Lessons on value In a great book Julian“ Robertson – A tiger in the Land of Bulls and Bears” the author, Daniel A. Strachman, writes about Julian Robertson. “Retirement has not slowed Robertson’s competitive edge. He has been and continues to be a perfectionist; he is extremely competitive, and just because he doesn’t manage money for investors does not mean he has lost his interest in winning. He’s still involved in the markets, and he’s still “kicking ass and taking names” as he has done for morethan 20 years. His peers and former colleagues call him probably the best long/short manager who ever lived, and all believe that he still has a lot of living to do. Robertson still focuses on the global equity markets becausehe feels they offer an opportunity to “go places where prices arevery reasonable.” He is currently buying companies with very high free cash flow-once a value investor always a value investor. The companies that are attractive to him are those that do not have regular growth but do have free cash flow. He isparticularly interested in companies that have 16 to 20 percent average free cash flow. This indicates a company’s ability to build outward. When we last met, he had turned his sights onto opportunities in Asia, in particular South Korea. One of the country’s top banks was particularly attractive to him. His research showed that it was selling at about four times operating earnings and was growing at a rate of 25 percent annually. The company, whose American Depository Receipts traded on the New York Stock Exchange, was very liquid, very cheap, and was growing rapidly, three things that in his eyes made for a good investment. When he first discovered the bank in South Korea, the company was growing at about two times earnings, and by the time he started investing, his research showed that it was capable of growing very rapidly to a point of probably around 10 times earnings. He believed that even after a growth rate of 10 times earnings, the company would still be www.capitalideasonline.com Page - 1 Lessons on value awfully cheap and that it made sense to get into the name. Robertson believed that an opportunity like this was something that many other investors would be able to uncover if they did even the most basic of research. However, because of the political uncertainty in the region, which translated into a perceived but legitimate risk in investing in Korea, a lot of people are not willing to put in the work to find these overseas bargains. To him, this is even more of a reason to get into the stock-he is able to profit from their inability to move into these regions. But while Asia and Europe offer a number of interesting opportunities, Robertson is finding most of his investment opportunities in what he calls the fifty-first state—Mexico. In Mexico, Robertson is able to find very reasonable stocks that trade at five times free cash flow and offer significant upside potential, as the economy is in a constant state growth and rebuilding. One of the stocks Robertson had liked was Cemex. It’s a worldwide cement company that he thought was very well managed and very well priced, but because it is based in Mexico, investors were unwilling to focus on it. He also liked the Mexican Coca-Cola company, saying it was very well priced compared to other stocks but was also overlooked because of its location. Robertson is happy to go into stocks in countries and regions of the world that others overlook because to him this represents opportunities. By going where others refuse or are afraid to go, Robertson is often able to extract significant profits, prior to things settling down or becoming more in vogue—it is like shopping at the store the day before they advertise everything is on sale and getting all of the merchandise you want at discount before anyone else even knows it’s available. While many people believe Robertson has shifted his focus to other things, such as his New Zealand projects and working with the community, he still remains very active in the market. A number of former Tigers have said that they believe that since he closed the www.capitalideasonline.com Page - 2 Lessons on value funds, Robertson has earned more than 20 percent on his own assets over the last few years. They believe that he continues to trade actively and look for and is able exploit value in all corners of the globe. And while many believe the numbers are quite high, he would not comment on how well he’s done since Tiger folded. “Nobody knows how much he is managing, except that it is north of a billion, or how much he is up,” said one ex-Tiger. “But all of us know that when he asks us how we have done and we tell him, he just gives that smile and says, ‘Oh, really, ’cause I did this.’ Make no mistake, he is still in the markets and is still ferociously competitive.” So what can we learn from Robertson? What made him so successful? What caused Tiger to collapse? What lessons did other hedge funds take away from Tiger’s history? Robertson has been accused of being gruff—a hard taskmaster sometimes— but the real problem behind Tiger’s demise was not Robertson’s character or ability to manage or hire employees, or for that matter, to get along with and retain his investors. It rested in his inability to adapt his investment philosophy: finding value in the markets. That, coupled with the enormous growth that Tiger experienced over its 20 years of existence, was the recipe for his destruction. Remember, the market never spoke to him, and he does not subscribe to the idea that the market speaks to anyone. “I hate that term, learn the market,” he said. “You hear these people on television saying the market this, the market that, and the market is a collection of stocks which represents certain companies, and these people who say that the market has told them this and that—well, the market has never spoken to me.” Peter Lynch once told Robertson that the only thing for sure was that whenever he got a promotion, the market would go down. As such Robertson does not believe that anybody really makes any money playing the markets. He believes that the only way to make www.capitalideasonline.com Page - 3 Lessons on value money is to buy stocks that are cheap and watch them go up—or short stocks that are overpriced and watch them tumble. In his pitch, Robertson told potential investors that the way to search for value is to use fundamental research like that described by Graham and Dodd. He and his team knew of no substitute for careful and comprehensive analysis of investment situations. Their research process included not only rigorous financial analysis, but interviews with senior members of a company’s management team and discussions with important customers, suppliers, and competitors. The aim was to understand how management thinks about their businesses and at the same time develop a clear understanding of the industries in which they compete. To do this, Robertson understood the two most important aspects of reliable research: first, hire a staff with strong qualitative and quantitative skills, grounding in their specific area and relationships with knowledgeable and important people in that area. Second, separate the wheat from the chaff. Tiger’s size and trading activities around the globe allowed it to take advantage of “the best research available” to do just that. But his research entailed more then simply looking at reports or checking with customers. To a Tiger analyst, this was only the tip of the iceberg. In many ways, the work that Tiger analysts and Robertson himself performed to get a name in the portfolio or trade put on set the standard for how research is conducted at hedge funds around the globe. His was the model, not only for many of the industry’s best and brightest managers who are former Tigers, but for the countless numbers of existing and potential managers who are emulating Robertson or his Cubs. A key part of the research model was the firm’s Friday lunch meetings, where ideas were presented. The. analysts would gather around the table and go through ideas one story at www.capitalideasonline.com Page - 4 Lessons on value a time, picking apart every little aspect and reviewing every angle of a potential investment opportunity to determine if it was worthy of being in the portfolio. “It was quite an exchange,” said one former analyst. “It was the type of thing that you had to be prepared for and one that if you were not, you would surely get caught.” The Friday lunch was not a place to be unprepared or long-winded. Robertson likes hearing stories quickly and efficiently. “Get to the point or don’t bother,” was the way one former analyst put it. And the time limit was short—five minutes or so, sum it up, get it out, and move on. That was the nature of the meetings, and they worked. If something was too complicated, he would not like the idea. Analysts were expected to sum up their investment ideas in four sentences. The four sentences may have consisted of six months of work, but that was all the time they were given to make their case and get the information in front of Robertson.