WHITNEY TILSON: I got lucky in that the market offered me an opportunity to put 30% of my fund into something that was both super safe and super cheap. I'm much more open today to paying up for a stock. I think WeWork is worth 0, and we'll be bankrupt within a year. They're just a real estate company that's borrowing long and lending short.
ED HARRISON: Ed Harrison here for Real Vision. In this interview, I'm going to be talking to Whitney Tilson, who is arguably one of the foremost value investors over the last 2 decades. I have a ton of questions to ask him. I'm not sure if we're going to have enough time to get into them all.
But we're going to definitely talk about how we got into investing. What is a good value investment? And we also want to talk to him about some of the ideas he has currently in terms of things that he's positive about but also things in the market that he doesn't see as positively. Hope that you enjoy the conversation.
Whitney Tilson, it's a pleasure to talk to you. We're going to talk a lot about value investing-- some of the ideas that you have. What you're doing currently with Empire Financial Research. But the first question that pops to me when I look at your resume is that your parents were teachers. How is it that you got so involved in investing?
WHITNEY TILSON: Yeah, well, it didn't come naturally. That's for sure. My parents, their entire lives, never owned a stock. So it wasn't like investing or business was ever talked about around the dinner table. I grew up in developing countries-- Tanzania and Nicaragua most of my childhood.
My interest in business developed when I was an undergraduate at Harvard and got involved with Harvard student agencies. And I remember, probably my sophomore year as an undergrad, somehow through some friend, went sat in on a Harvard Business School class. And I just loved the case study method.
And I still remember the case and what the insights were. And I knew right then that I wanted to go to Harvard Business School. And that was my mission from that point forward. So I did a bunch of entrepreneurial stuff. Coming out of college, I was employee number 2 helping Wendy Kopp start Teach for America, then did a fairly traditional 2-year associate program at Boston Consulting Group and was lucky enough, knock on wood, to get into Harvard Business School-- the only school I applied to.
If I hadn't gotten in, I just would have waited and applied to some other schools later, but got in, and off I went. But up until that point all the way through Harvard Business School, had no interest in investing. I was very in business. So when The Wall Street Journal came, I'd read it, except I'd take the C section, the Money and Investing Section, I threw it in the trash-- never even read it.
So my only exposure really to investing was through my college buddy, Bill Ackman, who was very interested in investing at a young age. And I still remember bumping into him on campus back on black October 1987. And he was white as a ghost. And I said Bill, what's the matter? And he said, did you see what happened in the stock market? I said no.
And he's like, well, it just had its worst day since the Great Depression or something. And my family just lost millions of dollars. And I was thinking to myself, gee, I wish I had millions of dollars to lose. But so Warren Buffett came to speak at Harvard Business School when I was there. And I didn't even go hear him-- incredible opportunity, because I didn't even know who he was.
So it wasn't until the mid '90s-- I graduated in 1994, so call it '96 I'd say. I got interested in investing for a very simple reason. I had $10,000 in my bank account. It was the first time in my life I ever had any savings. I had college debt. Then I had business school debt. I had gotten married back in '93. My wife was working as a lawyer.
We were living in her grandparents' apartment. So we had a low cost of living. Both of us had incomes. I was working in the nonprofit sector at the time. So I didn't have much of an income. But between the 2 of us, we finally had some savings, paid off our debt, had $10,000.
And so I called up Bill. And I said, Bill, what should I do with it? I want to invest this money. And keep in mind, 1996 or so, you're now 14 years into this big bull market. Everybody's talking about stocks. The early germs of the internet are sprouting.
So Bill said, all you got to do-- I still remember his exact words. He said, all you have to do is read everything Warren Buffett's ever written, go back and read all his annual shareholder's letters. And you can stop there. You don't need to read anything else.
That's when I discovered Buffett, read his shareholder letters. And that led me to a couple of years later, start going to the Berkshire meetings. I read Roger Lowenstein's book, Buffett the Making of American Capitalists or the first major biography of him.
Then that led me to The Intelligent Investor to Peter Lynch's books, Beating the Street, and One Up On the Street, Seth Klarman's original book, et cetera, et cetera. It led me into the literature. And I just got more and more into it and started buying a few stocks here and there.
And at the time, I'm embarrassed that I was sort of speculating in penny stocks, hot tips somebody had given me. But fortunately, I least, fairly quickly started gravitating toward higher quality businesses and Buffet's influence. And Bill Ackman's influence started to steer me into higher quality businesses.
And then I did that for a couple of years, started managing. At this point, maybe my wife and I had saved, I don't know, $100,000. I put that money in an E-Trade account, started buying the Gap, Dell, Microsoft. AOL was my big score-- went up six times in a year in the late '90s.
And I quickly came to believe that I was God's gift to investing, because every stock I picked went up. I now look back and realize I really wasn't doing much fundamental research, didn't have any particular insights. I was just sort of buying what was hot. And it was a stock market not too dissimilar to what we've seen over the past 10 years where you just sort of bought some popular blue chip stocks.
And they just went up every year. And you look like a genius, right? So it was at that point Bill was probably 4 or 5 years into his first hedge fund called Gotham Partners. He had grown it from $3 million at inception to $500 million under management. He was hot. And I figured, well, if I'm as smart as Bill, and if my friend can do it-- Bill and I are very close friends. But we're both super competitive.
