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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP756: The Rise and Fall of Julian Robertson’s Tiger Fund w/ Kyle Grieve
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Kyle Grieve discusses the rise and fall of legendary investor Julian Robertson.
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You're listening to TIP. Did you know that from 1980 to 1998, Julian Robertson's Tiger Fund delivered an outstanding 32% annual return, more than doubling the performance of the S&P 500 over the same time period. That kind of track record helped cement Robertson as one of Wall Street's most legendary investors. And yet, despite his incredible success, his fund actually had to return funds to its partners in very short order during the tech bubble. In today's episode, we'll explore just how Robertson became so effective at finding mispricing in the market and how he utilized a vast network of very talented people and contacts to help improve his access to information. We'll break down one of his most famous commodity trades that netted him $300 million in one day. We'll examine the mindset that Robertson carried with him from his days working in the Navy and why Robertson didn't believe the market really existed. You'll also learn how the Tiger Fund utilized a crude version of early sentiment indicators and how it was kind of a precursor to the CNN Fear and Greed Index that we see today. Then we'll look at why Robertson just loved monopolies and oligopoly so much and how he saw bubbles in Japan and the.com era forming before the masses. But most importantly, we'll examine his seven core investing themes that helped guide his success and look at some of the timeless lessons that investors can clone from him in their own investing processes today. So whether you're working on improving your ability to think independently, building information networks, or trying to just understand risk and leverage better, Robertson story provides a very robust framework and cautionary tale for any investor trying to understand the market better. Now let's get into this week's episode on Julian Robertson. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self made billionaires the most, we keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve. Welcome to the Investors Podcast. I'm your host Kyle Grieve and today we're going to discuss an investing legend, Julian Robertson. So throughout the last few years of investing I've continuously come across these so called Tiger Cubs. One fund such as Tiger Global Management is headed by a gentleman named Chase Coleman, manages $70 billion. Another one, Lone Pine Capital managed by Steve Mandel, manages $20 billion. CO2 Management, managed by Philip Lafont, has $58 billion in assets. So what do these three funds have in common? They are all part of the lineage left over from Julian Robertson's Tiger management. So why is Robertson left such a long list of successful progeny? Because the man simply just knew how to invest. From 1980 to 1998, his fund had a 32% kegger versus the S&P 500's 13%. And in those 18 years, the firm only lost money in four of them. This is a truly astounding track record, but it didn't end nearly as well as you might think. By early 2000, after the dot com bubble had burst, Tiger's AUM had fallen from 22 billion to about 6 billion, and he decided to close up shop. But today we're going to go over Julian Robertson's meteoric rise and fall through two key resources. So the first one is his biography, Julian Robertson, A Tiger in the Land of Bulls and Bears by Daniel Strachman. And the second is Money Masters of Our Time by John Tran. So I highlighted a few things in the intro of the book that I found very interesting. So first was just the talent that Robertson, I think, demonstrated in exploiting market inefficiencies. And second was how good he was at just finding and fostering talent from the people that he saw on Wall Street. And third was just his voracious appetite to win. So like many great investors, Robertson was just not your average person. While his contemporaries and colleagues all held him in a very high regard, they also found him to be mean and vicious at times. Like Warren Buffett, Robertson was a mathematical prodigy. The book refers to his mathematical memorization as Dustin Hoffman esque from the movie Rain Man. So he focused so much on his work that it cost him abilities in other non personal areas, such as, you know, remembering people's names. Now, as for his competitive streak, some of his friends and former colleagues said that playing golf with him just wasn't very enjoyable. And the reason being was that Robertson was just so competitive that he hated to lose even one hole, let alone an entire round. Now, the success of Julian Robertson and the Tiger Fund is often found in the lineage of investors that it spawned. The book states that there's about 30 to 40 hedge funds managed by investors who started at Tiger Fund. But keep in mind, the book was published in 2004. An article I found states that there's now 200 hedge funds managed by people who either worked directly for Tiger Fund or worked for someone who did. So his investing strategy has very far reaching tentacles. So let's start this episode by following the same order as one of the books here, which is to not focus on his early years first, but to examine just one trade that was highly successful for him. So this was his short on copper during the mid-1990s. So what had gotten Robertson interested in the short in the first place, and that was the supply and demand dynamics of copper. Robertson observed that copper prices were continuing to climb even though demand was not increasing and actually might have started to decrease. Now, as with all commodities, they move in cycles, and those cycles are controlled by the interplay of supply and demand. So when demand increases, supply generally increases as well, and the price goes up. Once demand is met, supply continues to climb, as there is always a bit of a time lag between the two. Once supply exceeds demand, the price goes down. So Robertson's observation was that since demand seemed to be dwindling, it didn't make much sense that copper prices were continuing to climb. So Robertson sent out his analysts to go find out more information. They were, you know, boots on the ground looking at inventory levels of copper. And really, to understand this trade, we must first understand Robertson's key investing strategy. So it was based somewhat on narrative. So the book's author, Daniel Strachan, writes, the key behind all of the firm's investments was the story. If the story made sense, then the investment made sense. And if there was no story or it was not easily understood, then it had no place in the portfolio. When the story changed, the investment had to change as well. It was and is all about the story. Now, I will say that I would not classify Robertson as a story stock investor. So back to the story. So here was the story of copper, and it just didn't make any sense when he looked at it, when he looked through the lens of supply and demand of that one commodity. So even after Robertson opened his short in 1994, the prices of copper continued to rise. So in early 1995, many investors closed their shorts, fearing that they were wrong. But Robertson just stayed in. Copper prices have moved up from $1.10 per pound to $1.25 per pound. Then the hammer dropped. So one of the largest copper traders in the world had been just propping up copper prices. The trader worked for a firm called Sumitomo in Japan. Once his firm learned of his nefarious trade, they realized that it was likely to result in quite a major loss. So they ended up dumping their position. And the increased selling pressure drove down copper prices significantly, bringing them down to about $0.87 per pound by late 1996. So the interesting part about this story is that Robertson reportedly knew Nothing about the loan actor's role in propping up those copper prices. All he knew was that the copper price was just connected from reality and at some point the market would come to its senses and re rate copper where it belonged to. The book mentioned some next level scuttlebutt here