing the money: the hardest part is raising the money to be managed. 35% of the key to any successful money management business sustained solid performance over a significant period. The other 65% is client relationship management. In the wake of serious disruption in the fund’s performance numbers, it is very important that the assets don’t walk out the door.
LONG/SHORT AND GLOBAL MACRO. Tiger had mastered the long/short game and was in the 1980s looking for new, bigger, and more liquid markets to enter. The answer was global macro. Robertson liked the idea of being a global macro trader/manager because it offered him two things: significant returns with the use of less capital, and more respect from his peers because he was trading in the same markets as George Soros.
RIGOROUS PROCESS. Once an analyst recommended an investment, Robertson and the rest of the investment team further scrutinized it. Ideas was questioned with rigor and discipline under conditions that could be described as fierce. The investment selection process was a brutal one that relied on incredible amounts of research and conviction, because they knew that idea generation was the firm’s competency.
A TIGER PERSON. A Tiger person had the following characteristics: (1) smart, bright, and quick with functional intelligence, (2) strong sense of ethics, (3) background in sports and interest in physical fitness, (4) interest in charity and public welfare, (5) sense of humor and fun to be around, (6) a good resume. Many stayed at Tiger even under the less-than-optimal conditions because they were making more money than they could anywhere else on the street.
INTERNET FRENZY. Growth stocks may have a year or two when they suffered, but if they were true growth stocks, they would continue to grow over time. This strategy worked well for much of the 1990s, but in 1998 and 1999 it did not. As the bull raged on within the technology bubble, hot money was dumping old-time names like Gillette, Coca-Cola and Cisco. Companies with no earnings were seeing their stock prices triple and quadruple overnight. People were quitting their jobs to become day traders, the folks at CNBC became minor celebrities and a cab driver or hot dog vendor could make a fortune in stocks. The fund was down over 19% in 1999, and money was pouring out of the fund.
CALLING IT QUITS. By March 2000, as the Nasdaq headed for the 5,000 level, Roberson had decided it was better to close the fund than to sell it (for which he had tried). The pain had grown to great, and he was no longer willing to try to navigate a market that he did not understand. The market, and the Nasdaq in particular, fell apart a few weeks and months after he decided to close. The problem was that while Robertson believed in the value philosophy, his investors had given up hope. He knew that the strategy would eventually pay off, but he didn’t know when.
LOST THE HUNGER. One analyst described the early years as “none of us knew what we were doing so we took risks, not because we were gamblers but because we did not know any better. This led us to significant rewards – if I or any of us knew any better we would have been scared out of our minds, but back then it was simply par for the course. By the time I left, the firm was filled with Wall Street lifers who looked at going to Tiger as the last stop of the career. They were not hungry; they were not interested in taking risks”.
THE USE OF LEVERAGE. Through the use of leverage, Tiger was able to commit capital aggressively to the best long and short investment situations. Leverage allowed the firm to increase exposure to the best opportunities available while reducing overall market directional exposure. While the use of leverage contributed significantly to the firm’s success over the years, Roberson’s ability to understand risk was what allowed it to post such significant profits. The team was active in finding company-specific risks because it believed that its ability to analyze those risks was one of the firm’s greatest strengths.
THE TIGER CUBS. There is a group of 30-40 managers that Roberson invests with and counsels and seek counsel from. At one point or another, all have worked with him or for him. They have been dubbed “the Tiger Cubs” by the press. There is another group of managers, the second generation of Tiger Cubs, that work in what used to be Tiger Management offices. Robertson is helping these managers along by providing them with back-office support and other tertiary money management services. He is also working with these managers to develop their organizations. Some hedge fund industry observers estimates that almost all of the 35 to 40 managers who have gone out on their own after leaving Tiger have hit the ball out of the park in terms of assets raised and performance numbers.
