1. “Smart idea, grounded on exhaustive research, followed by a big bet.”
“Hear a story, analyze and buy aggressively if it feels right.”
A colleague of Robertson once said: “When he is convinced that he is right, Julian bets the farm” George Soros and Stanley Druckenmiller are similar. Big mispriced bets don’t appear very often and when they do people like Julian Robertson bet big. This is not what he has called a “gun slinging” approach, but rather a patient approach which seeks bets with odds that are substantially in his favor. Research and critical analysis are critical for Julian Robertson. Being patient, disciplined and yet aggressive is a rare combination and Robertson has proven he has each of these qualities.
2. “Hedge funds are the antithesis of baseball. In baseball you can hit 40 home runs on a single-A-league team and never get paid a thing. But in a hedge fund you get paid on your batting average. So you go to the worst league you can find, where there’s the least competition. You can bat 400 playing for the Durham Bulls, but you will not make any real money. If you play in the big leagues, even if your batting average isn’t terribly high, you still make a lot of money.”
“It is easier to create the batting average in a lower league rather than the major league because the pitching is not as good down there. That is consistently true; it is easier for a hedge fund to go to areas where there is less competition. For instance, we originally went into Korea well before most people had invested in Korea. We invested a lot in Japan a long time before it was really chic to get in there. One of the best ways to do well in this business is to go to areas that have been unexploited by research capability and work them for all you can.”
“I suppose if I were younger, I would be investing in Africa.”
What Julian Robertson is saying is that there is profit for an investor in going to where the competition is weak. Competing in markets that are less well researched give an investor who does their research an advantage. Charlie Munger was once asked who he was most thankful for in all his life. He answered that he was as most thankful for his wife Nancy’s previous husband. When asked why this was true he said: “Because he was a drunk. You need to make sure the competition is weak.”
Warren Buffett makes the point that the way to beat Bobbie Fisher is to play him at something other than chess. Buffett adds: “The important thing is to keep playing, to play against weak opponents and to play for big stakes.” And “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.” Some investors try to find a market or a part of a market where you aren’t the patsy if you want to outperform an index.
3. “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.”
The investing strategy being referred to here is a so-called “long-short” approach in which long and short positions are taken in various stocks to try to hedge exposure to the broader market which makes gains more associated with solid stocking picking. This approach is actually involves an attempt to hedge exposure to the market, unlike some hedge fund strategies that involve no real hedging at all. When Julian Robertson started using this this long-short approach it was less used and short bets especially were more likely to be mispriced than they are today. Many of Julian Robertson’s so-called “Tiger Cubs” continue to do long-short investing. A recent report claims that $687 billion is currently invested in long-short equity hedge funds.
4. “Avoid big losses. That’s the way to really make money over the years.”
Julian Robertson believes that hedge fund should make it a priority to “outperform the market in bad times.” That means adopting a strategy where the hedge fund actually hedges. As previously noted, the long-short strategy helps achieve that objective. Another way to avoid “big losses” is to buy an asset at a substantial discount to its private market value. When the right entry point is found in terms of price, an investor can make a mistake and still come out OK financially. This, of course, is a margin of safety approach.
5. “For my shorts, I look for a bad management team, and a wildly overvalued company in an industry that is declining or misunderstood.”
When an investor shorts a company with a bad management team it is a safer bet since a business with a good management team is far more likely to fix problems. In other words, if a shorted business has a bad management team it is insurance that the real business problem problem underlying the short will continue. Julian Robertson is also saying that the overvaluation must be “wild” rather than mild for him to be interested in a short, and that he likes shorts in an industry in secular decline so the wind is at his back.
6. “There are not a whole lot of people equipped to pull the trigger.”
“I’m normally the trigger-puller here.”
The system used by Julian Robertson may decentralize the research and analysis function but it concentrates the trigger pulling with him. The newsletter Hedge Fund Letters writes: “Managers oversaw different industries and made recommendations but Robertson had final say. The firm made large bets where they had conviction and each manager commonly covered less than ten long and shorts. Positions were continuously revisited and if things changed there were no holds – positions were either added to or removed.” Someone can be a great analyst and yet a lousy trigger puller. Successful trigger pulling requires psychological control since most investing mistakes are emotional rather than analytical.
7. “I’ve never been particularly comfortable with gold as an investment. Once it’s discovered none of it is used up, to the point where they take it out of cadavers’ mouths. It’s less a supply/demand situation and more a psychological one – better a psychiatrist to invest in gold than me.”
“Gold bugs, generally speaking, are some of the craziest people on the face of the globe.”
On gold, Julian Robertson agrees with Warren Buffett, who has said:
“The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else — who also knows that the assets will be forever unproductive — will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century. This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future. The major asset in this category is gold, [favored by investors] who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end. What motivates most gold purchasers is their belief that the ranks of the fearful will grow.”
To buy gold is to speculate based on your predictions about human psychology. That is not investing, but rather speculation. A gold speculator is engaged in a Keynesian Beauty contest: “It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment, Interest and Money, 1936).
