Paul Singer (Trades, Portfolio) has made a fortune playing in the distressed debt market. His hedge fund, Elliott Management Corp., has won the dubious honor of being the world’s premier “vulture fund.” While such activities may not sit well with many investors, they have certainly proven to be profitable.
Singer himself has developed a remarkable insight into the market, which has no doubt helped form his idiosyncratic approach. The guru has shared some of these thoughts on occasion, perhaps most famously in Lois Peltz’s acclaimed book, “The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns.” Published in 2001, quite a bit has changed in the market, but it continues to reflect the underlying strategy and thinking that have defined Elliott’s success under Singer.
In this research note, we draw on Peltz’s work to discuss some of the great insights Singer can offer to all investors, whether interested specifically in opportunities of financial distress or of a more conventional bet.
First, prioritize capital preservation
Distressed debt scenarios, or indeed any investment scenario dealing with a financially distressed company, can offer fantastic opportunities for the savvy player. Most investors are too afraid to touch them, and few have the skill or confidence to succeed consistently. Yet, Singer is not as hungry for risk as his preferred strategy might at first imply. As Peltz wrote:
"His objective is to achieve a rate of return as high as is consistent with his goal of capital preservation."
While Singer aims for (and has delivered) high returns, his first goal is capital preservation. Many investors and funds playing in aggressive and potentially risky asset classes often indulge in healthy appetites for risk. That can pay off for a while, sometimes a long while, but a lack of attention to risk management tends to blow them up in the end. Singer, on the other hand, continues to be grounded in reality, never losing sight of what ought to be the first responsibility of any money manager or individual investors: Protect your capital base.
Seize opportunities when they emerge
New opportunities for profit in the market are always emerging, but they rarely last long. As Singer told Peltz, investors must be ready to seize opportunities when they pop up:
“The world has a rapidly shifting set of opportunities. You have to be there and you can’t stay in too long. It’s like the Welcome Wagon in front of your house for 10 minutes. You don’t want to be too late and miss the cookies.”
That focus on seizing opportunities is reminiscent of the thinking of another hedge fund we have discussed, Edgar Wachenheim. Wachenheim calls for confident and decisive action based on the best judgment derived from imperfect information in an ultimately probabilistic world. Singer would undoubtedly agree. But, as importantly, the guru admonishes us to be ready for changes in the world as they materialize.
Information is king
When managing an individual investment account or a hedge fund, information is the currency of the realm. Singer understands this intimately, as Peltz wrote:
"During the typical day, Singer first looks at the world through the newspapers, computers, and news events. After he assesses the price movement, he then talks to the portfolio managers, analysts, and traders as well as his contacts on the Street…He looks at different segments of the portfolio to see what needs to be adjusted…He does not spend much time talking to clients."
Knowing something first, or understanding the real implications of events before they are widely understood, will pay in a market powered by data and humans’ reactions to them. It helps to have a vast network and analytical resources like those enjoyed by Elliott Management, but smart individuals can also beat the market. The primary sources are out there, but it takes commitment to build up and maintain an accurate picture of the world and markets.
Avoid burnout by minimizing stress
The finance industry seems to run on stress. Investment banks, hedge funds and private equity firms all tend to create high-stress environments that lead to high rates of burnout. Singer has a different view of things:
"Singer doesn’t find his work stressful. 'Stress is not caused by managing over $1 billion; it is caused by people, relationships, mistakes, and losses.' Singer has used that philosophy to run an investment style that attempts to minimize stress…Balance is important to his life and work. 'I’m an incremental guy, not a burnout guy.'”
Competent risk management, delegation where possible to capable subordinates and a clear-eyed view of the world can help prevent the sort of burnout so many financial professionals experience. Singer has mastered the art of balancing his personal and emotional life with his investing profession by refusing to adhere to the irrational and toxic cultures seen across the industry.
The market is prone to irrational change
The world is a dynamic and ever-changing place. The market is no different. While certain strategies may prove to be timeless, others are situational. And it is always important to be ready for change when it happens. In extreme cases, the whole market can shift, often on a dime:
"Singer also observes how quickly an environment can change. 'Ideas, tones, markets can go in one direction for so long supported by one concept – and on a given moment’s notice, and unpredictably, it may be over and replaced by a whole other feeling and last another 20 years.'”
Singer saw the irrational exuberance of the tech boom before it burst. Investors must always be wary of changing market sentiment, as well as when exuberance or pessimism has become unmoored from economic realities.
The guru's insights are worthy of investors' attention, not just because of his returns or sophisticated debt strategies. His perception of the market as a whole has helped him lead Elliott Management through numerous market cycles. His record and philosophy deserve attention in equal measure.
