On September 18, Leon Cooperman, the chairman and CEO of Omega Advisors, spoke to a group of individuals at Roger Williams University about a diverse group of topics including life, politics and (most importantly) investing. Here are some short hand notes I took down from the event video:
“With an average IQ, a strong work ethic and a heavy dose of good luck, you can go very far.”
“The harder I worked, the luckier I got.”
Leon is from the South Bronx, and went to Hunter College in New York (now Lehman College). After college, he worked at Xerox for 18 months, and then went to Columbia Business School to get an MBA (graduated in 1967).
“One of the great secrets to success in my opinion is to surround yourself with the most able, capable people, and don’t be threatened by them, but be benefited by them.”
Four observations about life:
1) There’s nothing more important than family.
2) It’s great to have friends, but to have friends you have to know how to be a friend (Ralph Waldo Emerson – “the only way to have a friend is to be one”).
3) Never do anything where if what you did appeared on the front page of the WSJ or the NYT, you would be embarrassed; live your life as an open book.
4) When you have achieved financial security and success, share with others less fortunate than yourself.
Characteristics of an Outstanding Analyst / Portfolio Manager
1) The desire and commitment to be the best.
2) Strong work ethic.
3) Thorough and penetrating analysis and in-depth research with a strong analytical foundation.
4) Good communication skills are critical. Can easily write a several page summary of his or her investment views.
5) Have an intensity which leads one to be on top of positions and ahead of the crowd.
6) A good nose for making money, e.g. know a good idea when you see one; make sure the position is meaningful for the organization; know when to back away when the developments are not as anticipated – effective risk management.
7) Have conviction with respect to investment recommendations and confidence to add to a position if fundamentals are intact but stock is down.
8) Be aware of not only absolute P&L but also return on capital; judicious use of capital.
9) Team player – particularly important in tapping into the expertise of an organization.
10) In a typical year, an analyst should be able to produce at least 3-4 core investment ideas and 10-12 trading ideas.
11) Pride of ownership, sense of loyalty to the organization and commitment to clients.
12) Unbiased and willing to admit mistakes, skeptical, creative, curious, bold/edgy, able to take risk.
13) Can identify his or her comparative advantage and capitalize on this.
14) Identify variant perception.
“We look at all different markets to try and identify straw hats in the winter.” Looking for what is out of favor and potentially undervalued (including currency, commodities, stock, bonds, etc.).
“We visit companies, we knock on doors, we quiz management, we study industry statistics, study valuation, and try to determine whether a stock is mispriced.”
Over the past 20 years, returns at Omega have been 13.5%, net of all fees to investors; this is roughly 550 basis points better than the S&P 500, and with an average net long position of 70%.
Mr. Cooperman currently has a moderately constructive view of the U.S. equity markets (valuations reasonable). “Stocks are the best house in the financial asset neighborhood – it is still not clear whether it’s a good or bad neighborhood.”
Relative optimism comes from improving unemployment (albeit slowly), pent-up demand in the consumer sector, improving consumer balance sheets, pent-up demand in capital spending, pent-up demand in residential real estate investment (“housing starts are way below normalized demand”), stabilizing/higher home prices (rent as a percentage of mortgage payments at record high), constructive message from cyclically sensitive metrics, positively sloped interest-rate yield curve, growth in bank lending (from well capitalized U.S. banks), service sector improvement, a friendly Fed, strong corporate balance sheets, and an absence of metrics foreshadowing recession.
Average P/E on S&P from 1960 to 2010 was 14.9x; today, it’s at 13.5x on 12 month forward earnings (about 10% belong long-term average). In addition, in the 50-year period, the 10-year government bond averaged 6.67%; today, with long-term bonds near 1.6%, it is roughly one quarter of its long-term average – P/E ratios relative to interest rates are “extraordinarily” low.
1958 – “the year of the yield reversal” – up until that time, stocks yielded more than bonds; in 2012, the number of S&P 500 companies (excluding financials) with a dividend yield higher than that of 10-year Treasuries exceeded 50% (by comparison, the percentage was in the single digits for the vast majority of the 30 years prior to 2008).
In the last five years, there’s been “significant derisking” by the public and by institutions of their equity ownership – hundreds of billions have flowed out of domestic equity mutual funds, with a similar amount being moved into bond funds; as a result, equity ownership among pension funds have fallen from around 60% to 50%, and households have gone from 29% to roughly 20% (from 2000-2012). For the contrarian, this is a very interesting change in behavior that shouldn’t be overlooked.
Fiscal Cliff – “I refuse to believe they’re that dumb” [to let us fall into a dramatic recession].
“I’m very concerned about the huge buildup of federal debt… it’s unsustainable, and we have to deal with this… unless we move in this area, it’s going to be a significant issue.”
“Personally, I think the markets got 5% up and 10% down.” [I believe he’s talking about Q3/near term.]
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.