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Value Investor Insight 2 a FRESH LOOK: Robertson Vs November 30, 2006 ValuThe Leading Authority on Value Investing eInvestorINSIGHT Alpha from Omega Inside this Issue FEATURES Lee Cooperman began his storied Wall Street career before many of today’s hot fund managers were born … and he hasn’t lost a step yet. Investor Insight: Leon Cooperman While seeing the overall equity out- s a Goldman Sachs partner and INVESTOR INSIGHT look as “respectable,” finding unrec- CEO of its asset management busi- ognized value in Corning, 3M, A ness in 1991, Lee Cooperman was Omnicare and Transocean. PAGE 1 » financially secure, highly respected on Wall Street … and itching to run his own show. Investor Insight: Charles Akre “It was time,” he says. “I chose the name Betting on the compounding power of Omega, the end of the Greek alphabet, Penn National Gaming, Markel, American Tower, O’Reilly Automotive because this would be my last venture.” and 99 Cents Only Stores. PAGE 1 » The second chapter of Cooperman’s career has been as impressive as the first. His A Fresh Look: Tiger vs. Berkshire Omega Advisors, launched at the start of His touch appeared to be gone when 1992, now manages $5 billion and its flag- hedge-fund titan Julian Robertson closed up shop. It wasn’t. PAGE 19 » ship fund has earned net returns of 16.3% Leon Cooperman per year, vs. 10.6% for the S&P 500. Omega Advisors Interview: Julian Robertson Cooperman’s wide-ranging quest for Investment Focus: Seeks companies Reflecting on his evolving concept of value is currently uncovering many oppor- trading at significant discounts to their pri- value, “retirement” and what he vate-market values, often due to inappropri- tunities, including those in energy, makes of today’s market. PAGE 21 » healthcare, Japan and what he calls ately valued growth prospects. “quality-growth” companies. See page 2 Editors’ Letter Trying to understand why everyone Compounding Interest isn’t a value investor. PAGE 23 » CEOs who truly focus on compounding shareholders’ capital per share are a INVESTMENT HIGHLIGHTS rare breed. Chuck Akre’s success rests on betting big when he finds them. INVESTMENT SNAPSHOTS PAGE INVESTOR INSIGHT aving first invested in Berkshire 3M Company 7 Hathaway in the mid-1970s, 99 Cents Only Stores 17 H Chuck Akre has a simple explana- American Tower 15 tion for the shares' rise from $100 to over Corning 5 $105,000. “They grew book value at an Markel 14 above-average rate – for most of that time Omnicare 8 above 20% per year,” he says. “That O’Reilly Automotive 16 became the holy grail for me.” Penn National Gaming 13 Following this holy grail to identify Transocean 9 potential investments has paid off hand- somely for Akre, who now manages $1.7 Other companies in this issue: billion. His flagship partnership has returned AmeriCredit, Bed Bath & Beyond, an annual 21.3% (net) since 1993, vs. Berkshire Hathaway, CarMax, China Chuck Akre Shenhua Energy, Cisco, Citigroup, Consol Akre Capital Management 10.7% for the S&P 500. Energy, Crown Castle, CSK Auto, Investment Focus: Seeks high-return-on- Akre casts a wide net in his search for Gazprom, Lukoil, Microsoft, Mirant, capital businesses with excellent future “compounding machines,” identifying cur- reinvestment opportunities that are not fully rent opportunities in such varied industries Mohawk Industries, News Corp., Oracle, appreciated by the market. as insurance, gaming, automotive supply Royal Dutch Shell, Ryanair, Time Warner, UnitedHealth, Wal-Mart and dollar stores. See page 11 www.valueinvestorinsight.com INVESTOR INSIGHT: Leon Cooperman Investor Insight: Leon Cooperman Omega Advisors’ Leon Cooperman (along with Steven Einhorn, Mark Cooper, Michael Freedman and David Mandelbaum) describes why he always has a view on the overall market, why energy is his largest sector exposure, the worst aspect of money management and why he sees undiscovered value in Corning, 3M, Omnicare and Transocean. Your investing strategy can be described Steven Einhorn: Virtually all studies show as multi-faceted. Explain the various that about 60% of the return and volatil- components. ity of the average common stock is deter- mined by the movement in the aggregate Lee Cooperman: We basically try to make stock market. So while we’re bottom-up money for our investors in five different stock pickers, we think it’s important to ways. First, we take a position on market have a view of the economy and the over- direction: Do we think stocks are under- all market to help us determine which valued and likely to go up or are they industries and sectors to emphasize. overvalued and likely to go down? As good as you are at picking stocks, if you LC: There are thousands of mutual funds get the market wrong it can overwhelm that will happily manage your money for