“For better or worse we’re a herd leader. We’re at the front of the pack, we are one of the first movers. First movers are interesting; you get to the good grass first, or sometimes the lion eats you.” David Tepper (Trades, Portfolio), as cited by Ivanhoff Capital.
Being among the investing gurus followed by GuruFocus puts David Tepper in some very competitive company – these are among the best professional investors in the world.
Not only is Tepper in this august company, but he has outperformed every one of them on the 10-year GuruFocus scorecard and tied for second place on the five-year scorecard. This GuruFocus table shows the scores of the top five gurus, sorted by 10-year results:
Tepper and his firm, Appaloosa Management LC, have been described with many superlatives. Or you can simply say, as Bryan Rich did in a Forbes article, that Tepper is “probably the best investor in the modern era.”
Who is David Tepper?
Tepper, born in 1957, grew up in a middle-class neighborhood in Pittsburgh with an accountant father who liked to talk with him about stocks. The younger Tepper bought his first stock while still in high school –Â 100 shares of Career Academy, which was later to go bankrupt.
After graduating from the University of Pittsburgh, he worked as a credit and securities analyst at Equibank in Pittsburgh. That was followed by an MBA from Carnegie Mellon, and a stint as a junk bond analyst at Keystone Mutual Funds (now part of Evergreen Funds). By 1986 he had arrived at Goldman Sachs (GS, Financial), where he became head of the high-yield desk,after just six months.
When he was passed over for a partnership at Goldman Sachs, he started his own hedge fund in 1993 and found a name after flipping through a book about horses. His first choice, Pegasus, was already taken so he settled for Appaloosa, a breed of horses. Tepper bio is based on an article at Business Insider (also available elsewhere).
What is Appaloosa Management?
The fund began with $7 million of Tepper’s money and $50 million from other investors (according to Ivanhoff Capital). It is now worth $16.5 billion, according to Institutional Investor, and that’s after returning $3 billion in cash to investors at the end of 2016.
That was the sixth straight year he’s returned cash to his investors. Investopedia quotes Tepper as saying, “The question is what size gets you – except more fees for the manager. But it doesn’t necessarily make the investor more money.”
Appaloosa’s client list includes “high-net-worth individuals, pension and profit sharing plans, corporations, foreign governments, foundations, universities, and other organizations,” according to Wikipedia/BusinessWeek. To get into the fund, clients must agree to a three-year lockout period, during which they can withdraw no more than 25% of their total investment.
A Bloomberg profile observes that Appaloosa invests in equities, fixed income and hedging vehicles. It also notes that the fund’s fixed income vehicles are edgy: “For the fixed income investments, the firm invests in high-yield bonds, bank loans to highly leveraged companies, sovereign debt, debt of distressed companies and other debt securities.”
Indeed, the company’s first investment was in Algoma Steel, a distressed company that was in bankruptcy court. Investopedia reports that the bet paid off handsomely; Appaloosa bought preferred Algoma shares for 20 cents and sold them in less than a year for 70 cents. That was the first of many long shots by the firm.
In succeeding years, Tepper and Appaloosa made many contrarian, or early, moves. Some flopped, but more paid off and paid off very well. Most remarkable, perhaps, was his quick response to the 2008 financial crisis; when the rest of the world was running for cover, he was buying highly discounted blue-chip and financial stocks. When the market recovered, the firm had earned $7 billion, a 70% return on his original investment. The Investopedia article says, “Tepper’s trades following the 2008 market crash can arguably be labeled the greatest trades ever made.” More recently, he has profited from forays into the debts of Argentina, South Korea and Russia.
What is Tepper’s investing philosophy?
In the section above, one investing philosophy hint appeared: taking on risky positions, or more accurately, taking on positions that appear risky to most other investors. Ivanhoff Capital quotes Tepper as saying, “We don’t really buy high flyers. We buy before they get [to be] high flyers.”