that I thought was worth mentioning. So Tiger Fund was examining things such as, you know, the stores of copper at the London Metal Exchange. They were looking at the levels that they were and they could observe that they weren't falling, meaning that demand was starting to dry up. And as a result of this nugget, they actually increased their short position. So other sleuthing involved, you know, meeting with metal producers to learn more about the production forecast from both new and and existing mines. They also met with copper users and observed how full their inventories of copper were. So if you invest in commodities, these are just excellent things to know because it gives you valuable tangible evidence that the cycle is very likely to turn or will do so in a short period of time. So this trade was mentioned first in the book because on one day In May of 1996, the copper short produced an astounding $300 million in profits. Now, I like the story because I personally have zero interest in shorting, but I think it shows that investing is a game that can be won in just different ways. While I have no desire to short commodities, it's still a good lesson in understanding supply and demand as well as a reason the market can be kind of slow to come to its senses. A single investor with deep pockets can just prop up the prices of a commodity or even a stock. And it's not until they or somebody close to them realizes how large of a mistake the trade is that value can be completely unlocked. I would like to briefly touch on Robertson's early years here as there's some interesting facts to share. So first off, Robertson was a southerner. He was born during the Great Depression in North Carolina. His father was very well dressed on the outside and a ferocious competitor on the inside. And this level of competitiveness was passed down from father to son. When Julian Robertson Sr. Passed away, Jr. Said that he may not agree with you, but he agrees with the premise that you have a right to your opinion. This was another artifact passed down to Junior. So one of his former colleagues mentioned that Julian likes people to understand why they are wrong. He'll get into heated discussions on the topic. Now I find this very amusing because I've come to realize the power of confirmation bias. It's just so rare to change someone's mind on a topic simply because they just close their minds off to dissenting opinions. As a result, I personally rarely engage in arguments with others with the intention of changing their minds. To me, it's just a waste of time. I enjoy learning other people's viewpoints strictly so I can see where my viewpoints might be wrong. If I think they're wrong, I'll just nod my head and thank them for their opinion. But trying to argue with them just seems like a good way to never be invited back to a dinner party. Like many other great fund managers, competitiveness comes from many areas of life. I already mentioned that his father passed down this competitive streak, but he also developed internally from playing sports such as football and baseball. But when it came to academics, Julian wasn't always the most polished student. So he loved math, which was a subject that he was very good at. And as a result of his proficiency in math, he was also very fond of business courses. By the age of 23, Julian entered the Navy, which would have taught him a great deal about things such as, you know, leadership, discipline and taking responsibility for your actions, as well as maturity. The Navy stint allowed Julian to see the outside world outside of America, which really opened up his perspective. Robertson entered the investing world with some help from his father, who thought that New York was the place to go to make money and get a formal education in both investing and the markets. So off he went. Robertson started working on Wall street in 1957 at Kidder & Peabody & Co. And stayed there for 22 years working in a variety of sales related roles for the firm's money management arm. So he started on the sell side as a broker getting commissions off of transactions. During his early years he showed a preference for leaning both towards the sell side and the buy side. He wanted to know more about exactly what it was that he was selling to his clients. And he excelled at this not only through his own work, but also by relying on others he could lean on to gather more information. Now, while working at Kidder Peabody, he made an extensive network of colleagues and friends to mine ideas from. This is a perfect way of finding new ideas. And this is another reason why being social about your ideas on things like, you know, substack or Twitter or X can be so beneficial for finding new ideas. While Robertson didn't have access to those mediums at that time, he was able to create this massive network of people that he could share ideas and information with. I have used this to my own advantage. You know, I'm constantly deluged with more ideas that I really know what to do with. Without openly discussing my ideas, I would never have gotten to that point. So if you want to really foster a similar network, just put your ideas and processes out to the public. You'll be very, very surprised how many interesting people you network with and how open they will be to sharing their ideas and insights into businesses that you might also find very, very interesting. So Robertson was investing his own money in his personal account at the time, and he was drawing interest from others in his network to manage their money as well. So he obliged them, managing just small amounts for his colleagues. For the next 10 plus years, Robertson continued managing other people's money while working at Kidder Peabody. The trust built during this time would prove to be integral to raising funds for Robertson's fund once he decided to go all in. So what exactly was Robertson's strategy that was drawing colleagues to him like moths to a flame? It was a simple value approach. Julian just loved hunting for value. And much of what he learned came from his learnings from Ben Graham and David Dodd. One area of the book that I highlighted was how Robertson learned that the market didn't exist. So Strachman writes, there is no market as such, he decided, just a collection of companies that traded in one place or another. He came to believe that nobody really makes money playing the markets. The only way to make money is to buy stocks that are cheap and watch them go up. The hunt for value is what he enjoyed most. The hunt for those opportunities is what drove him to be successful. Now, similar to Munger, Robertson spent much of his career trying to understand just how things worked and why ideas failed. One of the significant learnings that he had was just how the fund industry worked. For instance, while at Kid or Peabody, he got quite the education in marketing and sales inside of the money management business. And the longer he worked on it, the better he understood it and actually the less he liked it. Now, Robertson was a man who just wanted to do things, and to him, things like sales and marketing were doing things on behalf of others and he didn't like that aspect of it. So speaking to his competitive streak, he also didn't find that the sales and marketing platform allowed him to really shine and differentiate himself from others doing the exact same thing. Julian just wanted to be a producer. You know, he wanted respect from those around him and he wanted to be the best. The profession that could accomplish all three was running a hedge fund. Through one of his first investors at Kidder Peabody. Julian was Introduced to a gentleman named Alfred Jones, who was actually the forefather of the hedge fund industry. Jones taught the traditional hedge fund approach which involved things like using both long and short positions. So the idea which I personally don't subscribe to, is that having both long and short positions allows managers to profit in both goods and bad times. So here are my primary holes in that reasoning. So the first one is that bull markets tend to just last longer than bear markets. So I'd actually prefer to just align myself with what the market tends to do, which is to go up over time. Second, if