David Tepper has been one of the most followed and admired hedge fund managers for the past decade. He has the folksy wisdom of Warren Buffett, the analytical deepness of Jim Rogers, and the trading acumen of George Soros. He launched his fund Appaloosa in 1993 with $7 million of his own and $50 million outside money. Since then, he has averaged an annual return of 30% after fees. He invests in high yield bonds, distressed debt, and equities in the U.S. and emerging markets.
Tepper explains his investing philosophy with the phrases “trees grow” and “Those who keep their heads while others are panicking do well.” In other words, growth is natural and optimism tend to get rewarded over time. He is accustomed to invest a large portion of his portfolio into a single idea.
Tepper made most of his money out of the recoveries from big market corrections – emerging markets in 1997, the tech crash in 2000-2002, the financial crisis in 2008. Not during, after. His fund lost 25% in 2008. Made 120% after fees in 2009.
Big corrections create big opportunities. As Peter Lynch said a long time ago, “It is not entirely clear what causes deep market corrections, but without them, many of the best performing long-term investors would have never achieved their spectacular returns.”
It seems Tepper’s market approach has changed from being a trend follower to being a deep value investor. He was short going into the 1987 crash.
Going into the crash I had set up my entire portfolio as just short – I had no long positions. I made a fortune during and after the crash. It was very cool.
We don’t really buy high-flyers. We buy before they get high-flyers.
Patience and Confidence to act on your own analysis are key.
The main thing that makes Appaloosa stand apart from the pack is the depth of our analysis and the fact that we’re not afraid to be the first one to act on our convictions. If you look at our history over the years, we are usually the first mover in a country or situation, time and time again.
For better or worse we’re a herd leader. We’re at the front of the pack, we are one of the first movers. First movers are interesting, you get to the good grass first, or sometimes the lion eats you.
We’re value-oriented and performance-based like a lot of funds. But I think what differentiates us is that we’re not afraid of the downside of different situations when we’ve done the analysis. Some other people are very afraid of losing money, which keeps them from making money.
Tepper likes to replay his losses in his head:
It is the only way you learn from your mistakes.
Tepper says that losing 29% ($80 million) on Russia when Russia defaulted after an IMF deal “the biggest screw-up in his career”.
I’ve made a lot of bad trades.
The worst trade we’ve made was probably in 1998. It was Russia and we thought Russia could devalue but they wouldn’t default. But they did both. So we kind of miscalculated that. We were too long and I couldn’t get out of that trade. We were down 20 something percent.
We had huge emerging market and junk positions that we sold down to avoid disaster, so we were able to act fast. Our biggest mistake was not realizing how illiquid markets could get so quickly. Many firms went out of business at the time, and at one point, I wondered if we would be able to survive. That was kind of an interesting lesson for a lot of people.
Tepper bought back Russian bonds after the default in 1999 at five cents on the dollar. He made 61% on that trade:
It was like minting money. It was almost worth all the hell we had to go through.
Size matters. The amount of capital you manage can impact your approach significantly. Tepper routinely returns principle and profits to his investors after a strong year.
The question is what size gets you – except more fees for the manager. But it doesn’t necessarily make the investor more money.
Fixed income funds should naturally be a little bit larger than, say, equity funds. You want to be big enough that you can see everything and small enough that you don’t kill yourself with size. So I think different sizes are right for different types of funds.
Say you want to buy 5 percent of a $2 billion company, and have it be meaningful. That means it’s a 1 percent position in a $10 billion fund. So if you’re an equity fund, if you keep getting bigger and get to $20 billion, that means your position is now only a half percent position. The 1 percent position doesn’t do much for the fund and so the half percent position does half as much. So there’s an aspect to the business, in equity funds especially, that gets funky on size.
No market approach works all the time. There are times to be aggressive and there are times to sit and wait.
Sometimes it’s time to make money, sometimes it’s time not to lose money.
The key is to wait. Sometimes the hardest thing to do is to do nothing.
Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.
The media says that hedge funds are the new masters of the universe… We’re just a bunch of schmucks.
Tepper is also famous for his charity work:
The more I make, the more I’ll give away.