Of course, it takes a lot of courage to take on those positions, but Tepper is quoted as saying, “The main thing that makes Appaloosa stand apart from the pack is the depth of our analysis and the fact that we’re not afraid to be the first one to act on our convictions. If you look at our history over the years, we are usually the first mover in a country or situation, time and time again.”
And “We’re value-oriented and performance-based like a lot of funds. But I think what differentiates us is that we’re not afraid of the downside of different situations when we’ve done the analysis. Some other people are very afraid of losing money, which keeps them from making money.”
A ValueWalk article says, “Tepper is an expert in distressed equity and debt investing.” And this: “He likes to buy into companies that are near bankruptcy. He will then sell the company’s debt when it matures or sell the stock once the company has recovered. He prefers to invest in companies that have high amounts of revenue. He is also willing to take chances on utility companies because he believes that government will keep these types of companies afloat because it is usually in the public’s best interest.”
Perhaps the most interesting perspective on Tepper and Appaloosa comes from another ValueWalk article, by "Alex," which sees distressed stocks as alternatives to call options. Investors can make a long bet on a company by buying call options, which normally sell for a fraction of the price of the stock on which they are based. If the market cooperates, the same dollar returns are possible with a much smaller investment up front. However, options have expiry dates, and the value of an option decays day after day and expires worthless if the stock price does not rise, or rise enough, by that date. This erosion of long option value is called Theta, or as Alex put it, the Theta Tax.
The ValueWalk article argues that buying the right distressed stocks at the right time allows Tepper to pay the equivalent of option prices but avoid the value decay that dooms many option investors. Alex called this strategy Cheap Optionality. He pointed to Tepper buying Bank of America (BAC, Financial) at $3.00 and CitiGroup (C, Financial) preferreds at less than $1.00 at the height of the 2008 crisis, and added, “Both these stocks had the characteristics of a long call. If the banks failed, investors would lose everything, but a recovery meant 100% to 500% gains. Tepper had asymmetric risk/reward in his favor and didn’t have to pay a dime in theta decay for it.”
What are the results?
Let’s again look at the results over various periods, but first observe how GuruFocus defines the Score Board: “These are the performance numbers for the stocks gurus bought and the five-year and 10-year performance numbers of their flagship funds.” (in other words, the score does not include fixed income or other nonequities):
Since inception, in 1993, Tepper and Appaloosa have had average annual gains of almost 27%.
What is in Tepper’s portfolio now?
This GuruFocus chart/table provides an overview of the equity portfolio and highlights Tepper’s current interest in the health care sector:
And this table, also from GuruFocus, shows his top 10 holdings over the past two completed quarters:
These are the top 10:
- Allergan PLC (AGN, Financial).
- Energy Transfer Partners LP (ETP, Financial).
- Alphabet Inc. Class C (GOOG, Financial).
- Williams Partners LP (WPZ, Financial).
- Facebook Inc. Class A (FB, Financial).
- PNC Financial Services Group Inc. (PNC, Financial).
- Allstate Corp. (ALL, Financial).
- Teva Pharmaceutical Industries Ltd. ADR (TEVA, Financial).
- Pfizer Inc. (PFE, Financial).
- Owens-Corning Inc. (OC, Financial).
Conclusion
“We won’t stop if we’re down a little bit. We don’t freeze. We keep investing with a disciplined, logical approach.” (David Tepper, cited by Tren Griffin at the 25iq blog)
Tepper and Appaloosa have had an extraordinary ride in the markets, and it seems likely it will continue. For the rest of us, there are several lessons we might take away for our own investing. Lessons such as finding asymmetrical risk/reward opportunities, and then having the fortitude to ride them out.
In an article titled The Dodge & Cox Case for Active Investing, I noted that one of the "features" the firm said characterized successful active investors was their willingness to deviate from holdings of the benchmark. To beat the market you need to think and act differently than most other investors, particularly if you are an institutional investor, trading large blocks at a time.
Tepper has made the most of his background, his firm’s ability to do research and his confidence in that research to generate results for his clients.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
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