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Saturday, November 13, 2010

David Tepper - Middle Class Billionaire

It always interesting to learn a little more about hedge fund billionaires.




Here is an interesting article on David Tepper.



[nymag.com]



With the stock markets down, Europeans rioting in the streets, and worried investors all but stuffing cash inside their mattresses, it was unsurprising that the mood at the annual Ira Sohn conference at the Time Warner Center in May, at which Wall Street’s moneymen of the moment share their investment outlooks to benefit a pediatric cancer fund, was about as cheerful as the annual Prophecy Conference in Tulsa.



�The rebound has been synthetic, fabricated by governments that can’t afford it,� droned one presenter, whose speech was accompanied by a PowerPoint image of New York City sliding over a waterfall. He then warned the audience members, who were mostly wearing dark suits and funereal expressions, to expect the course ahead to be �wrenching and unpredictable.�



At least the premillennialists have Jesus. In midtown in the spring of 2010, all anyone in the hedge-fund world seemed to believe in was gold.



Then, late in the afternoon, David Tepper, a hedge-fund manager out of New Jersey, bounded up onstage and ripped off his tie, as though the lack of air in the room had become physically constraining. �I got a little story for you,� he said into the microphone, and proceeded to read it from a crumpled piece of paper in his hand.



�In 1898, the first international urban-planning conference convened in New York,� he said. �It was abandoned after three days because none of the delegates could see any solution to the growing crisis caused by urban horses and their output. In the Times of London, one reporter estimated that in 50 years, every street in London would be buried under nine feet of manure.�



He paused, allowing people in the crowd to snicker to themselves, then went on to recommend a handful of investments most would consider highly risky, among them debt in AIG and equity in financial companies like Bank of America and even some banks in teetering Europe. �I know, everyone hates the financials,� he said. �But the PIIGS��Portugal, Ireland, Italy, Greece, and Spain, considered to be the most troubled European economies��every single one has a deficit-reduction plan! The ECB�the Bundesbank�bought back government bonds!� He paused for dramatic effect. �Holy Christ. It’s like the chastity belt is off, and the girl is starting to play.�



The crowd tittered nervously. �On the way to work this morning, I got a headache because I was listening to one guy talking about how there’s gonna be hyperinflation. And then after him there was some guy telling me there’s going to be a depression and deflation. Neither�neither�is most likely going to happen,� he said. �The point is, markets adapt, people adapt. Don’t listen to all the crap out there.�



Tepper had good reason to feel confident in this thesis. Last year, when the market effectively crapped itself, Tepper’s firm, Appaloosa Management, made a fortune rolling around in it. In February and March 2009, when consensus had coalesced among market watchers that certain financial institutions were insolvent and would have to be nationalized, triggering a massive sell-off that drove shares of companies like Citigroup and Bank of America into the single digits, Tepper decided to tune out the chatter. After all, the Treasury Department had said it would hold up the banks�why wouldn’t they keep their promise? He directed deputies at his firm to purchase billions of dollars’ worth of bonds and stocks in those and other financial institutions. Then they waited.



At the time, taking such a position was like swimming into the ocean as a tsunami approaches: It looked crazy. But actually it was the right thing to do. When the government intervened as promised, the value of the shares shot back up. Appaloosa made over $7.5 billion. Not bad for a tiny fund from New Jersey.



�It was like that scene in Trading Places with the orange-juice futures,� Tepper recalled early this summer, over lunch at the Hilton Hotel near his office, which is located in a nondescript red building across from the mall in Short Hills. �The whole market and the whole world were in pure panic,� he said, chuckling. �Everyone was too scared to do anything.�



The trade shot Tepper to the top of the list of hedge-fund-industry earners annually compiled by AR Magazine, just ahead of famed investor George Soros, and earned him comparisons to Warren Buffett in the financial press and a certain amount of hero worship inside the industry. �He is a golden god,� one distressed-debt investor told me, admitting that he had the Wall Street Journal article describing the trade taped to his wall. �Can you give him my résumé?�



In addition to an increase in profile, the trade netted him a personal payday of nearly $4 billion, more money than Tepper, who grew up in Pittsburgh and had never even been on a plane until he was 21, literally knows what to do with. �What do you think I should do with it?� he asked me. �I could buy an island. I could buy a private jet�but I have NetJets. I could get myself a 22-year-old!