Market Cycles | Howard Marks
Published in: 2018
Howard Marks, co-founder of Oaktree Capital Management, sums up his 28 years in his current role and 22 years before that as an asset manager: the trick is not to be the hottest stock picker. The trick is to survive. We will be wrong more often than we expect. The future is not ours to know. Being wrong comes with an activity whose outcome depends on an unknown future. However, we can calibrate the portfolio after the cycle – and thereby improve our odds.
THE PILLARS OF LONG-TERM GROWTH. Output of an economy is the product of hours worked and output per hour. As the population grows, hours worked tend to grow, and so does GDP. The growth in the population means that there are more people working every year to manufacture and sell products (as well as more people to buy and consume them). Productivity changes occur gradually and require long periods to take effect. They stem mainly from advances in the production process. Long-term growth is determined by fundamental factors such as the birth rate and increase in productivity (but also by other changes in society and the environment). These factors usually change relatively little from year to year, and only gradually from decade to decade.
SHARE OF INCOME FOR CONSUMPTION. Consumption fluctuates more than employment and income. Residents can choose to spend a higher proportion of their income on consumption when: (1) the daily headlines are favorable, (2) they believe that the election result supports a stronger economy, (3) higher income or lower taxes, (4) consumer credit has become more accessible, (5) an increase in asset prices has made them feel richer, or (5) their team won the World Cup.
2-3% IS THE NORMAL GROWTH RATE. The normal growth rate of US GDP appears to be around 2-3% per year. Growth can be 1% or hit 4-5% (during boom times or during a recovery from a slowdown). The annual growth rate can be negative by a few percent and if it remains negative for two quarters in a row, it is called a recession.
PRODUCTIVITY. Population growth and productivity have declined in the United States and other developed countries. This indicates a slower growth in the coming years than in the years after the Second World War. Emerging markets – and China in particular – have been growing rapidly in recent decades, and although their growth is slower at the moment, they may well outgrow the developed world in the coming decades.
OPERATIONAL LEVERAGE. A company’s profit is often far from stable from year to year. Profits are significantly more volatile than GDP. Sales and costs vary for many reasons, and different types of costs vary in different ways, especially in response to changes in sales. If a company’s revenue increases by 20%, its rental costs will not increase initially, its expenses for machinery will probably not increase initially and its expenses for purchasing goods will increase immediately and proportionately. Thus, total costs may increase less than revenues. The second form of leverage is from debt financing. Companies vary in operational and financial leverage.
VALUATION PENDULUM. Markets rarely go from “underpriced” to “fairly priced”. Usually, it continues from “fairly priced” to “overpriced”. For the 47 years from 1970 to 2016, the average annual return was 10%. Only 3 out of 47 years, however, the stock market closed + -2% from normal, ie between 8-12%. In 13 of the 47 years, the stock market closed more than 20 percentage points from normal – either up more than 30% or down more than 10%.
BUY WHEN PRICE < VALUE. All you need is (a) an estimate of value, (b) emotional strength to continue, and (c) eventually your estimate of value will prove to be correct. However, asset classes move in a pendulum. Risky assets outperform when valuations are penalized too much. Then they underperform until they again have adequate risk premiums. Not only are good times followed sooner or later by bad times, but often good times give bad times (unwise debt issuance or over-expansion).
IT’S ALL PERSPECTIVES, NO FULL PICTURE. There is a story about a group of blind men who walk on the road and meet an elephant. Everyone touches different parts of the elephant and has different explanations for what they have encountered. We are the blind men. Although we have a good understanding of events we have witnessed, we do not get the overall perception we need.
PROBABILITY DISTRIBUTION. The future is not a single fixed outcome that is intended to happen, but a series of possibilities. At best, we have insight into the respective probability of the outcome. Investment success is like choosing a lottery winner: a lottery ticket (outcome) is drawn from a bowl (the whole opportunity set). A result is chosen from many possibilities. To win this game more often than you lose, you must have a knowledge advantage. The ball selector who knows the 70:30 ratio has an advantage. It is only if we know more than others (whether it consists of having better data, doing a superior job of interpreting the data we have, knowing what actions we should take) that our forecast will lead to our excess return.
