Back in the summer of 2012, we had some fun when we reported that Whitney Tilson – the consummate, if always late “value investing” immitator of other prominent investors especially Warren Buffett and Bill Ackman and sworn #NeverTrumper – following several years of abysmal returns, closed his then-hedge fund T2 (with Glenn Tongue), splitting off into his own, oddly-named venture, Kase Capital. Then, one year ago, Whitney – who in recent years was better known for his family photos from Africa than managing money- did it again when Tilson officially closed his hedge fund and exited the asset management industry.
The reason for the closure is that Tilson’s latest hedge fund, Kase Capital, which was managing a whopping $50 million at the time of closure, down from a peak of $180 million, lost about 8% in the first 8 months of 2017, and his clients finally threw in the towel.
Shortly after exiting the asset management industry, Tilson – who admitted that in his “18¾ years managing money professionally via numerous hedge funds and mutual funds, I had a very unexpected, frustrating and humbling experience: my performance got worse over time” – decided to teach others about his numerous investing mistakes, and founded Kase Learning, which offers a range of seminars and webinars for professional investors but mostly for avid amateurs “to help them become better investors and, for some, launch and build a successful investment management business.”
And while it remains to be seen if Tilson is a better teacher than investor, it now appears that Whitney – having shown some modest returns in his personal account – is contemplating a return to money management yet again. As Tilson reveals in a wide ranging Seeking Alpha interview, “I’m in the process of setting up a separately-managed accounts business right now. Initially, it’s just going to be for friends, family and former investors, but perhaps I’ll expand it over time.”
Why will this time be different? Because, as he explains, “money management is still the greatest business in the world, I love the game” and “I am confident that I will be successful now that I’ve taken a break and internalized the lessons I learned (and now teach) from nearly two decades in the trenches.”
Which is odd because in the very same interview, Tilson says that he is discouraging “many young investors who take the seminars I teach at Kase Learning from starting their own funds.”
That would make Whitney is different, although aside from blowing up not once but twice, it wasn’t exactly clear “how.”
To those who decide to test their luck and allocate capital to see what lessons Tilson has “internalized” from getting blowing out of the money management industry, good luck, although one wonders why take the risk when one can just do the opposite of Dennis Gartman and retire comfortably in the near future.
Interview With Whitney Tilson: The Most Important Question An Investor Needs To Answer
Seeking Alpha: You’ve seen a lot of changes in your nearly two decades in the industry – what does the industry look like going forward? How can managers adapt to what seem like ever-increasing challenges?
Whitney Tilson: I think that starting, building and managing a successful hedge fund is much harder today than when I started with $1 million with a laptop on an Ikea desk out of my bedroom nearly two decades ago. There are so many more hedge fund managers, looking for inefficiencies in the nooks and crannies of the market. Plus I’m convinced that the supercomputers running the quant funds are much smarter today than they were even five years ago – and that this trend is going to continue, just like what’s happened with self-driving cars. In the past, I think they were just playing the momentum game, which actually created opportunities for value guys like me, but now I feel like they’re running the value investing playbook. Lastly, the huge (and, I think, permanent) trend toward indexing means that only a handful of stocks are driving the indices, which makes it really hard for any manager who doesn’t own these stocks to keep up.
From a top-down perspective, hedge funds as an asset class are deeply out of favor because a long, complacent bull market like this one is the worst kind of environment. Thus, hedge funds for nearly a decade have offered the worst of both worlds: crappy performance and high fees.
In light of these many headwinds, am I discouraging the many young investors who take the seminars I teach at Kase Learning from starting their own funds? For some, yes. The right answer for them is to bide their time, get more experience, build their investing and entrepreneurial skills as well as reputation, and bank more savings. For others, who have what it takes to launch a fund, my message is that they will have to be even better than their predecessors, do even more in-depth research, be even more rational and disciplined, and make even better decisions. Even for the best-prepared emerging managers, this will not be easy.
That said, human nature hasn’t changed in two key ways: first, there will always be large numbers of investors who won’t be satisfied with average (which is, of course, exactly what one gets with an index fund) and will therefore seek active managers who can outperform. Secondly, there will no doubt be plenty of market corrections and even a few panics in the future, which will create wonderful opportunities for investors who can keep their wits about them.
SA: How has your investing style and view of the markets changed? How does your current personal investing style compare to the one employed at Kase?
WT: In my 18¾ years managing money professionally via numerous hedge funds and mutual funds, I had a very unexpected, frustrating and humbling experience: my performance got worse over time! In an experienced-based business, this is not the outcome one would expect – after all, in other experience-based endeavors – think teachers, fighter pilots or brain surgeons — I have no doubt that someone with a dozen years in the field would outperform a rookie.
I’ve spent a lot of time carefully analyzing what went wrong in my case, in part so I can be a better investor in the second half of my life (I’m 51) and also so I can teach the right lessons to my students. The answer is complex: to use Charlie Munger’s favorite word, it takes lollapalooza effects to screw up the great business I had after my first dozen years. An eight-year attempt to manage money with a partner didn’t work and the market became more challenging, but the single biggest reason I’d cite is that I became too smart for my own good. My success led me to think that I could add value by, for example, trying to time the market, trading, using options, going out on margin, and short selling. All of these activities cost me dearly.