you have shorts in a bull market, you're foregoing the opportunity to have larger long positions which will go up in price. And third, if you have a long term view on investing, you can find businesses that are resilient to short term economic shocks and just hold them. Fourth, a crappy business with poor fundamentals can still continue to rise, meaning even if you short it, you could very easily be wrong. And lastly, fifth, here, when you add leverage, which many hedge funds do, you rapidly increase risk. But what Jones got right was the incentive structure. He actually didn't believe in a management fee, which is very rare to find in any hedge fund today. He also structured the fund to retain 20% of the profits, which is a standard practice that remains in place today. And he specifically didn't incentivize gathering assets because he believed that doing so would incentivize fund managers to just grow aum and distract managers from making money for their partners. Now, the timing of Robertson's conversation with Jones was also very important. They occurred in the early 1970s when the market was experiencing a pretty Rocky period in 1973 and 1974, losing 17 and 30% respectively. So Robertson had a favorable view of shorts, which he put on at that time. By 1977, Robertson was done with Kidder and Peabody and the sales and marketing aspect of the hedge fund industry. He took an extended vacation in New Zealand with his family and upon his return decided to leave Kidder and Peabody. The next chapter for Robertson's life was very evident to him and that was to run a hedge fund. The book makes a compelling point that managing a fund is actually really well suited for individuals with the right temperament. If you're competitive, enjoy the mentality of an athlete, want immediate feedback on your performance, and are well compensated for that outperformance, well then the fund management industry is a very good place to be. Now let's double click on the mentality of the athlete part here. So athletes are a very good metaphor for people in Wall street because they tend to be people who are, you know, good on a team. They understand competition and know the difference between winning and losing. Since Robertson ticked all of these boxes, the fund management industry was the next logical step. The timing was also good. Julian observed the massive successes of individuals such as George Soros, which further motivated him to enter the hedge fund industry. Robertson's investing style isn't super aligned with how I invest, but it was very successful for him. Where I do fully align with him was on how he felt about compensation when he first started the Tiger Fund. So Robertson believed that you were only compensated based on performance, not on aum. And if you lost your investor's money, you weren't compensated. Simple as that. Lets take a quick break and hear from today's sponsors.
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All right, back to the show. If you ever wondered where the name of the Tiger Fund came from, it was from Julian's 7 year old son. So his son observed how his father would call everyone tiger when he forgot people's names, which was very common. So one competitive advantage that the Tiger Fund had from the outset was the ability to just source really valuable information. So I mentioned that Robertson developed a substantial Rolodex during his time at Kidder and Peabody and he was just not afraid to use this to his advantage at the Tiger Fund when he found a very interesting idea, he would search for people in his network who could help him acquire the best possible information to make the most informed decision. Strachman writes. His use of phones to gather information is legendary. A reporter once commented after watching him in action, that speed dial must have been invented for Robertson in that he is constantly finishing up one phone call and then dialing another. At Tiger, Robertson spent most of his time either on the phone looking at charts or reviewing information. He constantly developed networks in order to make sure that when Tiger got information, it had the right people available to process it. Another crucial aspect to understand about Robertson is the investors that he ended up partnering with. So I mentioned Alfred Jones earlier, who was a tremendous influence on him. And inside of Jones's head fund called A.W. jones and Company, another of Robertson's earliest investors had actually taken over that fund. So he transformed the fund from investing just in individual stocks to investing solely in other hedge funds. And the Tiger Fund was one such fund. This was an excellent lesson for Julian as he took a very similar approach to investing. Once the Tiger Fund was closed, he would seed a number of his Tiger cubs, many of whom ended up being incredibly successful. Now, Julian Robertson was highly successful right from the get go. So in 1982 and 1983 the fund was up 42% and 47% net of fees. As a result of those tremendous results, more and more funds began to pour in. Aum But Tiger Fund had a problem that is normal for very well performing funds and that's just that they started having more capital than ideas. Now the good thing about a true hedge fund, the long short type that Julian was running, was that Shorts gave him a whole new area to invest in that could generate pretty significant returns. And his Shorts were doing very, very well. So in 1984, when Tiger had 20% returns, over half those returns were generated by short positions. As a result of this influx of new cash, he got to hire more analysts to scour for even more ideas. Now his audit of the market at this time would have told him that looking for Shorts was definitely the way to go. He looked at the investment advisory sentiment which reported that about 59% of people surveyed were bulls, while only 23% were bears and the remaining were undecided. Now, margin account buying on the American Stock Exchange and over the counter market was also massive in the first two weeks of the year. Additionally, the put call ratios were low, which indicated a lot of optimism. Now I don't think I've ever really looked at the put call ratio before, but I probably should as a general sentiment indicator. So one indicator that I have found helpful is a CNN Fear and Greed index. So the indicator is built on seven equally weighted market based indicators that are scored from 0 which denotes extreme fear to 100 which denotes extreme greed. The seven components are one stock price momentum. So it uses the S&P 500 versus a 125 day moving average. And this just measures whether The S&P 500 is trading above or below its 125 day average. The second is the stock price index which measures the 52 week highs versus lows on the New York Stock Exchange. This measures the number of stocks hitting 52 week highs versus 52 week lows. Third is stock price breadth. So this is just a measure of whether volume is advancing or declining. Fourth is the put call ratio which measures the ratio of bearish put options versus bullish call options. Fifth is junk bond demand. This measures the spread between junk bonds and investment grade bonds. Sixth is market volatility. It just measures the CBOE volatility index which just shows basically whether volatility is high or volatility is low. And then seventh, here is something called the safe haven demand of stocks versus bonds which measures the performance of stocks versus US Treasuries. So when you average the scores for each, A score of 0 to 25 denotes extreme fear. 25 to 50 is fear, 50 to 75 is greed, and 75 to 100 is extreme greed. I've noticed that I find the most interesting opportunities during extreme Fear. This is both within my own portfolio and also in new names that I haven't invested into yet. I think Julian Robertson was essentially doing the exact same thing, just with fewer measurements and maybe in a less systematic way. Another metric that Robertson used was to determine how much money in the market was coming from dumb money versus smart money. Now I can't help but think of the great Peter lynch quote on the subject that goes dumb Money is only dumb when it listens to smart money. What Robertson was observing was how much money in the market was coming from