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