Julian Robertson – Start With Management & Avoid REIT’s

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One of our favorite investors here at The Acquirer’s Multiple is Julian Robertson.

Robertson founded the legendary investment firm Tiger Management, one of the first hedge funds. He has trained and supported some of the best hedge fund managers in the world, collectively known as the “Tiger Cubs”.

According to ValueWalk, the Tiger Cubs manage around 50 of the world’s top hedge funds, including Stephen Mandal’s Lone Pine, Andreas Halvorsen’s Viking, Rob Citrone’s Discovery Capital Management, Philippe Laffont of Coatue Management and Lee Ainslie of Maverick Capital.

One of the best Robertson interviews was one he did with The Graham & Doddsville Newsletter. It’s a must read for all investors. Here’s an excerpt from that interview:

G&D: How did you get your start in investing and what has shaped your investment philosophy?

JR: Well it started with my father, who was an interesting guy. He was a very authoritarian figure, but he wanted me to learn a number of different things. He showed me how the stock tables worked in the paper, and I got interested in an early age and we worked on a few stocks together. He was in the textile business but he was a really good investor. I joined the Navy after college, as I had been in the ROTC in college. Prior to the Navy, I never really had any sort of responsibility. But upon joining the Navy, I literally had 700 million pounds of TNT and an atomic bomb under my command. I enjoyed the responsibility. After the Navy, my father wanted me to get some training in New York before I went to a brokerage firm down south. That was 55 years ago, and I’m still here. I’ve adored New York, and if I could force everybody to do it, I’d force them to grow up in a small town in North Carolina and then eventually come to New York.

G&D: What do you think explains your incredible success?

JR: Well I started at the right age, certainly. But what really made me was the realization that I could hire really good young people. When we started Tiger Management, I did that. One of them, John Griffin, used to teach a security analysis course at Columbia Business School and now guest-lectures there. John and I are still great friends. There was a big age difference between us but we’re still close. When he left to go on his own, I didn’t handle it particularly well. If I had been smart I would have taken a piece of his action. We’re probably better friends now though than we’ve ever been. He’s going to host my 80th birthday day in June. His son and my grandson are great friends. I was talking to John the other day about how we’ve never really given anyone too much too soon that they couldn’t handle.

But I said, the trouble was, I tried to rehabilitate a lot of people who, for one reason or another, didn’t have it. So I’ve made some mistakes on that. But our young people were really great. And good ones begat even better ones – even today, we still do! So I’d say the success really belongs to the young people who worked here. John Griffin, Andreas Halvorson, Lee Ainslie, and probably the greatest analyst of all time, Steve Mandel.

G&D: So many of the people that worked at Tiger Management have gone on to be extremely successful investors in their own right. What was the process and the training like here for young analysts?

JR: It was sort of a melting pot. I was so much older than they were, so they had to have a father-like opinion of me. They thought I had a unique touch or something, so they would put me on a plane with one of them, who would act like a camp counselor to keep me from getting in trouble and we’d go to Japan and see what we could learn. We were buying a stock in Korea, and things were so new about it that the paper called the broker and asked who was buying that stock. And the broker told them about us and said that since Tiger was buying so much that he was too. So they didn’t really know what was going on over there either! It was just a gold mine.

G&D: If someone brings an idea to you, what are the first few things you want to know?

JR: The first thing is, is the management decent and honest? A lot of people don’t really care about that. The way to look into that is to do some diligence. Are they actively involved in their community? You should try and find folks who know them and see what they think. Of course, you also want to investigate the growth possibilities. We had fantastic analysts and I found I could count on their earnings projections.

So I sort of turned from a cheap skate investor, one who was focused on low multiple stocks, to one interested in real growth stocks. Today, in my opinion, the world’s cheapest stock is Apple (editors note: the interview was conducted when Apple traded at $450). If that company had existed in the 1970s, it would be trading at 5x what it currently is.