speculators who had a hard time sustaining a bull run versus pensions which had obviously much, much higher amounts of capital and therefore could maintain a bull run. And all these indicators at the time were telling Robertson that the primary markets weren't offering very much opportunity. So he turned to small caps as it appeared that these companies were undiscovered and had very solid upside. But he hadn't really spent too much time looking at this market cap area before. So he ended up outsourcing his Ideas from an interesting place, which was his own investors. So what he did was he just made a call of arms to his investors, asking them to share any small cap name that they thought looked interesting. Now this is interesting to me because while I'm sure investors will share names with their general partner, I've never actually heard of a fund manager actively seeking for ideas from their limited partners. Now this transition towards small cap was actually just the beginning of the Tiger Fund's diversification into different assets. As a fund took on more and more assets under management, it was essentially forced to diversify its investments to find new opportunities when areas it focused on just dried up. The next step was in global macro investing. So Global macro investing was a top down way of investing for the Tiger Fund. They would create a top down view of a foreign country, taking into account things such as economic trends, interest rates, economic policies, inflation, and even government stability. From there, they'd find areas that were just ripe for making some good returns. Another bonus of global macro Investing for Robertson was that it allowed for pair trades. For instance, they might be long a foreign currency and then short that country's bonds. But even with global macro investing, there's only so much capital that can be invested before moving the markets. Since they are investing in currencies, that was another logical step to make investments into. So the book mentions a dollar trade that Tiger Fund invested in that produced a lot of profits. It didn't mention what that trade was, but my assumption is that it was something along the lines of going along the US dollar while shorting US Treasuries. Regarding this, Robertson said, I think without actually realizing it, we put more and more into these types of trades because we realized that they were more liquid than anything else. So we became sort of by osmosis, more involved in macro. It was a long term kind of evolution that worked out very well for us. Now typically when I see investors starting to diversify their strategy, this is usually a bad thing. The Tiger Fund did exceptionally well though in its first five years. And even with these additional trades, it continued to outperform. In 1985, Tiger Fund was up 35% by fall versus negative 2.7% for the S&P 500. Now I find it interesting that Tiger Fund continued taking on more and more AUM at this time if they were just so focused on generating returns for shareholders. Most funds actually end up limiting their AUM on purpose just so that they can focus on their strategy and avoid taking on newer strategies that generally have a lower performance. The book doesn't mention whether Tiger Fund changed its incentive program at this point. So it's really hard to say now. As the Tiger Fund continued to see success, Robertson continued looking for new markets. Since he was obviously really good at investing in equities, he asked investors to approve him to invest in futures as well. He would focus on commodities, on the futures. So for futures, he would use quite significant leverage. He mentioned that he would only commit a maximum of about 25% of capital to their commodities positions, but that since he got 10 to 1 leverage, it would actually only be about 2.5% of equity. So the use of this much leverage and trying to justify it just always kind of scares me. I know some investors that have used leverage very beneficially, but I tend to just follow Charlie Munger's great advice. Smart men go broke three ways. Liquor, ladies and leverage. From here, Tiger Fund also added private placement and venture capital. But because the lockup period was a lot longer, they only had a nominal percentage of the fund's capital in these assets. Later, in 1986, Julian Robertson decided to add another fund, the Puma Fund. This fund had a stipulation that required that investments be locked up for a minimum of four years. It consisted about 2/3 equity and one third debt. The lockup period would allow for more private placements. That wouldn't have been prudent for the Tiger Fund. Robertson began to form a hypothesis about Japan in around the late 1980s. So he felt that the Japanese markets were overvalued. And even if a small amount of capital left Japan's markets and came to the US it could easily fuel a pretty big bull run. An example of the overpriced Japanese market relates to a business everyone knows like Toyota. So in 1986 it was trading at 17 times earnings and by 1987 it was trading at 22 times earnings. Now if you compare that to Ford in America, it only traded for five times earnings and seven and a half times earnings the following year. Another example is a business such as Tokyo Electric, which in 1986 was trading at 70 times earnings and had a market capital that exceeded the entire Australian equity market. We'll touch more on Japan, but Let's move to 1987, which was the year of Black Monday. In early 1987, Robertson used the word silly season when describing the investing environment. Robertson, similar to John Neff, believed that the silly season was a time when the market was just running on extreme levels of momentum. So this forced, you know, speculators hands to try and find other stocks that could carry momentum, which would usually be in businesses that had very, very high growth rates. So he also discusses a concept called automatic winners, which is a concept that I think probably applies to today's AI stock. So in Robertson's time, this referred to businesses that really had anything to do with the treatment of aids. These automatic winners didn't need to have any intrinsic value to show, and yet the share price would continue to go up. But Robertson would not take part. And today any business that mentions AI seems to get a decent bump in its share price. It's also permeating private markets and even small businesses. So I recently read about a window cleaning service that is purporting to use AI. All AI is doing with this business though is helping it schedule appointments and follow ups. So I think it's pretty dishonest to attempt to highlight a business like this as some sort of AI play. My guess is maybe it's for SEO reasons. Now let's get back to Japan. So Robertson was paying very close attention to what was happening in Japan because he felt it was a pretty good potential short candidate. Japanese public companies were also taking part in forming a bubble. So the Japanese businesses were using their cash on the balance sheet to actually fuel the bubble further. And since returns were so high, many of these corporations were also using debt to juice their returns. But Robertson saw this as being incredibly dangerous because it was very clear that the corporations and their lenders were operating under assumptions that the markets only go up now. In early 1987, the Tiger Fund made its first investment into another fund, putting 4% of assets into the Polar Fund. This was another logical place for Robertson to put additional assets as he was offloading some of the decision making to the fund, which allowed him to put more AUM to work. Additionally, once invested in the Polar Fund, he could actually clone some of their shorts that he now had access to and that he felt were very good ideas. By mid-1987, the Tiger Fund was doing well and beating the index. One of their biggest holdings was a business called Jefferson Smurfit. So the business was in the paper business and was Tiger's actually second largest position. The stock had increased nearly seven times from Tiger's lowest purchase price and was still attractive, trading at only 10 times earnings. Now I love these types of businesses because they're just that gift that keeps on