The Dhando Investor | Mohnish Pabrai
Published in: 2007
The value investor Mohnish Pabrai presents in the book what he calls a Dhandho framework for investing – how to get a high return at low risk. Since the launch of Pabrai Investment Funds, a copy of Buffett’s partnerships in the 1950s, Pabrai has outperformed all major indices and 99% of all funds. Dhandho means in Indian “endeavors that create wealth”, and with an annual return of 28% after fees, that is exactly what Pabrai has done.
Einstein has said: “Compounding is the 8th wonder of the world.”… “We, the compounders, agree with Einstein. It is all about the doubles. How long does it take to get a double and how many doubles can I get in a lifetime?” – Pabrai
HEADS I WIN, TAIL I DON’T LOSE MUCH. Pabrai sums up his investment philosophy as a constant pursuit of situations with minimal risk and maximum return: ”Heads I win, Tails I don’t lose much”, as oppose to the maxim ”high risk, high reward”.
RISK AND UNCERTAINTY. Financial risk can be defined in several ways: (1) risk of losing money permanently, (2) volatility and (3) uncertainty. The best situations arise when uncertainty is high but the risk of losing money is low. Low risk / high uncertainty can be identified in entrepreneurs such as Ray Kroc (McDonalds), Herb Schultz (Starbucks), Richard Branson (Virgin) and also Buffett and Munger. For example, the only capital ever to go into Microsoft was $500k. It can therefore not be said that Microsoft was a high-risk project. But it had high uncertainty. Bill Gates ended up in an extreme place on the “bell curve” but he took no greater risk of ending up there.
LOW RISK, HIGH UNCERTAINTY. Risk and uncertainty are two different concepts. A company’s future may be uncertain. But when you have carefully thought through possible future outcomes and come to the conclusion that the risk of permanent loss of capital is very low, you may have found a lucrative low-risk / high-uncertainty situation. When extreme fear strikes, stock markets can act irrationally. Bad news leads to extreme fear and low valuation as a result. Look for simple businesses that have temporary problems. Look for companies with low valuations and previous profit warnings. Lower expectations may actually mean lower risk of losing your money on the investment.
BUY EXISTING BUSINESSES. Pabrai believes that owning a few listed companies is the best way to build wealth. No major effort is required and in the stock market, a patient investor can occasionally find big discounts. There is also no need for a large amount of capital and there is a gigantic supply of investment opportunities. In addition, the transaction fees are relatively low.
SIMPLE BUSINESSES. “The Dhandho Way” is simple, which is also its power. To fight against your own psychological forces, you must, according to Pabrai, buy businesses that are so painfully easy to understand that in tough times you can remind yourself why you bought the stock. If you need a cumbersome spreadsheet and more than a short paragraph for your thesis, you should look for another investment opportunity.
SUSTAINABLE MOAT. Only businesses with a sustainable moat – ie sustainable competitive advantages – can earn an above average return on invested capital. Over time, the moat tends to shrink. Charlie Munger has said that of the 50 most important companies on the NYSE in 1911, there is only one left today – General Electric. The average life expectancy of a company on the S&P 500 has decreased from just over 60 years in the 1960s to 15-20 years in the last ten years.
FEW BETS, BIG BETS, INFREQUENT BETS. Warren Buffett has said that diversification can be seen as protection against ignorance. Having a portfolio of 100 companies makes it difficult to beat the indices. According to Pabrai, investing as well as gambling is: ”looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favor is the ticket to wealth”.
MARGIN OF SAFETY. The larger the discount to the intrinsic value, the lower the risk. And the bigger is also the upside. Stocks are often valued at or above the intrinsic value. Investors should be patient and wait until they find cheap stocks with a large margin of safety, low risk and potentially large upside. In the long run, the cost of permanent losses is high due to the interest-on-interest effect.