Since I closed my funds last September and received cash (along with all of my investors) a few weeks later, I’ve primarily been focused on building my new business, Kase Learning, so have kept my investing very part time and incredibly simple: of the money I allocated to stocks, I invested 1/3 in Berkshire Hathaway, 1/3 in Howard Hughes, and 1/3 split evenly among Amazon, Alphabet and Facebook.
And you know what? I haven’t made a single trade and have spent no time thinking about my portfolio, yet it’s roughly doubled the market’s return.
I think there is a powerful lesson here: don’t try to be too smart; instead, keep it simple and only make a few investment decisions a year, when something really obvious comes along.
SA: You experienced the ups and downs of short selling. What lessons can you share?
WT: There are so many that we created a full-day seminar focused solely on short selling at Kase Learning. One simple piece of advice for most investors is: don’t do it! It’s just too hard, too risky and too time consuming. This was the advice Charlie Munger gave me very early in my career and one of my great regrets is that I was too dumb to listen to him.
But even if you never short a single stock, you will be well served to study and learn about it, develop the skeptical mindset of a short seller, and know where to look for red flags and unearth hidden troubles. It’s a crucial skill for any long investor, when analyzing a stock that has a meaningful short interest, to recognize that this is a major warning flag that the stock might be a value trap, figure out what the short thesis is, and thoroughly disprove it before buying the stock.
For some investors, however, doing some (or even a lot of) short selling can make good sense. But I’m not sure the traditional Tiger-cub model of being short 70 1%-average-size positions works anymore – certainly in a complacent bull market like this one. Instead, the successful short sellers I’m aware of today tend to fall into two categories:
1) They are very quiet, avoid battleground stocks, and tend to short melting ice cubes – companies often owned by other value investors, but where earnings decline materially; or
2) They are concentrated and opportunistic, with clearly identified catalysts. For example, one of my students, Gabriel Grego of Quintessential Capital Management, did extensive, global due diligence on fashion retailer Folli Follie, discovered that the company didn’t have nearly the number of stores or revenues that it claimed, built a large short position, and shared his work at the Kase Learning shorting conference on May 3, which led to an immediate collapse in the stock and its delisting within two weeks (he will be presenting a new idea at our next shorting conference on Dec. 3).
SA: What is the most important question an investor should answer when developing their investment thesis?
WT: What is your variant perception and why is it right? Almost every stock is valued based on investors’ consensus expectations about the future performance of the business. It’s generally quite easy to figure out what these expectations are – just read any analyst report.
Your challenge is very simple – yet also very difficult: find stocks in which the performance of the business turns out to be far different than the consensus view today (either outperformance if you’re long or underperformance if you’re short).
Three years ago, the stock of Restoration Hardware was riding high, peaking above $100 before it dropped by 75% amidst missed earnings and investor fears that the company would be yet another bricks-and-mortar retailer crushed by Amazon. Yet another one of my students correctly saw that RH has a visionary CEO and a highly differentiated product and strategy, and thus was likely to recover – and has made six times his money in less than two years.
This is a classic value investment: find a good company encountering difficulties that other investors think are permanent, (resulting in a severely depressed stock price), but which prove to be fixable — and ride the stock up and up and up.
But sometimes the variant perception can be that a great company, with a stock at an all-time high, still has many years of high growth ahead of it, when the consensus view is that growth is going to slow. If you can find a stock in which growth instead accelerates (good examples in recent years include Netflix and Amazon), you’re likely to make a lot of money here as well.
SA: How would you answer that question for your thesis on Berkshire Hathaway?
WT: As you can see in our latest analysis of Berkshire Hathaway, which is always posted at www.tilsonfunds.com/BRK.pdf, I don’t think the stock is particularly cheap – it’s a 90-cent dollar today, so I view it as an attractive substitute for an S&P 500 index fund. I think it’ll keep up if the bull market continues, as it’s done almost exactly since the market bottomed in March 2009, but will outperform in a down market thanks to its healthy, diversified cash flows, Fort Knox balance sheet and conservative management. I think this is especially true in light of Buffett’s new disclosure this week that he’s bought back some of his stock recently – at prices around 1.4x book value. I think this puts in a new (albeit soft) floor on the stock at close to today’s price.
SA: What company’s share price confuses you the most, and why?
WT: Tesla. I think Musk is a brilliant entrepreneur, engineer, and genius in many ways, but both he and the company have gotten wildly overextended and are cracking under the pressure. I hope for the sake of U.S. manufacturing and the future of the environment that Tesla doesn’t implode, but I think the odds of this happening have risen to at least 30% in the last few months.
SA: What investment idea (from your personal investing or managing money) do you think most about and why?
WT: Again, Tesla (even though I haven’t had any position for nearly five years). It’s an unbelievably entertaining unfolding drama, with tremendous lessons that can be learned by smart observers.
SA: Would you ever consider managing money again? If so, what would need to happen for you to consider this?
WT: Funny you should ask, as I’m in the process of setting up a separately-managed accounts business right now. Initially, it’s just going to be for friends, family and former investors, but perhaps I’ll expand it over time. Money management is still the greatest business in the world, I love the game, and am confident that I will be successful now that I’ve taken a break and internalized the lessons I learned (and now teach) from nearly two decades in the trenches.