giving. When you find a good multi bagger that remains undervalued, you can just continue buying shares of the company. And if the business has a long Runway and it's Run by a great capital allocator, it's just a great place to park capital. This example demonstrates that despite the Tiger Fund's investment in a wide range of asset classes, it still retained kind of that value investing feel to it. The other two businesses they invested in had very similar characteristics. So one was a savings and loan business called Metropolitan Financial. Like many savings and loan businesses at the time, it was trading at a significant discount to intrinsic value at only 44% of its book value. And it was taking advantage of that discount by announcing a very extensive buyback program. Another name that was mentioned was West Fraser Timber Company. This was a business in the lumber industry that was spending a lot of money on growth capex, but was still very healthily cash flow positive. Now, I tend to stay away from making any market predictions because I would say there's probably a 99% chance that I'll be wrong and my takes will most likely be useless to myself or anyone I share them with. So I always find it interesting when other investors or market prognosticators make these kind of market level calls. So let's play an interesting thought experiment. Let's say one year from now, you know where interest rates will be in every country in the world. And you also know the general direction that the interest rates move before they reach that point. Do you think that you'd be able to use that information to help you in the market? My answer to that actually would be a resounding no. Because even if we know the future, we actually don't see how investors will perceive that information once they hear it. Perhaps they thought, you know, rates would drop faster. And even if rates fall because they didn't drop fast enough, they will keep cash on the sidelines. Or if rates drop low, they worry that the central bank are doing so because there's maybe a recession around the corner and they again stay in cash. The point is that, you know, even if you know a specific metric, there's really no way of knowing how the market will perceive it, which makes things a lot more complicated. So on October 2, 1987, Robertson sent out his newsletter. He wrote, I do not see a great danger of drastic market decline until we all get a great deal more complacent. Putting this another way, the danger point will come when we start spending our profits instead of worrying about when we start keeping them. Only two weeks later, Black Friday occurred, during which the Dow Jones dropped nearly 23% in a single day. Luckily for the Tiger Fund, they actually didn't receive any margin calls. As a result of those losses from Black Friday. But the results were just not very good. Robertson had positioned the portfolio thinking that it was more likely the portfolio would suffer more in actually up markets than a down market. But he wasn't sufficiently hedged for a down market like this and wasn't able to properly take advantage of a down market. So the Tiger fund had decreased by about 30% as a result of Black Friday. Robertson listed three main reasons for this decrease. So the first one was that the portfolio was overweighted in small caps. He noted that when the market took a dive, investors would withdraw from small caps and invest into the stability and safety of large caps. The second one here was that his primary macroeconomic prediction was based around the overpriced Japanese market and not on the domestic market. Since he refused to take part in speculating on Japanese stocks, he underperformed because the Japanese market continued to outperform the US Market. And third was that they were hurt by leverage in a kind of indirect way. So I mentioned that he wasn't margin called. But since his positions were leveraged up and the market was illiquid, unwinding these positions meant they actually had to take on more losses than if they were unleveraged. As a result of this experience, Tiger Fund decreases leverage from about 300% to about 150%. Now, just to give you an idea of market sentiment, post Black Friday, Robertson said, there are so few bulls that I can't imagine who's going to impregnate the cows through his channel checks. He was having a very hard time finding bullish investors and he thought this was excellent for his prospects. Since Robertson was very well known on Wall street, he was able to engineer the ability to, you know, reach the masses with messages of positivity. He went on Barron's after the crash and gave his thoughts on the economy, the market investing, and the prospects of an impending recession. Now, one business that Robertson had particular affinity for was Ford Motor Company. It was always cheap and he felt it was recession proof to boot. So he felt the downside on Ford was low because this was the time of the leverage buyout. If Ford sales, let's say plummeted by 60%, he assumed that Ford would be taken out in a leveraged buyout. The acquirers would pay something like $77 per share and in the process receive about $35 in cash. And since the business was selling for mid single digit P. E multiples, if they outperformed, then there was a really good chance that they'd make money based off the EPS growth and the multiple expansion. As 1988 rolled around, Robertson continued to be bearish on Japan and bullish on America. Now, just to give you an idea of some of the evaluations in this hot Japanese market, so you had a business called Mitsukoshi, which was a Japanese department store, and it had about $5 billion in sales, but the company was losing market share. So they had basically zero earnings in 1986 and 1987, and yet its share price had gone from 580 yen to 2,000 yen between 1985 and 1987. Tiger's research suggested that they had about a 5% ROE with net margins below 1% and it was trading at 154 times earnings. So it's just insane. So in a memo that Julian wrote, he listed five characteristics of the street that were troubling him and his firm at this time. So the first was that corporate stock repurchases and leveraged buyouts were consuming about 10% of the total shares outstanding in the American market on an annual basis. Now, if this were to continue, hedge funds would end up owning the majority of available stock. Second was that there was too much cash on the sidelines if money wasn't being put to work. It generally means that investors are wary of the market. Once that money was deployed, which was $12 billion by Tiger's calculations, it would create significant buying pressure. Let's take a quick break and hear from today's sponsors.
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All right, back to the show. Third is that retail investors just weren't interested in the market because it just wasn't exciting and stocks just weren't going up in price. Fourth, boredom. The bull market had passed and investors were seeking excitement elsewhere. And fifth was that the crash of 1987 was still top of mind. While there isn't very much written in Robertson's biography about being an activist, he also wasn't Afraid to give his opinion on executives if it felt like it was warranted. For instance, Ford, a business that I'd already mentioned that Julian really liked, was partaking in what he felt was some subpar capital allocation, and Robertson was going to call him out on it. So according to Tiger's research, the business had very strong returns on invested capital in the 20 to 25% range, and yet it only traded at 4 times earnings. So he didn't like that they were using capital on acquisitions that he felt offered just a 4% return when they could just buy their own stock at a much higher return. So as a result, Robertson wrote Ford a letter about capital allocation. He felt that Ford's attempt in the defense industry just made no sense when that business segment was losing money. So the acquisition that he referred to was for a segment that only had 5% ROE. He also emphasized that Ford's price to earnings multiple would be fair value if it really doubled to eight times. So buying back stock made a lot of sense and apparently they listened to him. Now, I'd like to also talk about another