COPYCAT RATHER THAN INNOVATORS. According to Pabrai, innovation is a gamble while cloning is safe. Therefore, successful cloning is the best business. Look for businesses run by people who have demonstrated that they can learn and copy from the innovators time and time again.
Dan Rasmussen – Infinite Loops
Dan Rasmussen, founder and CIO of Verdad Advisers joins the Infinite Loops podcast and discusses Bubbles vs. Crises Investing in Emerging Markets Identifying when “value investing” works, and when it doesn’t.
The Practice of Modern Value Investing – Dan Rasmussen & James Grant
Dan Rasmussen joins legendary financial reporter Jim Grant to discuss the state of equity markets, discrepancies between practice and theory, and his chronic contrarianism. Listed on Forbes’ 2017 “30 under 30” list, Rasmussen also shares his philosophy on how to find value in today’s world. Filmed on May 30, 2018 in New York.
Dirty Money
Netflix Original Documentary Series exposing the greed, corruption, and crime spreading through our global economy.
Overdose: The Next Financial Crisis
“Overdose” is the story of the greatest economic crisis of our age – the one that awaits us.
Reminiscences of a Stock Operator | Edwin Lefevre
Published in: 1923
Reminiscences of a stock operator was first published in 1923 and is seen as a classic in investor circles. The book is based on the life of investor and trader Jesse Livermore but built around the fictional speculator Lawrence Livingston. Many concrete tips for stock trading are interspersed with the story of Livermore’s roller coasters in life.
NOTHING IS NEW ON WALL STREET. What is happening in the stock market today has happened before and will happen again. We humans run on greed and fear and cannot stay away from speculation. In every boom, private investors fail to turn paper profits into money and in every crash they sell at the bottom.
“When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.”
HAVE THE WISDOM TO STAND ON THE SIDELINES. Only a fool trades all the time. There is no referee who says that we must constantly be on the playing field. The intelligent investor only trades when the odds are in his favor. The “action bias” that investors generally suffer from drags many otherwise intelligent people into ruin.
”There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. It never was my thinking that made the big money for me. It was always the sitting. Got that? My sitting tight!”
THE VALUE OF LOSSES. Investors will repeatedly make mistakes that lead to losses. As long as no mistake leads to total loss, these are good learning opportunities. During the career, the investor accumulates lessons learned about what to avoid and evolve from these mistakes if these are not repeated. Livermore saw losses in the market as a fee for experience and knowledge.
“There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.“
DON’T TAKE TIPS. If you buy shares on tips from your neighbor, you also need his tips when it’s time to sell. You become dependent on a party that you certainly do not have access to in the future. In addition, it is difficult to keep a straight course if the share price falls sharply and you yourself are not familiar with the investment. The risk of being scared away when it is darkest is significantly greater than if it is a self-chosen stock.
DO NOT SKIMP ON THE SPREAD. Livingston learned early on that it was a “fools game” to try to catch the last cents in the spread. He believed that this – as early as the beginning of the 20th century – had cost stock traders enough millions of dollars to build a highway across the American continent.
“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth — or the first. These two are the most expensive eighths in the world.”
TAKE THE CHANCE WHEN IT COMES. When the opportunity arises to follow one’s analysis, one must take the chance. You sell when you can – not when you want. A major investor cannot sneak out of a position, he must wait for liquidity. By observing the trading volumes and trying your hand, trading skills can be refined over time.
THE REAL JESSE LIVERMORE. Livermore was born in Massachusetts in 1877 and grew up in poor and simple conditions. He began his trading career as a 14-year-old by taking a job as a “stock price writer” with a stockbroker in Boston. He learned to see patterns in stock trading and began to “bet” on stocks in “bucket shops” (a type of betting business for the stock market). As a 15-year-old, he resigned from his job and was then a professional stock trader for the rest of his life. The first time he came to Wall Street, he lost everything, after which he had to return to the “bucket shops” and rebuild his portfolio. Livermore lost several times, but always recovered through short-term loans. The peak of his career was after the great crash of 1929 – Livermore had then been short shares and was good for $100m. By the time he committed suicide in 1940, at the age of 63, his fortune had shrunk to $5m.