For years I’ve had a fund that I’ve put money into in case of a real crisis. I’ve put TIPS into that portfolio and I’m convinced now that they’re a disaster. There’s just no yield at all. You’re taxed on the yield. So I’m thinking very seriously of shifting all of my TIPS into something like Apple or Google. Apple is just an extraordinary company. They just have ideas. They don’t have any factories. They just have great ideas and then outsource all their manufacturing so that they really don’t take too much operating risk.

G&D: When would you sell Apple?

JR: Well, there will be a time to sell the stock, of course. But right now, they’re trading at 12x earnings for a company with amazing products. This year will see the Apple television set. I’m almost sure of that. But when the stock skids, it likely won’t be a massacre because they have so much cash.

G&D: Could you give us a general sense of what you think an analyst should look at first and what should get one most excited about a particular stock?

JR: I’d say if you have an idea that company management is comprised of really great people, you should look hard at that stock. But keep in mind that people can change too. For example, Steve Jobs was not a great person in many respects before he was fired, according to his biography.

G&D: Of the “Tiger Cubs” that you’ve mentioned, is there one that you feel is most similar to you in terms of investment style?

JR: I think a lot of those guys gravitated toward Tiger Management because they had similar investment philosophies. I would say that there are many more similarities than there are differences between all of us. I would say, though, that some writers out there will try to determine a correlation between the portfolios of the various “Tiger Cubs” or Tiger Seeds. We can show you figures that just blow that right out of the water. On the other hand, I think almost all “Tigers” had sensational 2007s and reasonably good 2008s but not very good 2009s and 2010s. You could say there’s obviously some correlation but it’s not that. It’s just that our fundamental risk parameters were similar.

G&D: Analysts are bombarded with so much information today, what do you think they should focus on to most effectively allocate their time?

JR: I would say that hedge fund investing is, in another sense, the antithesis of base-ball. You can hit .400 and not make much money if you’re not playing in the big leagues. But if you play in the big leagues and you hit .400, you’re going to make big money. With hedge fund investing, you get paid on your batting average irrespective of the “league” in which you’re playing. So go where the pitching is the worst.

Go to the minor leagues; go to Korea and China now. There are 1,000 fraudulent companies and 1,000 fabulous stocks! I once found somebody to whom I gave this pitch who said, “Gosh, I should go to China!” Then I reminded him about his family. He replied that he was about to get married to a Vietnamese woman who would love to live in China. So we backed his fund in China. I think our Chinese fund, which should officially launch in May will be a good one because we have a manager on the ground there who’s talented and loves the business.

G&D: Can you talk a little about your investment philosophy?

JR: 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. That being said, there are long periods of times where the 50 worst companies will outperform the 50 best.

Always of particular importance to me at any company is the quality of people at the company. Still, this is not an infallible way of looking at companies. I am reading the Steve Jobs biography right now and am at the point where he got fired from Apple. One takeaway I have is what a difficult person Steve Jobs was when he was a young guy. He seemed to have changed dramatically as he got older.

G&D: What advice do you have for young analysts and business school students?

JR: Peter Lynch’s books have some great insights would be great for anyone to read. Here’s a ‘small-world’ story for you. My neighbor who lived across the street from me in Salisbury, North Carolina went to Columbia Business School. He roomed with Warren Buffett when he was there. The reason I bring this up is that Warren is just so disciplined, smart, and sound – these factors are really what makes him great. People should look at some of the things he’s done in his career and try to emulate him. I’m actually going to the Berkshire Hathaway annual meeting for the first time this year.

G&D: What do you look for in your shorts?

JR: For my shorts, I look for a bad management team, and a wildly overvalued company in an industry that is declining or misunderstood. For instance I think REITs are jokes. People look at them for yield, which in a sense they provide. But, I think about this like I think about printing money. As long as people keep printing, things go alright until something blows up. The REITs are the worst because they pay high dividends and when they don’t earn enough to cover the dividend they issue stock.

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