�Sometimes,� he whispers, leaning across the table, �if someone is an asshole, like a waiter at a restaurant, I think, I could just buy this place and fire that guy.�



He may sound like Richard Pryor in Brewster’s Millions, but if Tepper really wanted a private plane or a 22-year-old, he could have acquired either long ago. Unlike, say, John Paulson, who hasn’t much distinguished himself since his bet against the housing market was described as The Greatest Trade Ever, he’s not exactly a one-hit wonder. It’s just that before the economy melted down, no one really paid attention to what some guy in New Jersey was doing.



Tepper has been a billionaire�he has to think about it for a minute�since about 2003. Seven years ago. Not that you’d know it from looking at the stone house in Livingston, New Jersey, where he has lived and raised three children with his wife, Marlene, for the past twenty years, or from Appaloosa’s offices, which are sparsely staffed and conspicuously lack a statement staircase, Jeff Koons sculptures, or any other signs of the taste hedge-fund money usually buys.



But in the seventeen years since he founded Appaloosa, its assets have grown from $57 million to $13 billion. His annualized compound return in that time period is 30 percent net to investors, putting him in line with legendary money managers like Soros, Stanley Druckenmiller, and Julian Robertson.



Again, not that you’d know it. �I will tell you this,� says his friend Phil Glassman, a neighbor with whom Tepper plays poker on Thursdays and golf on Saturdays. �If Dave can take twelve bucks off me on the golf course, he will do it, with pleasure and with a smile.�



Tepper loves it when people say things like this about him. �They’ll also tell you, �He never carries cash and has to borrow money to pay for things.’ See?� he says, opening his wallet. It is indeed empty. Also, he could use a new one. �I’m just a regular upper-middle-class guy who happens to be a billionaire.�



Obviously, he has professional reasons for wanting to come off this way�investors like to think the money managers handling their pension funds and endowments are penny-pinching rather than profligate. But for him, it’s more like an obsession. He gleefully describes how he talked the artist Peter Max down on a series of portraits of hedge-fund managers he did for Trader Monthly a few years ago. He’s been known to badger the secretaries about spending too much money on paper cups for the office and for years drove to work in a rusted minivan even while, one employee notes, �half the people in the office were driving Porsches.�



Tepper also has personal reasons for flying under the radar: Being �the billionaire next door,� as Glassman puts it, can be kind of awkward. �You’ll write this article and I’ll hear from someone I haven’t heard from in a long time asking for money,� says his sister, Sheryl Weitman, who lives in Florida. �And I think that’s a hard thing about being David. How do you know who’s your friend, and who is your friend because of the money?�



This is not to say that Tepper doesn’t occasionally act like a billionaire. In 2004, he donated $55 million to his alma mater, Carnegie Mellon. Recently, when the owners of the Pittsburgh Steelers indicated they were willing to sell a stake in the team, he seized the opportunity with childlike enthusiasm. �Owning your favorite football team? Getting to watch all the games from the field? That’s every little boy’s dream,� says his friend Marc Kramer. (So is this: Flying private to every game with four of your closest friends. �It’s like a middle-aged version of Entourage,� says Kramer.) Five years ago, the Teppers hired Ashlee Simpson to sing at their daughter’s bat mitzvah. For his own 50th, he threw himself a little get-together at the Mandarin Oriental, during which he danced onstage with Ellen DeGeneres and sang �All I Wanna Do� and �If It Makes You Happy� with Sheryl Crow.



�It was a kick-ass evening,� remembers his college friend Roland Lazzaro. You wouldn’t have read about it in �Page Six,� though. Steven Schwartzman apparently hogged all the birthday-party news that year.



Lately, perhaps because this recent success has upgraded his status from merely having money to having what on Wall Street is commonly called Fuck-You Money, he doesn’t seem to care as much that people know about his wealth. This past spring, he finally bought not just a vacation home but the vacation home: a $50 million, 6,200-square-foot oceanfront property in the Hamptons belonging to Joanne Corzine. �I’m ready to be rich,� he told a reporter before he made the purchase.