central tenet of investing that I think I'm trying to improve on, that I think Robertson understood very, very well. And that's buying businesses that can do well in a variety of market conditions. So in 1988, there were many, many fears of recession. So Robertson purchased a number of companies that he knew would do very, very well during these times. These are businesses such as Wal, Merck and Johnson and Johnson. He was also impressed by businesses like Ford, Cleveland Cliffs and United Airlines that were continuing to impress just because they were growing at pretty high rates on top of the previous resilient businesses that I just named. Robertson liked businesses that were involved in monopolies or oligopolies. One example was De Beers. This was a company which controlled about 80% of the world's diamond market. He felt that the business needed to improve its disclosures. But a business that controlled that much of the market rarely needed to worry about things such as compressed margins. When he bought the company, he was trading at a bargain bin price of only three times earnings. He also felt there was an oligopoly forming in airlines in the form of United Airlines and American Airlines. So his overarching thesis was that they would dominate specific long distance domestic routes in the near future. And even though Walmart was no monopoly, its position as a low cost provider made it very, very difficult to compete with. So Tiger Fund went long on Walmart and shorted its higher price competitors. There was a lot written in this book about Robertson's political beliefs, which I've skipped, but there's actually one area worth mentioning. So in the late 80s, Robertson did not really like the US administration and felt they should draw lessons from their closest ally at the time, which was Great Britain. He was a very big fan of Margaret Thatcher and similar to a George Soros, he was on a friendly basis with some of these very high levels politicians where he could find information that very few others could. Thatcher would actually later become a Tiger advisor along with Senator Bob Dole. Now one part of researching great investors I draw a lot of wisdom from is how they source ideas. Yes, many of them obviously have analysts that are working for them that provide a very good flow of new ideas. But Robertson also got ideas from his investors as well. He outlined where his network would get some of their ideas in the book very, very well. So he felt the best ideas would come from an industry that someone already knew intimately. He gave the example of, let's say, a doctor who might have seen research on a new drug or procedure who might come across a good opportunity in that industry. Another place to look was friends who just understood when a business was really turning. The problem with friends like these is that the information can be a little bit murky into whether or not it's insider training. So I'm not entirely sure how he got around that, but he never got into any trouble. So you'll probably notice a trend here which was that Robertson was very focused on Japan. There's an outstanding chart shared in the book that shows a chart that one of Tiger Fund's analysts created which compared the financial metrics between Japan and the US for the year 1989. So the chart had three areas, corporate statistics, interest rates and stock market ratios. The information shows that the US market was superior according to all corporate statistics, including things like operating margins, pre tax margins, net margins, return on equity, return on capital, cash flow to equity and equity to cash flow. When it came to interest rates, Japan's rates were lower in terms of 3 months CD rates and 10 year government bond rates. However, the differences were most pronounced in the stock market ratios where the Japanese market was nearly four times as expensive as the US market on a price to earnings basis and about double as expensive on a price to book basis. They also had about a quarter of the earnings yield of the US Interestingly, from what I could find, even though Robertson was correct on the bubble that was forming in Japan, it didn't appear like he made any massive gains from this event. Despite the fact that he was a short seller. In the early 1990s, Robertson was featured in an article in a publication called Businessweek Assets. He got the COVID story, which ended up being excellent press for the fund, which helped generate new investors for the Tiger Fund. It was not intended to be this way, but it just goes to show you that in the fun industry, all press is good press. Now, I mentioned earlier that Robertson invested all over the globe. Let's cover some of his key learnings and lessons. So the first lesson is one that times can truly change. I have just discussed a chart that Tiger Fund released regarding just how expensive Japan was compared to the U.S. despite having businesses of lower quality. This prompted Robertson to say, it's amazing how in the rest of the world no one really seems to care about profitability. His one strategy in Japan that did work was his Nikkei put strategy. So from 1987 to 1991, he would invest about 1.5% of Tiger's assets into these puts. Since he thought that Japan was so overvalued, this was an excellent insurance policy if the market were to ever crash. Now from Japan, he started learning more about German markets to understand some of the American giants better. So he said, can you really know the merits of Shearing, Plow, Merc or Johnson and Johnson without having a decent knowledge of Smith, Klein, Beacham and Faisons? So his study of Germany came up with some very interesting conclusions. Mainly that he didn't like German businesses very much. He felt that management had very little incentive to act in alignment with shareholders. Managers rarely own stock and trade unionists made up nearly half of the boards of directors. There was just too much old boy network running much of Germany's industrial and financial businesses. And they were all completely content with the way things were being run in the uk. He leveraged his knowledge from investing in Walmart to invest in a few business models that he liked. So two major supermarket chains in Britain shared a similar advantage with Walmart, namely being a low cost provider. The one advantage businesses like Sainsbury and Tesco had was that they owned popular brands that they could sell in their stores. So unlike Walmart, which only sold other brands, these businesses could take advantage of both manufacturing and selling opportunities. I mentioned earlier that the press had ended up being very kind to Robertson in the good times. But the opposite obviously held true when he went through some more challenging Times. So in 1996 and 1995, he trailed the S&P 500. And the same author who was singing his praises now took a completely opposite stance, blasting Robertson for a variety of losing trades in 95 and 96. Now, what were the reasons that the article's author felt that Robertson was slipping? He thought it was due to the concentration of power that Robertson had in decision making and how he was unwilling to offload responsibility to others in the business as it scaled. This is just a fascinating subject. So on tip748 I discussed Netflix's unique culture. Reed Hastings believed that hiring the top talent meant they could do just much more decision making without having to ask for permission from higher ups. And it seems like this was a significant problem for Julian Robertson as Tiger Fund's assets began to scale. Now it's easy to look back and say that he probably should have just offloaded responsibility to others. But you also have to remember that he was a big reason for the Tiger Fund's success. And that success had been because he was the one who was taking information and he was the one who was making the final decision. So he might have viewed ceding those duties to someone else as being highly risky. The author also felt that Robertson just spent too much time researching currency and interest rate trends and not enough time on individual businesses because he was less willing to act on his analysts ideas. He was losing talent. Robertson disagreed with the article and actually ended