In the hedge fund world, David Tepper (Trades, Portfolio) often gets overlooked because he tries to keep a low profile. But that does not mean you should ignore this champion investor.
Tepper co-founded Appaloosa Management in 1993 and today, the fund has $17 billion in assets under management.
Appaloosa invests in stocks and bonds of distressed companies, a highly specialist area of the market, but one that can be highly lucrative if you get it right. Since its founding, Appaloosa has averaged 30% annual returns, earning Tepper a fortune of $10.2 billion in the process.
In November 2007, Tepper gave a talk to undergraduate business students at Carnegie Mellon University about his career and took questions from students about investing. The full speech was published in Santangel’s Review. I've pulled out some highlights below. This isn't a full transcript, just some quotes that I found to be the most informative.
Investment advice from David Tepper (Trades, Portfolio)
Appaloosa has made a name for itself over the years by investing where others are afraid to go. As Tepper described, the fund was one of the first in Russia after the fall of communism and was handsomely rewarded for this risk:
"When I left I started a hedge fund called Appaloosa Management. Appaloosa was a fairly early hedge fund and we’ve been doing it for 15 years. We’ve invested in distressed debt and we invest around the world. We were one of the first investors in Russia and I was in Russia in 1996 when Yeltsin was on the tank. We can talk about that, if you guys would like to. We’ve had Donald Trump in my office and we could talk about Donald Trump if you’d like to. [Laughter] Appaloosa was the first non-Korean to buy Korean treasuries. We were there in the Asian meltdown in 1998, so we can talk about that if you’d like. We were big in 2002 scandals – Adelphia and WorldCom and different business scandals. We were big in some of those companies, investing in them on the way up and we can talk about that if you’d like."
Tepper made big bets on Russia and Korea because he was convinced these countries were good counterparties, which could repay their debt. He acted with conviction when he saw the opportunity:
"In Russia’s case, it was cheap when we went in. You know, we lost a lot of money in ’98. But then we went further into Russia because everybody was selling out of Russia. It got so cheap on the fundamentals because banks wanted it off their balance sheets by the end of the year. So we bought a lot.
You do the analysis of the country just like you do a corporate analysis to see what the ability to pay the debt back is. We were debt investors so you want to see the basic ability of the country to pay its debts at that time. It was just fundamental analysis, deciding if the stuff was cheap enough or not.
In Russia’s case, [it had] incredible natural resources. In Korea’s case, [it had] incredibly industrious people and an incredible export machine potential. With the falling won at the time, that just created what we thought would be the ability to get reserves real fast."
While taking these enormous risks has earned Appaloosa outsized returns over the years, there have been losses. Huge mistakes. One of the biggest came towards the end of the 1990s, when Long-Term Capital Management failed and dragged Appaloosa down with it:
"The biggest mistake I made when I had the hedge fund was [when] we were really caught in Russia in the meltdown in ’98 when Long-Term Capital [Management] went down. We lost 20% or something that year, which was a really bad year for us. We were very involved in emerging markets; Russia, Brazil, the whole thing. When Russia hit and when ’98 hit, not only did the liquidity disappear, the spreads widened out. You’re seeing some of that right now again in the marketplace. So that was a mistake, a false liquidity. We thought the liquidity was there. I thought the liquidity would be there, would always be there and I was not careful about my position size at the time."
Another mistake: Tepper missed the bursting of the housing bubble that ultimately resulted in the financial crisis:
"Another mistake I made was, we should have been shorting that market. We didn’t short that market and it was like a free option to short some parts of that market. It was so ridiculous in retrospect. I knew about it, because I had some people telling me about it and I was too busy, or too unfocused to look at it."
Disclosure: The author owns no stock mentioned.
