David Tepper on investing under uncertainty: practice
We discussed how David Tepper protects his positions. However, at the same time when have your heard a value investor saying anything remotely like this:
We’re not afraid to lose money. Hence the plaque. I should say, we’re not afraid to make money – David Tepper
The thing that comes to mind with him is not his defense. In complete contrast to Seth Klarman for example his record is consistently inconsistent … as he would be the first to recognize. He has several years of average or below average returns punctuated by home runs every five years or so. As Seth Klarman is the master of being fearful when others are greedy, you could say that David Tepper is the master of being greedy when others are fearful… an important ability to learn if you ask me.
All the points that we discussed on how he protects his downside came into fruition in his now famous March 2009 trade:
Tepper was sitting on a pile of cash, having sold out of most of his positions in the spring of 2008, and didn’t have any debt. So when the U.S. Treasury put out a white paper in February 2009 announcing its Financial Stability Plan, which included the Capital Assistance Program designed to shore up the capital of banks, he took his time and read the fine print.
The white paper and term sheet said the preferred stock the government was buying in the banks would be convertible to common shares at prices far above current trading levels at the time — which meant it was indeed a time to buy, buy, buy.
So he did. The fund began amassing sizable positions in bank-related securities: common and preferred shares, and junior-subordinated debt, to be exact. His targets, Bank of America and Citigroup in particular, as rumors circulating that the banking behemoths would be nationalized in early 2009 edged the stocks to near collapse.
Tepper was able to buy Bank of America preferred shares at just twelve cents on the dollar and Citigroup bonds at just nineteen cents. As those stocks rallied by the end of 2009, Appaloosa raked in the billions.
Appaloosa also was able to buy about a billion dollar’s worth of AIG’s commercial mortgage-backed securities at nine cents on the dollar. Currently trading at about ninety-three cents, the “AIG ace” was a major coup and contributor to the firm’s success in 2009.
“Most of the upside was on the preferred and debt side, “ he says. “That’s perhaps why so many people missed this trade. They just couldn’t see it.” – NetNet profile
Let me emphasize this last point: most of his bets on banks and AIG were on the preferreds and debt side.
He also bought substantial stakes in common and preferred equity in several zombie REITs (NCT, GKK, MPG). We discussed one of these REITs and I hope to have showed that it had a margin of safety.
This is a sample of other moments:
- 1989 Junk Bonds Collapse: “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.”
- 1998 Russia: “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.”
- 2002 Junk Bonds Collapse Again: “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, 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.”
- 2010 Quantitative Easing: “You talk about when you get moments, this might be one of those—kind of (…) Either the economy is going to get better by itself in the next three months…What assets are going to do well? Stocks are going to do well, bonds won’t do so well, gold won’t do as well. Or the economy is not going to pick up in the next three months and the Fed is going to come in with QE. (…) What, I’m going to say, ‘No Fed, I disagree with you, I don’t want to be long equities?’ Sometimes is that easy, not all investment decisions are difficult ones”
- CNBC interview
- NY Magazine Profile
- Ira Sohn Conference
- NetNet on the 2009 trade
- Felix Salmon on the 2009 trade
- Wall Street Journal
- Pittsburgh Tribune-Review
- The Independent
- One of several FT articles on Delphi
- Buys Corzine’s house