up suing the publication for half a billion dollars. They ended up settling outside for no financial gain towards Robertson. And he actually got the publication to write an editor's note recognizing the error in their story. In 1990, the Tiger Fund had a billion dollars in AUM. By 1999 that had grown to 22 billion in AUM. But that was to be the high point of Julian Robertson's illustrious career. But before we cover the fall of Tiger Fund, I want to cover the seven main themes of Robertson's stock picking framework. Number one is management. Number two is looking for a monopoly or oligopoly. Number three is value. Number four, regulation. Number five, upstream needs. Number six, growth. And number seven, big core positions. So first up is management. Even though Julian Robertson relied heavily on others to get information, he was still a fundamentals based investor at heart. So it's no surprise that he placed a significant emphasis on good management teams. I spoke about earlier in the episode on what he observed in management teams in Germany. He wanted management that owned shares in the businesses that they were managing and he wanted them to be aligned with shareholders in terms of incentive programs. Now, similar to Buffett, he wasn't a big fan of unions. And you know, the more I invest, the more I understand Buffett and Robertson's aversion to unions. When you look at problems a business faces in the lens of unions, it's a really sticky situation. So my mother in law has been working for Air Canada for multiple decades now, and there's a strike that happened a few days ago that upset her very deeply. And I can completely resonate with how she feels and how it paints Air Canada in a very bad light. But when you look at Air Canada from an investor standpoint, you know, you want everyone to just get back to work so they can continue generating revenue. It's a really challenging paradox to deal with. Luckily, I'm not an Air Canada shareholder. I try my best to avoid businesses that have union workers so I can avoid any potential labor disputes. I prefer businesses that just hopefully treat their employees well enough that they don't feel a need to unionize. Robertson also searched for management that was focused on the bottom line, while top line growth was an essential factor. If they couldn't drive incremental revenue to the bottom line over time, he was just not that interested in investing in it. And I resonate a lot with this. Growing revenues isn't hard when you can just pump money into sales and marketing initiatives. But too many businesses invest in that area and then it almost becomes like a drug where, you know, if they wean themselves off of that spending, things are just going to head south very quick. So they become reliant on it to grow the top line, even though it often has no real impact on the profitability of the business. Peloton, I think, is a very good example of this. So from 2018 to 2022, their SGA increased at a 74% compounded annual growth rate. At the same time, revenue was compounding at just 69%. However, throughout that entire time, the business was unable to turn a profit. The second principle is related to his affinity for monopolies and oligopolies. So I already mentioned De Beers, American Airlines and United Airlines. Then to a lesser extent, there was Walmart, Tesco and Sainsbury. These businesses all were deeply entrenched businesses that were next to impossible to topple. Monopolies are great simply because the chances that they're still turning a profit in five to 10 years are going to be a lot higher than a business that has, you know, 15 other companies that it must constantly try to compete with. That's not to say that businesses that don't hold a monopoly can't succeed. I just think that Robertson was investing in these businesses simply because he felt it tipped the odds in his favor. Now, the investors podcast is an excellent example of a business that doesn't really have a monopoly yet. TIP has been around since 2014 and it's continuing to roll along very well today. Now, while the business part of TIP is getting more and more challenging due to the significant number of competitors podcasts, we're still able to stay in the game simply based on the quality of the work that we are able to do. A good example of this is just how many podcast hosts use podcasting as an advertising tool for their primary business. So at tip, podcasting is our primary business. For that reason, we can produce very high quality episodes because we spend a significant amount of time researching and making our episodes compared to someone, you know, maybe who's a hedge fund manager first and a podcaster second. They have to deal with the full time job of managing the fund and then any spare time is devoted to podcasting. At tip, I'm a podcast host first and everything else comes second. For this reason, TIP does have some advantages, but they're still very minor. Now, the third principle here is value. So Robertson was still a value investor at heart. He mentioned Graham and Dodd in his 1987 shareholder letter, Strachman writes, he reiterated his belief that the Graham and Dodd way was the only way to view the markets and that to fully make an educated decision, portfolio managers had to look at a company's financial documents. He wrote that Graham's overriding concern in picking a company would have first been his balance sheet and then its earnings, and there would be very little concern as regards to the market. The key is to find reasonable value, not in consultation with so called stock market gurus. He talked about the strength of Benjamin Graham, Warren Buffett, John Templeton, Peter lynch style of investing. He talked about how he believed the market technicians may have their day, but he wondered where they would be in five years. Now, similar to Graham, Robertson paid close attention to a company's balance sheet. For this reason, he was very attracted to businesses like banks. He looked at banks specifically in countries such as Japan, Germany and the US he would focus on their balance sheets and part of his analysis just to see if they made attractive longs or shorts. So he'd look at things like what industries the bank was loaning money to to ensure that investments would actually move in the direction that he hypothesized. The fourth principle here is regarding regulation. So I've already mentioned unions here, which are a form of regulation. Still, I'll focus on how Robertson used regulation to his advantage. By searching for rules that would further hamstring his competitors. So he was always looking for ways that the government would kind of tie the hands of a business's competitors. This made the incumbent even more powerful. Now, on the other side of regulation is when a government can harm a business. So this happens very frequently, you know, especially in companies that can maybe damage the environment. Picture British Petroleum and their oil spill. So the 2010 Deep Water Horizon spill incurred costs that exceeded about $65 billion. And while I think it's perfectly fine that BP had to take on the responsibility of this mess that they made and clean it up, it's still an issue that I personally prefer not to have any money invested in. So, similar to unions, I also try to find businesses where it's unlikely that regulation can reduce the company's ability to generate future cash flows. The fifth principle here involves seeking ideas with a supply chain. So since Robertson had these numerous opinions on, you know, which countries around the world were likely to consume more or less, he could help. It helped him identify businesses that would benefit from this increase in, you know, demand. So a simple analog today is in chips. Many companies inside of the chip supply chain have and will continue to benefit from from the need for more and more chips. So in 1998, Robertson had a view on palladium, a key commodity essential for the production of items such as, you know, cell phones and catalytic converters. So he observed that in Russia and South Africa, the palladium mines there were depleting and would not be able to service the surging demand in both phones and cars. This is a great way to find ideas, especially if you enjoy deep