individual selection. a management fee of 1% or less. If you’re Leon Cooperman Second, we spend a fair amount of a hedge fund with the audacity to charge time on the asset-allocation decision, between 1% and 2% as a management The Forest and the Trees making a determination on what asset fee and take 20% of the profits, your class has the best prospective investment clients have the right to expect something In 40 years on Wall Street, Lee Cooperman returns 12 months ahead. At the most more. What I consider “more” is that has distinguished himself both by an ability basic level, we’re looking at stocks vs. when the market’s overvalued, my clients to see the big picture as well as to dive into bonds vs. cash, but we also go deeper into expect me to figure it out and be hedged the details. He rose through the research each category, investment-grade vs. high- and out of harm’s way. When the mar- side of Goldman Sachs, eventually chairing yield bonds, for example. ket’s undervalued, they want me to be the firm’s investment committee and run- ning its asset management business. He Third, our bread-and-butter business leveraged to the upside. If the U.S. is was named the #1 portfolio strategist for and where we’ve been quite successful is uninteresting, they expect me to find nine straight years in Institutional Investor’s in finding undervalued individual stocks something around the world that makes “All-America Research Team” survey. At the on the long side. Fourth, we look for sense. That’s why I want to have diversi- same time, the thoroughness of his overvalued stocks on the short side. fied capability – we have an excellent research on individual companies is leg- Finally, we also make “macro” invest- team that is also looking at fixed income, endary – to this day, he’s well-known for ments, in currencies, global fixed income commodities and currencies. Those are insightful and tough questioning of execu- and the major international indices. areas, if we do them well, in which we tives on analyst calls. can produce additive returns without nec- Many value investors – Warren Buffett essarily correlated risks. At 63, Cooperman shows no sign of letting most prominently – say they spend little up. As he describes it: “I grew up in the time thinking about the market’s overall Do you consider today’s U.S. equity mar- South Bronx and am a graduate of P.S. 75 direction. Why is that an important part ket overvalued or undervalued? and Morris High School. I went to City of your strategy? University of New York for $24 a semester. I SE: I’d describe our view of the U.S. mar- then spent 16 months at Columbia LC: We’re not a slave to our market view, ket outlook as respectable. That means a University getting an M.B.A., graduating on but the truth of the matter is that a rising market that isn’t susceptible to pro- January 31, 1967. With a six-month-old son, tide does lift all boats and a falling tide nounced downside risk and that should National Defense Education Act student lowers them. I would suspect even deliver a high single-digit to low double- loans and no money in the bank, there was Warren Buffett has some fairly clear and digit total return over the next 12 months. no opportunity to go on the obligatory six- strongly held broader views when he’s month tour of Europe before going to work. I short dollars, for example, to the tune of What are the factors driving that view? started at Goldman Sachs the day after I $19 billion. We just apply the same type graduated from business school and I’ve of thinking when setting our equity-mar- SE: One is the economy, which we believe been working that same way ever since.” ket exposure. will grow modestly over the next 12-15 November 30, 2006 www.valueinvestorinsight.com Value Investor Insight 2 A FRESH LOOK: Robertson vs. Buffett Here’s to You, Mr. Robertson At the time legendary investor Julian Robertson closed his hedge fund, I described his portfolio as a “lame col- lection of companies.” Mea culpa, Mr. Robertson. By Whitney Tilson Six and a half years ago, at what see how all of these stocks had per- page, despite two bankruptcies, Tiger’s turned out to be the very peak of the formed. Did Buffett’s high-quality busi- portfolio did far better than Berkshire's – Internet bubble, famed hedge-fund man- nesses trading at not-so-cheap stock though both handily beat the market. In ager Julian Robertson closed his fund prices outperform Robertson’s lower- just six and a half years, an investor put- with the following prophetic words: quality, but much cheaper, businesses? I ting $1 million in an evenly weighted This is an irrational market, where certainly would have bet on the former … portfolio of the Tiger companies would earnings and price considerations take and I would have been dead wrong.
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