8. “When you manage money, it takes over your whole life. It’s a 24-hour-a-day thing.”
This is a quote from the book Hedge Fund Masters on the Rewards, the Risk, and the Reckoning by Katherine Burton. Julian Robertson is not alone in this way since many financial and tech billionaires only turn to things like philanthropy after a career change. This is also a statement about how competitive and constantly changing the investing world is. Only an academic like Bob Gordon who is not involved in the real world can make a claim that the pace of innovation is slowing. The pace of innovation is increasing and its impact is brutal. With regard to innovation and the level of competition in hedge funds, Roberto Mignone, head of Bridger Management said once: “You’ve got a better chance surviving as a crack dealer in Chicago than lasting four years in the hedge fund business.”
9. “The hedge fund business is about success breeding success.”
One of my favorite essays was written by Duncan Watts and is entitled: Is Justin Timberlake a Product of Cumulative Advantage? The concept of cumulative advantage is so important in understanding outcomes in life and yet it is so poorly understood. The basic idea is that once a person or business gains a small advantage over others, that advantage will compound over time into an increasingly larger advantage. This is sometimes called “the rich get richer and the poor get poorer” or “the Matthew effect” based on a biblical reference. Merton used this cumulative advantage concept to explain advancement in scientific careers, but it is far broader in it application. Cumulative advantage operates as a general mechanism which increases inequality and explains why wealth and incomes follow the power law described by Pareto. Part of what Robertson is saying is that the more money you raise, the more money you can raise [repeat] the more talent you can attract, the more talent you can attract [repeat].
10. ” I remember one time I got on the cover of Business Week as “The World’s Greatest Money Manager.” Everybody saw it and I was kind of impressed with it, too. Then three years later the same author wrote the most scathing lies. It’s a rough racket. But I think it’s a good thing in human narcissism to realize you go from highs and lows based on your views from the press – really, it shouldn’t matter.”
Letting the views of the press on you impact your view of yourself or what you do is folly. Criticism is hard to take for most anyone, but considering the source is helpful in getting past that. The only thing that everyone likes is pizza. My uncle who recently passed away liked to say ‘Illegitimi non carborundum’ which is a mock-Latin aphorism meaning: “Don’t let the bastards grind you down.” This saying was popularized by US General Vinegar Joe Stillwell during World War II, who is said to have borrowed it from the British army.
11. “[In March 2000] This approach isn’t working and I don’t understand why. I’m 67 years old, who needs this? [In March 2000] There is no point in subjecting our investors to risk in a market which I frankly do not understand. After thorough consideration, I have decided to return all capital to our investors. I didn’t want my obituary to be ‘he died getting a quote on the yen’.”
Sometimes the world changes so much that it is time to either take a break or hang up your cleats – especially if you are already very rich. Some people do this successfully. Others ride old methods to their financial doom. Druckenmiller and others decided to mostly retire when they saw that their methods were no longer working. In 1969, Warren Buffett wrote a letter to his partners saying that he was “unable to find any bargains in the current market,” and he began liquidating his portfolio. That situation of course changed and Warren Buffett emerged with a new competitive weapon in the form of the permanent capital of a corporation rather than the panicky capital of a partnership.
12. “[At the age of six.] I still remember the first time I ever heard of stocks. My parents went away on a trip, and a great-aunt stayed with me. She showed me in the paper a company called United Corp., which was traded on the Big Board and selling for about $1.25. And I realized that I could even save up enough money to buy the shares. I watched it. Sort of gradually stimulated my interest.”
If you want a child to be interested in investing it is wise to introduce key ideas to them early in life in real form. No matter how small the stake, the impact of real money at work in a market means the experience is meaningful and memorable. Mary Buffett writes in her book that Warren Buffet believes that whether a person will be successful in business is determined more by whether a person had “a lemonade stand as a child than by where they went to college. An early love of being in business equates later in life to being successful in business.”
Bloomberg Interview: http://www.marketfolly.com/2009/10/julian-robertson-interview-bloomberg.html
CNBC Interview: http://www.cnbc.com/id/101092813
Business Week: http://www.bloomberg.com/bw/stories/1996-03-31/fall-of-the-wizard
Graham and Doddsville Newsletter: http://www8.gsb.columbia.edu/rtfiles/Heilbrunn/Graham%20%26%20Doddsville%20-%20Issue%2015%20-%20Spring%202012.pdf
Forbes Article: http://www.forbes.com/sites/schifrin/2013/06/05/julian-robertson-hedge-funds-are-the-antithesis-of-baseball/
UNC Blog: http://blogs.kenan-flagler.unc.edu/2010/09/27/hedge-fund-pioneer-julian-roberston-on-his-investment-philosophy/
The New Investment Superstars http://www.amazon.com/gp/search?index=books&linkCode=qs&keywords=9780471403135
Hedge Hunters: http://www.nytimes.com/2007/12/19/your-money/19iht-MCOLUMN22.html?_r=0
- A Dozen Things I’ve Learned from Irving Kahn about Value Investing and Business
- A Dozen Things I’ve Learned about Value Investing from Jean Marie Eveillard