dives into specific industries. So the following principle is one that I deeply resonate with, which is to look for companies that have inherent growth potential. Both his biography and the John Train book don't delve too much into the growth investments that Robertson made. But we can look at one of the interviews that he did on CNBC in 2018 to learn more about what he was looking at at that time. So he mentioned three businesses that everyone will be very familiar with. Alphabet, Meta, and Microsoft. So these are all businesses with very tremendous growth. You know, Robertson said that they reminded him of some of the companies inside of the Nifty50 era, but that these businesses were much cheaper and much higher in quality than the one in the Nifty 50. He felt that even though these three names were maybe optically expensive, when you factored in future growth, their valuations were very easily justified. So the last one here is related to owning prominent core positions. So John Train mentions that Robertson was heavily invested in about a dozen or so giants of the industry. This one was harder for me to wrap my head around because even if he had a dozen positions in the equity portfolio, the equity part of the Tiger fund was not, you know, 100%. He was long and short. He was using leverage, and then he was holding, you know, foreign exchange, commodities and other assets as well. But, you know, he was still a concentrated investor who would like to make some pretty sizable bets. So in that sense, he would put money behind bets that he just had high levels of conviction in. I respect that, and I think that's a hallmark of many great investors who have outperformed over long periods. So you'll probably notice a theme of some of the businesses that I've discussed on today's episode. Robertson wasn't looking for high flying tech businesses with a good story and no fundamentals to speak of. So as the tech bubble began forming, the Tiger fund was having one hell of a time making a profit for their investors. So the good businesses that appealed to Robertson, businesses like Gillette, Coca Cola, and General Motors, were being discarded by the market for story stocks with no profits to show for it. So Stackman writes, things that were supposed to go up were going down, and things that were supposed to go down were going up. Now, this showed a commonality. In most bubble like markets, investors always want to participate in the upside of a market. And often they're willing to sell shares in outstanding businesses just to buy businesses that are more speculative because they maybe have a better chance of increasing in price. This is a sad fact, but it's a fact that investors just have to live with. And it means that during, you know, super euphoric markets, we have to be willing to hold businesses that might have mediocre or downright bad returns, even though the business fundamentals are continuing to improve. Now, interestingly here, Strachman points out that the Tiger Fund was still finding decent opportunities in the market at this time, but they simply were not yielding the results that they usually did. For instance, opportunities that were cheaply priced and growing were simply not having their value realized by the market. All investors, I think, could probably resonate with this feeling of helplessness. So Robertson had believed that the success of Tiger rested on a steady commitment to just buying the best stocks and shorting the worst ones. However, due to the irrationality of the market, this strategy proved to be ineffective. Robertson said, in a rational environment, our strategy functions well, but in an irrational market, where, you know, earnings and price considerations take a backseat to most clicks and momentum. Such logic, as we have learned, does not count for very much. As a result of this, Robertson decided it was time to make some massive changes to the Tiger Fund, otherwise he'd have to shut it down. He explored some strategic partnerships who could maybe take over the fund or merge with it, but he just couldn't find the right deal. And Strachan points out that Robertson wanted to do right by his investors. Now this reminds me a lot of Warren Buffett, who could have easily sold the Buffett partnerships when he dissolved it, but decided against that because he just didn't want to monetize his investors. Buffett saw himself as an investor alongside of his partners and didn't think it was right to just make money off of them, even though he fielded numerous offers to buy the partnership. Robertson, in a similar vein, didn't want to hand his partners over to someone who, you know, just wouldn't treat his investors the way that he thought they should be treated. Nobody that he was speaking to about a potential deal was willing to guarantee that his investors would be taken care of. And that was just a deal breaker for him. So in a letter to investors In March of 2000, Robertson explained that the Tiger Fund had stumbled badly. And as a result, investors voted strongly with their pocketbooks. This was a significant reason that he closed the fund. And the 19 month period leading up to this saw a massive $7.7 billion in redemptions represent nearly a third of assets under management. Now the interesting aspect of Robertson's story is his rise and subsequent downfall. You know, he was the product of growing too quickly and serves as an excellent reminder that size can really be a significant impediment to success if a leader is unwilling to delegate some responsibility to others. John Train called Julian Robertson the queen bee in his book. The reasoning behind this was that Robertson was seen as a central node in the Tiger Fund's decision making process. Trane went as far as to write that Robertson managed a Tiger Fund the same way that he would manage a fund of merely $250 million, meaning he was probably taking far too much responsibility for a fund that eventually grew to over $20 billion in assets under management. Now why was he like this? Could it have been because the fame of success got to his head? After all, Robertson scaled the Tiger fund from only $8 million. And as he gained success, the press coverage about him helped him achieve even more success and his name became much better known to the investing world. Robertson's story serves as a poignant reminder of what could just go wrong when a talented manager is unable or unwilling to make adjustments as the business scales There were numerous examples of public companies that required massive overhauls in management to survive and thrive. So you look at Uber. So their founder, Travis Kalanick, stepped down due to cultural and management issues. His replacement, Dara Kazrausha, was brought in to stabilize and scale responsibly. Then you look at Google. So the founders Larry Page and Sergey Brin were just brilliant technologists, but they were so, so business people. So they brought in Eric Schmidt, who provided, you know, operational discipline, business scaling and executive management that Google really, really needed. Now, I realize that these aren't Apple to Apples comparisons, but I think you get the picture. If you think of a hedge fund as a business, which it really is, you have to understand that structural changes are required as the business scales. And if you don't make these structural changes, you run the risk of key man dependency. And if that key man can no longer handle their responsibilities as they once did, then there's a very good chance that things will go south very fast. If the tech bubble had never happened, would Roberson have shut the fund down? It's a tricky question, but I assume the answer is still yes, because the fund would have continued to grow larger and more unmanageable for a centralized figure to handle on his own. That's all I have for you today on Julian Robertson. Want to keep the conversation going? Follow me on Twitter Rational Mrks or connect with me on LinkedIn. Just search for Kyle Grief. I'm always open to feedback, so please feel free to share how I can make the podcast even better for you. Thank you for listening and see you next time. Thank you for listening to tip. Make sure to follow we study billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.