http://www8.gsb.columbia.edu/rtfiles/Heilbrunn/Graham%20%26%20Doddsville%20-%20Issue%2015%20-%20Spring%202012.pdf
Spring 2012
Mr. Robertson founded the legendary investment firm Tiger Management,one of the first hedge funds. Mr. Robertson has trained and supported some of the best hedge fund managers in the world collectively known as “Tiger Cubs”). He graduated from UNC Chapel Hill and also served in the US Navy.
G&D: How did you get your start in investing and what has shaped your investment philosophy?
JR: Well it started with my father, who was an interesting guy. He was a very authoritarian figure, but he wanted me to learn a number of different things. He showed me how the stock tables worked in the paper, and I got interested in an early age and we worked on a few stocks together. He was in the textile business but he was a really good investor. I joined the Navy after college, as I had been in the ROTC in college.
Prior to the Navy, I never really had any sort of responsibility. But upon joining the Navy, I literally had 700 million pounds of TNT and an atomic bomb under my command. I enjoyed the responsibility. After the Navy, my father wanted me to get some training in New York before I went to a brokerage firm down south. That was 55 years ago, and I’m still here. I’ve adored New York, and if I could force everybody to do it, I’d force them to grow up in a small town in North Carolina and then eventually come to New York.
G&D: What do you think explains your incredible success?
JR: Well I started at the right age, certainly. But what really made me was the realization that I could hire really good young people. When we started Tiger Management, I did that. One of them, John Griffin, used to teach a security analysis course at Columbia Business School and now guest-lectures there. John and I are still great friends. There was a big age difference between us but we’re still close. When he left to go on his own, I didn’t handle it particularly well. If I had been smart I would have taken a piece of his action. We’re probably better friends now though than we’ve ever been. He’s going to host my 80th birthday day in June. His son and my grandson are great friends. I was talking to John the other day about how we’ve never really given anyone too much too soon that they couldn’t handle. But I said, the trouble was, I tried to rehabilitate a lot of people who, for one reason or another, didn’t have it. So I’ve made some mistakes on that. But our young people were really great. And good ones begat even better ones – even today, we still do! So I’d say the success really belongs to the young people who worked here. John Griffin, Andreas Halvorson, Lee Ainslie, and probably the greatest analyst of all time, Steve Mandel.
G&D: So many of the people that worked at Tiger Management have gone on to be extremely successful investors in their own right. What was the process and the training like here for young analysts?
JR: It was sort of a melting pot. I was so much older than they were, so they had to have a father-like opinion of me. They thought I had a unique touch or something, so they would put me on a plane with one of them, who would act like a camp counselor to keep me from getting in trouble and we’d go to Japan and see what we could learn. We were buying a stock in Korea, and things were so new about it that the paper called the broker and asked who was buying that stock. And the broker told them about us and said that since Tiger was buying so much that he was too. So they didn’t really know what was going on over there either! It was just a gold mine.
G&D: If someone brings an idea to you, what are the first few things you want to know?
JR: The first thing is, is the management decent and honest? A lot of people don’t really care about that. The way to look into that is to do some diligence. Are they actively involved in their community? You should try and find folks who know them and see what they think. Of course, you also want to investigate the growth possibilities. We had fantastic analysts and I found I could count on their earnings projections. So I sort of turned from a cheap skate investor, one who was focused on low multiple stocks, to one interested in real growth stocks.
Today, in my opinion, the world’s cheapest stock is Apple (editors note: the interview was conducted when Apple traded at $450). If that company had existed in the 1970s, it would be trading at 5x what it currently is. For years I’ve had a fund that I’ve put money into in case of a real crisis. I’ve put TIPS into that portfolio and I’m convinced now that they’re a disaster. There’s just no yield at all. You’re taxed on the yield. So I’m thinking very seriously of shifting all of my TIPS into something like Apple or Google. Apple is just an extraordinary company. They just have ideas. They don’t have any factories. They just have great ideas and then outsource all their manufacturing so that they really don’t take too much operating risk.
G&D: When would you sell Apple?
JR: Well, there will be a time to sell the stock, of course. But right now, they’re trading at 12x earnings for a company with amazing products. This year will see the Apple television set. I’m almost sure of that. But when the stock skids, it likely won’t be a massacre because they have so much cash.
G&D: Could you give us a general sense of what you think an analyst should look at first and what should get one most excited about a particular stock?
JR: I’d say if you have an idea that company management is comprised of really great people, you should look hard at that stock. But keep in mind that people can change too. For example, Steve Jobs was not a great person in many respects before he was fired, according to his biography.
G&D: Aside from honesty and other important core analytical attributes, what do you look for in an analyst when you decide to seed their fund?
JR: Competitiveness. Is he a competitor? Does he get into the batter’s box and crowd the plate to intimidate the pitcher? I use that as an analogy but I believe that athletics actually do mean a lot. For instance, Mandel is a fabulous athlete and particularly strong in tennis and squash. He picked up golf and now he’s good at that too. Griffin plays everything. Really all of those analysts I mentioned earlier have been good athletes during their lives. But there are certainly exceptions to that too.
A whole bunch of funds have been successful with no jocks involved. I should also mention that all of those guys have a real interest in making this world a better place. Mandel is on the National Board of Directors for Teach For America. Griffin is a founder and Board Chairman for something called iMentor, which is a huge entoring organization here in New York. Lee Ainslie has done a lot and Andreas is getting into it in a big way. That’s another interesting aspect to those who have been successful investors. Look at George Soros. He’s quite a philanthropist.
G&D: In addition to a competitive spirit, how do you decide which analysts are good enough for backing from your fund?