Tepper’s sister thinks he should get security with his increased exposure, an idea he scoffs at. �No one gives me any trouble,� he snorts, bulking up his ex-football-player shoulders. He’s been targeted in other ways, though: In July, the Securities and Exchange Commission, lately on the lookout for obvious targets to make an example out of, zeroed in on a trade Appaloosa made in November 2008 in which it sold short Wells Fargo stock (effectively assuming the position that the bank would fail) then bought it back five days later at a reduced price. In a letter to investors, Tepper denied �knowingly� manipulating the price of the stock in order to get a deal on it, but he still ended up paying a $1.3 million penalty.



Everyone has an idea of what Tepper should do with his recent windfall, from his family to Warren Buffett and Bill Gates to obscure societies. �My favorite is the Loch Ness Monster Society,� he says. �Like, can you support research into the Loch Ness Monster? The Loch Ness Monster!�



He’s also been getting a lot of letters from kids asking him to pay their college tuition. �I’m gonna have somebody put together a form letter for that,� he says. �It’ll say something like, I’m going to give you a great gift. What I got: Nothing.�



The backstories of Wall Street power players usually contain some element of hardship, some kind of experience that gives a context to their shameless drive to pursue wealth beyond reason: Goldman Sachs’ Lloyd Blankfein grew up in the Linden projects in Brooklyn. Philip Falcone shared a three-bedroom house with eight siblings while his mother slaved at the local shirt factory. George Soros had to hide from the Nazis.



David Alan Tepper’s childhood was just average. Born in 1957, he grew up in Stanton Heights, a middle-class section of Pittsburgh. His father, an accountant, was preoccupied by a certain amount of financial angst, but then, he had three children. David, the middle child, played football and memorized the baseball statistics on the backs of cards given to him by his grandfather�early evidence of what he claims is a photographic memory. �He was analytical,� remembers his brother, Scott. �We had a railing on our porch, and he would be like, �If I put my head in there, would I get stuck?’ �



He also distinguished himself as a wisecracker, a guy’s guy, a reputation he maintained throughout his time at the University of Pittsburgh and then at Carnegie Mellon, where he regaled classmates in the M.B.A. program�now called the David A. Tepper School of Business�with his Elvis impressions during the annual student follies.



�He was kind of a character,� says his classmate Rich Goldberg. �He had a huge amount of self-�confidence, and he was pretty irreverent.�



He planned, as a child, to be rich. �I’m going to be a millionaire before I’m 30 years old,� he used to say, according to his sister. He wasn’t, though he was making six figures as a trader at Goldman Sachs in New York, where he had transferred from Boston. His future wife, Marlene, would soon join him, much to the chagrin of her family: Her sister wrote her a letter warning her David might be after her money.



Tepper landed in New York in the mid-eighties, at the heart of the junk-bond boom. Goldman Sachs was late getting into the business when the firm moved Tepper onto the desk. �They saw it as kind of unsavory,� says Jonathan Kolatch, who worked alongside Tepper and now runs a hedge fund, Redwood Capital Management, in nearby Englewood Cliffs. His analytical mind gave him an edge; he could see value in ailing companies where others couldn’t.



After the market imploded in 1989, most banks dissolved their high-yield trading desks. But Goldman’s survived, in part because Tepper, who had worked his way to head trader, helped take the edge off with a canny move: purchasing underlying bonds in the financial institutions that had been crippled by the crash. When the banks emerged from bankruptcy and the market picked up again, the value of the bonds soared. After these successes, Tepper assumed Goldman would reward him with partnership. He thought wrong. The culture of Goldman Sachs is like Survivor: You have to choose your alliances carefully. While Tepper had formed a friendship with Robert Rubin, the head of fixed income, he’d neglected to endear himself to Jon Corzine, the head of his division and the person in charge of determining his fate. The fact that Tepper chose a mentor over his head needled Corzine, according to his former co-workers. Also, there was his personality. He was a boundary-pusher, loud and profane, and a know-it-all, who claimed, among other things, to have popularized the phrase �It is what it is.�



�David is not Mr. Goldman Sachs,� says Kolatch. �He does not have that navy-suit, Harvard-type background. I think he looked to them like a little bit of a renegade.�



Fortunately, this type of personality was perfectly suited to the burgeoning world of hedge funds. After being passed over for partner a second year, Tepper quit. The mutual-fund manager Michael Price, a Goldman client, lent him a desk at his office, where Tepper began aggressively trading his personal account, hoping to raise enough money to start his own fund.



