Wednesday, October 1, 2014

Julian Robertson

I've been reading as much as I can about Julian Robertson. He interests me not only because he's been very successful but because his style of investing is different from mine. I'm always trying to learn new ways to invest, and whom better to learn from than a legend?

One biography of Robertson has been published, Daniel Strachman's Julian Robertson: A Tiger in the Land of Bulls and Bears. The book gets terrible reviews on Amazon, and unfortunately they're justified. The book is riddled with solecisms and awkward metaphors, but its worst flaw is its extreme repetition, which includes gems like "The firm would need to diversify its assets to ensure that it did not put all of its eggs in one basket" and "Winning, you see, is everything to Robertson. Robertson is all about keeping score. To the victor goes the spoils, and he always wants to be the victor."

John Train provides a much better-written profile of Robertson in Money Masters of Our Time. Robertson has also given numerous interviews over the years. The best of these are his two Barron's interviews from the late 1980s, and his 2006 interview with Value Investor Insight. In 1996, Businessweek published a hatchet job on Robertson called "The Fall of the Wizard." Below is what I've been able to piece together about his career.

Tiger's early years

After serving in the Navy, Robertson worked at Kidder Peabody for two decades as a stockbroker. Unlike many brokers, he tried to understand securities instead of merely selling them, and he began trading stocks as a sideline. Early success as a trader attracted the attention of his colleagues at Kidder, and he agreed to manage money informally for several of them.

One of those colleagues was Robert Burch, the son-in-law of hedge-fund pioneer Alfred Jones. Burch and Jones probably gave Robertson idea of starting a hedge fund. In any case, when Robertson left Kidder and set up the Tiger Fund in 1980, they were among its first investors, and Tiger employed the strategy that Jones had pioneered, buying some stocks while shorting others as a hedge.

Robertson founded Tiger with Thorp McKenzie, another broker from Kidder, but McKenzie left the fund in 1982. From then on, Robertson ran Tiger as a glorified one-man shop: while he depended on numerous analysts to research potential investments, he made all the trading decisions personally.

The 1987 crash

Tiger's performance during its first five years was phenomenal: despite being partially hedged in a roaring bull market, it consistently beat the market indices. Returns slackened in 1986, however, and the 1987 crash blindsided Robertson. Two weeks before Black Monday, he wrote to Tiger's investors that "I do not see great danger of a drastic market decline until we all get a great deal more complacent."

He had assumed that the overvalued Japanese stock market would peak first, providing a warning signal for any downturn in the US market. In fact, Japan held up comparatively well during the crash, and since Tiger's largest shorts were Japanese stocks while its longs were mostly American companies, its hedging strategy failed dramatically.

Robertson was bullish after the crash, partly as a reaction to what he saw as near-universal bearishness. He told Barron's in December 1987 that "there are so few bulls that I can’t imagine who’s going to impregnate the cows." He also thought that the crash would have a limited effect on the general economy-- it might even help it by lowering mortgage rates, which he considered more important to most Americans than the stock market-- and that many stocks were cheap. In Barron's he touted Ford Motor trading at 4x earnings, thrifts at 4-6x earnings and a discount to tangible book value, and PVC manufacturers at 6x earnings.

Japan's bubble

Robertson became bearish on Japan in 1986. Japanese companies traded at astronomical valuations even though, contrary to popular perception at the time, they were earning much worse returns than their American counterparts. In the 1987 Barron's interview, he mentioned Nippon Telegraph and Telephone and Japan Airlines as being particularly overvalued. Incidentally, although Japan's Nikkei index rose 70% from the time of Robertson's interview to its peak on the last day of 1989, JAL was flat during that period. NTT also peaked long before the Nikkei.

During the 1990s, Tiger profitably shorted Japanese bank stocks. By then Japan's economy had slowed and the banks' problems with bad debt had become well-known, but they continued to trade at much higher valuations than American and European banks before belatedly crashing.

Not all of Robertson's predictions proved correct. During the late '80s, he assumed that the Japanese stock market would plunge and that this would spur the Japanese to invest more abroad. While the market did plunge, it had the opposite effect, as Japanese businesses curtailed their foreign investments.

A move to macro

As Tiger's assets under management grew from a few hundred million in the late 1980s to $22 billion at its peak in 1998, Robertson's interest in macro trading grew commensurately: "I think, without actually realizing it, we put more and more into those types of trades because we realized that they were more liquid than anything else, so we became—sort of by osmosis—more involved in macro."

Although his macro returns seem to have matched his stock-picking returns, they were much lumpier. Tiger had a phenomenal 1993, followed by two disappointing years and then a roaring comeback in 1996-97. In October 1998, Tiger fell 18% because of a wrong-way bet on the Yen. Around the same time its original long-short strategy began to fail as the Internet mania reached a fever pitch, and Robertson had to shut Tiger down in March 2000 after it fell 43% in the preceding eighteen months.

Since 2000

Robertson supposedly quintupled his money in the eight years after closing Tiger. In 2006, he predicted the housing bubble and drew an important distinction between debt and equity bubbles:

"I actually think the insanity of the late 1990s is repeating itself... There’s a more serious bubble today than there was then... The Internet bubble affected a few of us, but the vast majority of Americans were not fazed by that. Now you’ve got people living on the refinancing of equity in their homes and almost all of us own homes."

In the same interview, he described how his idea of value has evolved:

"When I started in the business and for a long time, my concept of value was absolute value in terms of a price-earnings ratio. But I would say my concept of value has changed to a more relative sense of valuation, based on the expected growth rate applied against the price of the stock. Something at 30x earnings growing at 25% per year – where I have confidence it will grow at that rate for some time – can be much cheaper than something at 7x earnings growing at 3%."

I suspect that, as with Robertson's increasing reliance on macro trading, necessity motivated this change in philosophy. The statistically cheap stocks that Robertson had been buying in the '80s had all but disappeared by the late '90s, and they remain rare today.

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