JR: Well it’s based on who has given you the good ideas and you have to keep track of that. We’re going to back a new fund and I think you’ll hear about it in two or three months. This fund will be managed by a team of people who we’ve vetted and who we think are very good. We’ve had some losers along the way. Something else we do, by and large, is that we test most of the people who come to work here. This is a psychological test that lasts for about three hours. If the results of that test aren’t consistent with how successful managers would think about and respond to the questions asked, then we feel we’re doing a bad job with those people who have come to work for us.
We’ve had flops take it and great managers take it, so we’ve been able to extract a lot of useful information about our people from that test. It’s something that helps prevent us from seeding a fund run by someone who wouldn’t be all that good. The test tries to assess whether a person is thoroughly honest or if they’re trying to game the test. The questions are worded in such a way that they help us do that.
G&D: Of the “Tiger Cubs” that you’ve mentioned, is there one that you feel is most similar to you in terms of investment style?
JR: I think a lot of those guys gravitated toward Tiger Management because they had similar investment philosophies. I would say that there are many more similarities than there are differences between all of us. I would say, though, that some writers out there will try to determine a correlation between the portfolios of the various “Tiger Cubs” or Tiger Seeds. We can show you figures that just blow that right out of the water. On the other hand, I think almost all “Tigers” had sensational 2007s and reasonably good 2008s but not very good 2009s and 2010s. You could say there’s obviously some correlation but it’s not that. It’s just that our fundamental risk parameters were similar.
G&D: Analysts are bombarded with so much information today, what do you think they should focus on to most effectively allocate their time?
JR: I would say that hedge fund investing is, in another sense, the antithesis of baseball. You can hit .400 and not make much money if you’re not playing in the big leagues. But if you play in the big leagues and you hit .400, you’re going to make big money. With hedge fund investing, you get paid on your batting average irrespective of the “league” in which you’re playing. So go where the pitching is the worst. Go to the minor leagues; go to Korea and China now. There are 1,000 fraudulent companies and 1,000 fabulous stocks! I once found somebody to whom I gave this pitch who said, “Gosh, I should go to China!” Then I reminded him about his family. He replied that he was about to get married to a Vietnamese woman who would love to live in China. So we backed his fund in China. I think our Chinese fund, which should officially launch in May will be a good one because we have a manager on the ground there who’s talented and loves the business.
G&D: What is your view of the current macro situation and how is it shaping your investment strategies today?
JR: I’m the only person in America, outside of Stan Druckenmiller, who has some worries about the US printing money. Europe also scares me. The printing of money is scary, but that is what they are doing to get out of it.
G&D: Besides Apple and perhaps Google, are there any other stocks or industries that you find particularly appealing today?
JR: I love WuXi (pronounced WOO-shee; ticker: WX) which is a Chinese-based employment agency for PhDs, primarily in the drug industry. Pharmaceutical companies can
employ a Chinese PhD living in China for about one fifth of what a US PhD would cost. So I think its business of somewhat disintermediating the pharmaceutical focused PhD market is a good one. The company’s earnings are certainly increasing beautifully at about 20% a year and it still sells at 10x earnings. It was ushered to the IPO phase by probably the best venture capital firm in the world, General Atlantic.
G&D: Can you talk a little about your investment philosophy?
JR: I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business. That being said, there are long periods of times where the 50 worst companies will outperform the 50 best. Always of particular importance to me at any company is the quality of people at the company. Still, this is not an infallible way of looking at companies. I am reading the Steve Jobs biography right now and am at the point where he got fired from Apple. One take away I have is what a difficult person Steve Jobs was when he was a young guy. He seemed to have changed dramatically as he got older.
G&D: What advice do you have for young analysts and business school students?
JR: Peter Lynch’s books have some great insights would be great for anyone to read. Here’s a ‘smallworld’ story for you. My neighbor who lived across the street from me in Salisbury, North Carolina went to Columbia Business School. He roomed with Warren Buffett when he was there. The reason I bring this up is that Warren is just so disciplined, smart, and sound – these factors are really what makes him great. People should look at some of the things he’s done in his career and try to emulate him. I’m actually going to the Berkshire Hathaway annual meeting for the first time this year.
G&D: What do you look for in your shorts?
JR: For my shorts, I look for a bad management team, and a wildly overvalued company in an industry that is declining or misunderstood. For instance I think REITs are jokes. People look at them for yield, which in a sense they provide. But, I think about this like I think about printing money. As long as people keep printing, things go alright until something blows up. The REITs are the worst because they pay high dividends and when they don’t earn enough to cover the dividend they issue stock.
G&D: Many think that the hedge fund industry is changed dramatically over the last few years in terms of the difficulty in raising money now, as compared to five to ten years ago, as the industry has become more institutionalized. What are your thoughts?
JR: I think this is true, but it is nonsense on the part of the buyers. They act as if you have to have $100 million in assets under management to be brilliant. The truth of the matter is that if you did your work you would be better off investing in a $25 million hedge fund. It’s much easier to turn $25 million into $100 million than it is $100 million into $400 million, and it’s a lot easier to turn $100 million into $400 million than it is to turn $1 billion into $4 billion. I think the focus on large, institutionalized funds is a temporary phenomenon. The good people will be looking for smaller funds.
When I was managing money I felt that if we could keep enough people, and that the caliber of our people was good, then it didn’t matter how much money we managed. But the truth of the matter was, when we were finishing, we had nearly $40 billion ($20 billion in assets under management levered 2-for-1) to invest. Even if we had 400 positions, we would have had to put $100 million in each position. It’s hard to find that many $100 million positions that you really want to invest in and that you can get into and out of. It’s tougher the bigger you get.
G&D: Thank you very much Mr. Robertson.
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