1. “Smart idea, grounded on exhaustive research, followed by a big bet.”
“Hear a story, analyze and buy aggressively if it feels right.”
A colleague of Robertson once said: “When he is convinced that he is right, Julian bets the farm” George Soros (Trades, Portfolio) and Stanley Druckenmiller (Trades, Portfolio) are similar. Big mispriced bets don’t appear very often and when they do people like Julian Robertson (Trades, Portfolio) bet big. This is not what he has called a “gun slinging” approach, but rather a patient approach which seeks bets with odds that are substantially in his favor. Research and critical analysis are critical for Julian Robertson (Trades, Portfolio). Being patient, disciplined and yet aggressive is a rare combination and Robertson has proven he has each of these qualities.
2. “Hedge funds are the antithesis of baseball. In baseball you can hit 40 home runs on a single-A-league team and never get paid a thing. But in a hedge fund you get paid on your batting average. So you go to the worst league you can find, where there’s the least competition. You can bat 400 playing for the Durham Bulls, but you will not make any real money. If you play in the big leagues, even if your batting average isn’t terribly high, you still make a lot of money.”
“It is easier to create the batting average in a lower league rather than the major league because the pitching is not as good down there. That is consistently true; it is easier for a hedge fund to go to areas where there is less competition. For instance, we originally went into Korea well before most people had invested in Korea. We invested a lot in Japan a long time before it was really chic to get in there. One of the best ways to do well in this business is to go to areas that have been unexploited by research capability and work them for all you can.”
“I suppose if I were younger, I would be investing in Africa.”
What Julian Robertson (Trades, Portfolio) is saying is that there is profit for an investor in going to where the competition is weak. Competing in markets that are less well researched give an investor who does their research an advantage. Charlie Munger (Trades, Portfolio) was once asked who he was most thankful for in all his life. He answered that he was as most thankful for his wife Nancy’s previous husband. When asked why this was true he said: “Because he was a drunk. You need to make sure the competition is weak.”
Warren Buffett (Trades, Portfolio) makes the point that the way to beat Bobbie Fisher is to play him at something other than chess. Buffett adds: “The important thing is to keep playing, to play against weak opponents and to playfor big stakes.” And “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.” Some investors try to find a market or a part of a market where you aren’t the patsy if you want to outperform an index.
3. “I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.”
The investing strategy being referred to here is a so-called “long-short” approach in which long and short positions are taken in various stocks to try to hedge exposure to the broader market which makes gains more associated with solid stocking picking. This approach is actually involves an attempt to hedge exposure to the market, unlike some hedge fund strategies that involve no real hedging at all. When Julian Robertson (Trades, Portfolio) started using this this long-short approach it was less used and short bets especially were more likely to be mispriced than they are today. Many of Julian Robertson (Trades, Portfolio)’s so-called “Tiger Cubs” continue to do long-short investing. A recent report claims that $687 billion is currently invested in long-short equity hedge funds.
4. “Avoid big losses. That’s the way to really make money over the years.”
JulianRobertson believes that hedge fund should make it a priority to “outperform the market in bad times.” That means adopting a strategy where the hedge fund actually hedges. As previously noted, the long-short strategy helps achieve that objective. Anotherway to avoid “big losses” is to buy an asset at a substantial discount to its private market value.When the right entry point is found in terms of price, an investor can make a mistake and still come out OK financially. This, of course, is a margin of safety approach.
5. “For my shorts, I look for a bad management team, and a wildly overvalued company in an industry that is declining or misunderstood.”
When an investor shorts a company with a bad management team it is a safer bet since a business with a good management team is far more likely to fix problems. In other words, if a shorted business has a bad management team it is insurance that the real business problem problem underlying the short will continue. Julian Robertson (Trades, Portfolio) is also saying that the overvaluation must be “wild” rather than mild for him to be interested in a short, and that he likes shorts in an industry in secular decline so the wind is at his back.
6. “There are not a whole lot of people equipped to pull the trigger.”
“I’m normally the trigger-puller here.”
The system used by Julian Robertson (Trades, Portfolio) may decentralize the research and analysis function but it concentrates the trigger pulling with him. The newsletter Hedge Fund Letters writes: “Managers oversaw different industries and made recommendations but Robertson had final say. The firm made large bets where they had conviction and each manager commonly covered less than ten long and shorts. Positions were continuously revisited and if things changed there were no holds – positions were either added to or removed.”Someone can be a great analyst and yet a lousy trigger puller. Successful trigger pulling requires psychological control since most investing mistakes are emotional rather than analytical.
continue reading: http://25iq.com/2015/05/09/a-dozen-things-ive-learned-from-julian-robertson-about-investing/