In 1993, with a few big scores under his belt and an investment from Jack Walton, a fellow Goldman junk-bond trader who agreed to become a partner (he has since retired), he started up Appaloosa. Since then, the fund has grown in adolescent fits and starts. Distressed investing is a tricky area: When you’re purchasing the garbage of a troubled company, hoping to find something valuable you can pawn, it’s �feast or famine,� as one investor puts it. Year to year, Appaloosa’s rate of return is wildly uneven. In 1998, Tepper bought a bunch of Russian debt on the assumption that the Russian government wouldn’t default. When it did and the ruble collapsed, it cost his fund hundreds of millions of dollars. But even as the market tanked, Tepper kept buying the ever-cheaper bonds, and a few months later, his tenacity paid off: The fund went up 60 percent.



A similar situation occurred in 2002, when the junk-bond market collapsed for a second time. Tepper lost 25 percent, but made up for it the following year, when bonds he’d purchased in bankrupt companies went up 150 percent. He took home $500 million, at the time a personal best, and the following year made his donation to Carnegie Mellon.



At the gala reception announcing the gift, his college buddy Roland Lazzaro aired a video tribute to his friend. One segment was called �Cindy Perl: Thanks for Nothing,� after Tepper’s high-school girlfriend.



�Everybody in your life, there’s one person you want to rub their nose in it,� said Lazzaro. �After a five-year relationship, she said to him, �David, I love you, but I don’t think you’re going to be able to support the lifestyle I want.’ � She ended up marrying a dentist.



Speaking of people whose noses Tepper might want to rub in his success, it’s worth noting that he happened to buy the exact $50 million mansion owned by the ex-wife of the man who had passed him over for partnership at Goldman Sachs. �You could frame it that way,� Tepper says, breaking into a grin. �You could say there was a little justice in the world.� The Teppers plan a total renovation of the mansion, which will likely involve razing the current property to the ground.



Tepper has a pair of brass testicles. Cartoonishly huge and grotesquely veiny, they are affixed to a plaque inscribed with the words THE MOST VALUABLE SET OF ALL TIME and are not at all out of place in Appaloosa’s offices, which resemble a high-end sports bar�all polished mahogany and flat-screen TVs and black-and-gold Steelers paraphernalia�or a wealthy frat house. (�We had this client, they make breast implants,� says a former employee. �He loved to keep them on the desk, he’d love to throw them around.�) Appaloosa is staffed almost entirely by men.



The balls were a gift to Tepper from a former employee�Alan Fournier, who now runs his own fund, Pennant Capital Management�in the wake of Tepper’s big score in 2003. Tepper had purchased the distressed debt of the three then-largest bankruptcies in corporate history: Enron, WorldCom, and insurance giant Conseco. When they emerged from bankruptcy and the debt appreciated, Appaloosa went up a whopping 148 percent.



Those trades were classic Tepper, according to a former analyst, in that they were complicated in execution but simple in theory. �He takes a macro perspective on something, for instance this European sovereign crisis, which is that �it’s not going to be that bad,’ � explains Kolatch. �And then he takes that and applies it to a micro idea, a particular stock, as opposed to saying I’m going to do this with the currency or do this with the interest rate, which is kind of what the macro guys do. He’ll buy these particular three stocks that will reflect this macro idea.�



This could be another reason why Tepper is so invested in being a regular guy. It pays to think like one. Of course the government will keep its promise, a regular guy would think. Of course California will bail out Pacific Gas & Electric Company, because it’s not going to let the state not have power. Of course Russia won’t default on its debt, since it can just print rubles the same way America prints dollars�eh, well, you can never really predict what those crazy Russians will do.



�She’s saying you’re a master of the obvious,� cracks Eric Cole, a newish trader recently from Morgan Stanley, when I float this theory.



Tepper doesn’t so much deny this as make it sound smarter. �I think when it comes to decisions, I try not to be emotional. To drown out the noise and look at the important facts.� Keeping your head about you when others are losing theirs is a lot easier said than done, especially in the midst of a panic like the one in 2009, when the data and rumors were at a fever pitch and people were worrying about whether they had enough canned goods to survive an economic siege. Even others who did the same trade as Tepper were afraid of going in as deeply. �That’s why he’s got a house in the Hamptons and I don’t,� says Kolatch.



Asked where this preternatural confidence comes from, Tepper merely shrugs. �I was never afraid to go back to Pittsburgh and work in the steel mills,� he says.