A Man For All Markets
Published in: 2017
Edward Thorp is the MIT professor who solved blackjack, roulette and baccarat and won over Las Vegas. At the age of 32, he went on to Wall Street to outperform the stock market for the next 30 years. Through his company Princeton Newport Partners, Thorp did arbitrage with shares, warrants, options and convertibles and showed positive results every quarter for a period of 20 years. The annualized return was 19.1% (compared to the S&P 500 10.2%). He then started Ridgeline Partners, which had an annualized return of 21.0% for the next ten years.
IDENTIFY INEFFICIENCIES, EXPLOIT & REPEAT. Thorp’s career can be divided into phases; (1) he identified a game with a theory that it was “beatable”, (2) he learned how to beat it, (3) he practiced it and made a fortune and (4) moved on when the inefficiency disappeared. Thorp was driven by intellectual curiosity rather than money.
“We did not ask: ‘Is the market efficient, but rather, in what ways and to what extent is the market inefficient? And how can we exploit this?”
MENTAL MODELS AND RATIONALITY. Thorp learned early on to think not only in pictures, words or numbers but also in models – simplified versions of reality. He strives to be constantly rational in all aspects of his life. For example, he refrains from taking a position on any topic or issue before he can make a decision based on facts. Another example is that he considers it important to keep track of his hourly wage and to strive to outsource the services that have a lower cost level – it is like time repurchases below market value.
PERFORMANCE BEFORE PERFECTION. According to Thorp, gambling is an excellent entrance into asset management. You learn to control your emotions, calculate odds, solve logical problems and stick to your strategy. He believes that an imperfect solution that can be used in practice is better than a perfect solution that is difficult to implement in practice. The strategy he used to beat blackjack was not the most effective he developed, but it was easy to apply and had enough of an edge.
START SMALL AND SCALE UP. When Thorp took on a new “game”, he always started with small bets that he was emotionally comfortable with. He did not raise the stakes until he was comfortable with the system and the betting process. He adopted this approach in Las Vegas as well as on Wall Street.
“I was lucky in that I came at investments through blackjack tables. And the blackjack tables are an amazingly good training ground for learning how to invest, how to think about investments, how to manage them. And the reason is that they teach you, on the one hand, to use probability and statistics to evaluate things. And on the other, they teach you discipline.”
PURSUE YOUR EDGE. Thorp’s strategies for gambling and investing had many similarities. He was looking for a small edge to exploit over and over again. In this way, the “law of great numbers” guaranteed that he would win over time. He used Kelly’s formula (a formula for theoretically optimal bet size) to optimize betting levels. Thorp believes, however, that it is important to constantly question one’s edge. Competitors are adapting and markets are changing. It is important to continue to develop and ensure that one’s strategies remain relevant.
DO NOT SKIMP ON THE SPREAD. Thorp questioned his traders who boasted that they “scalped” the spread when they traded. He claimed that they earned $0.25 ten times and lost $10 once – a calculation he did not like. Traders only saw what they earned from the stingy bids and did not think about the opportunity cost the times the stock was not traded down.
THE GOAL IS PEACE OF MIND. After his time in the financial industry, Thorp realized the value of independence. It is much less stressful to only do your own business than to run a large fund with powerful clients who question your decisions. Thorp believes that one should construct their activities with the goal of having peace of mind. Then you are most clear-minded and the happiest. He believes that what is most important in life is how you spend your time and the answer to that question depends on where you are in life and where you want to be in life.
“When I was 35, I had lots of time and less money, so doing 10% or so better than the index, with little risk, was attractive and fun. At 85, the marginal value of time is higher, and the marginal value of money is lower. These are strong disincentives when I can make a long-run 10% or so by doing nothing.”