Of course, he’s also cocky enough to believe he’ll never have to. �David has succeeded over time because he believes he’s the exception,� says Marc Lasry, the billionaire founder of Avenue Capital, a hedge fund that has invested in the same companies as Appaloosa. �If that’s how you’ve succeeded for twenty years, it’s hard to believe it’s going to end. I can guarantee you that David thinks he’s usually right. That he’ll be like, �Over time, I will always do a better job than others.’ It’s the only way he and others like him can succeed.�



�I used to get really upset when I had a down year,� Tepper says. �Now that I’ve been doing it this long, I have a much easier time. What matters, ultimately, is the track �record I have over time.�



There’s simply not enough upside in self-doubt. �We’re not afraid to lose money,� says Tepper. �Hence the plaque. I should say, we’re not afraid to make money.�



They’re not afraid to fight for it, either. Tepper likes to point out that Appaloosa is not a �vulture� fund exclusively and that the majority of investments are in equities, but that’s like a professional assassin pointing out that he doesn’t spend all his time killing people. The thing he is best at is finding a deal, and the best deals are found in sick and ailing companies. And this can be a dirty business. Two years ago, Tepper headed up a consortium that agreed to help auto manufacturer Delphi exit from Chapter 11 protection�only to pull out at the last minute after the credit markets seized up, stymieing the company’s ability to get financing. A bitter battle ensued. Delphi filed a lawsuit against Appaloosa, alleging, among other things, that Tepper �pushed, with the grace and diplomacy of a battering ram, to play a central role in the reorganization� of the company, only to turn tail and �manufacture an excuse� once they lost interest.



�I’m no longer mad,� says former Delphi CEO Steve Miller, who is now the chairman of AIG. Tepper has �certainly got a touch of arrogance, but he’s really entitled to it. He’s the kind of guy who moves ahead while you are trying to figure out what to do with your pawn. His ability to do math, really complicated balance-sheet math in his head, was awesome. But he’s impatient with us lesser mortals.�



By all accounts, Tepper’s personal volatility is as up and down as his returns. �He’s an asshole, to say the least,� says someone who worked with him. �I had stuff thrown at me. He can be a nice guy off the desk, in the kitchen or walking to the car. It’s almost like Jekyll and Hyde, you didn’t know any given day who was going to walk through the door.� This is not merely someone with a grudge. When Tepper coached elementary-school kids in softball, Phil Glassman says, he could be heard screaming all the way down the block.



Tepper admits he can be difficult. �I used to be worse,� he says over the phone. �When I was at Goldman, I’d say things to people like, �Do you know what a schmuck is? Go look in the mirror.’ Now I’m kinder and gentler. Aren’t I kinder and gentler?� he asks his employees.



In the background there’s silence.



�Aren’t I kinder and gentler?�



Over the summer, even Tepper’s outsize confidence was shaken. By August, Appaloosa had reduced its stakes in financial companies and picked up safer blue-chip pharmaceutical stocks.



Thanks to weak economic figures, discouraging jobs reports, and the sense that policy-makers were unlikely to provide any more stimulus, Tepper was close to becoming one of the doomsayers he had made fun of just a couple of months before. He was quoted prominently in a Wall Street Journal article, hemming about deflation. �It just feels very uncertain right now,� he said over the phone in August. �I’m a natural optimist, but the numbers are just horrid. The whole economy is stuck in mud. Thick. Dark. Mud.�



Sure, he was still having fun: There was golf, and poker, and his nephew’s bachelor party, among other things. But his main pleasure, trading gargantuan sums of money, was unavailable to him. �This company looks cheap, that company looks cheap, but the overall economy could completely screw it up,� he said grumpily. �The key is to wait. Sometimes the hardest thing to do is to do nothing.�



Basically, Tepper was bored. Betting on the markets is �like gambling,� he said. �It fills that same rush.� And once you get the rush of making $4 billion, it’s hard to fill that void with anything else.



�What would I do?� he said, back at the Hilton, when I asked why, with more money than he could ever need, he didn’t just quit while he was ahead. �When do you stop trying to be the best?�



Fortunately for Tepper, he didn’t have to wait too long. By early September, his spirits were up considerably. The government had indicated it was not completely averse to another stimulus. Things were bad, but they were moving. �I’m feeling more optimistic,� he said in September. �The mud is loosening up.� Soon, he’ll be ready to dive into it again.

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