So sort of in late 1998, my non-profit job after 5 years working with Michael Porter at Harvard Business School is something I had started coming out of HBS was winding down. I said, why don't I do what Bill did a few years earlier and just hang out my shingle as the world's smallest hedge fund?
And so 6 weeks later, it was mid-November 1998. And I made that rash decision. I've been telling every young person ever since, don't try and do what I do, which is rush out and start a fund out of your bedroom with $1 million under management with absolutely no experience, either on the business side of running and building an investment management business or really on the investing side.
I was sort of a late '90s bull market genius. But that's how it came to be. And I opened my doors as the world's smallest hedge fund on January 1 of 1999 with $1 million from my parents, my in-laws. Bill threw in a little bit of money. His dad threw in a little bit of money, plus my own money. That got me to about $1 million dollars when I started.
ED HARRISON: But you say that you didn't have a lot of acumen. But you hit a lot of home runs. I mean, subsequently over the next 2 decades, you did very well.
WHITNEY TILSON: Yes. Well, I split it sort of into 2 periods. The first dozen years or so, I really did knock the cover off the ball. It was a great time for investing. And to some extent, I was smart and lucky. But a lot of hustle led to the luck. What's the old saying? The harder I work, the luckier I get.
So as an example, only a year after I started, we're now in the spring of 2000. A year after I launched, I was up to about $4 million. And I heard that investing legend Joel Greenblatt, who I'd read his book, You Can Be a Stock Market Genius. Again, one of those classic early value investing books, that he was teaching a class up at Columbia Business School.
So I found out when the first class was and in what classroom. And I just showed up. And I sort of looked like a student. I was only 5 years out of business school myself. So I sat in the back of the classroom. And he didn't notice me or anything. And I learned for the couple hours he was teaching that day.
And then I went up to him after class. And I introduced myself and confessed that I wasn't a student but that I was a big fan of his. I'd read his book. I'm watching my own little hedge fund. Would he mind if I sat in on the rest of the semester? And he got a very uncomfortable look on his face, because it's against Columbia Business School policy to let just random right come sit in on their classes.
He said, I'm not supposed to do this. But if you promise to keep quiet-- like, you can't participate in any of the discussions like a regular student. But if you just want to sit there and keep quiet, I'll look the other way. And so I did. And that was an incredible investing education, because this was the absolute very peak of the internet bubble was March 10th of 2000.
I was taking his class that week. And he was preaching the gospel of special situations. And it's hard for young people today who didn't live through it to understand anything that wasn't nifty 50 internet-related, then, was incredibly cheap. Good industrial kind of businesses trading at 3 or 4 times earnings.
Berkshire Hathaway had fallen from $70,000 a share down to just over $40,000 a share, which was sort of cash and investment. So you got a much younger Buffett and Munger 75 operating businesses for free. He was trading a cash and investments. So that was an opportunity that I put 30% of my little $4 million fund into Berkshire Hathaway.
I got lucky on the timing. I'd been buying it. I'd owned it since I started my fund a year earlier. I bought a little more on the way down. So I wasn't perfect on the timing. But the day I really backed up the truck on it happened to be just coincidentally the final day of the NASDAQ blow-off to the upside and not coincidentally, because money was coming out of value stocks to go into astroturf.com or whatever and was the day Berkshire bottomed.
Within 2 months, Berkshire was up 50%. And that was a 30% position for me. So that's a combination of sort of being lucky but also being good and having some courage and being willing to take a big bet early in my career, because one of the things I tell young people who are trying to bootstrap a fund like I was is, you have to look for a couple opportunities to take some risk to deliver some outsized returns, because otherwise, you're going to be stuck in the small fund trap.
The vast majority of funds that start with $1 million out of their bedroom like I did-- the vast majority never even get to $10 million. And that's just not a viable business. So I got lucky in that the market offered me an opportunity to put 30% of my fund into something that was both super safe and super cheap.
The dilemma today is, you can take a big bet and put 30% of your fund into Bitcoin or something. But chances are you're going to get clobbered. So there was some luck there early in my career. So I made the pivot away from being sort of a nifty 50 big cap popular momentum stock investor into small cap value stuff, very obscure little businesses, universal stainless steel, a little company called Aon.
I can't even remember-- Imperial Parking-- these obscure little companies that were super cheap and beaten down. And I could see big picture, the large cap growth was trading at a valuation premium relative to small cap value. Just the sectors were trading at-- I don't know-- 20 or 30-year gap in terms of valuation.
And so I had ridden the big cap, large cap growth stocks for a few years mostly out of ignorance, not because I sort of said, hey, I know these are really overvalued, but momentum is momentum. And I'm just going to ride it. Even that I would've had some respect for. I didn't even have the good sense to do that.
But it was a very deliberate decision over the course of roughly 2000 and 2001 is, is, I got Warren Buffett value investing religion. And I thank Bill Ackman and Joel Greenblatt and some other real value investors who helped teach me. And it was in the nick of time. And so I got into the cheapest, most beaten down sector at the right time.
So as the internet bubble burst, and the market was crapping out in 2000, 2001 into 2002, I was in a sector that did pretty well. So I started putting up pretty good numbers. I was beating the market every year. And I picked up a writing gig at the Motley Fool. And that website had a lot of traffic and was riding the AOL Iomega internet bubble.
And then when that burst, there was basically nobody over there that had much credibility, because they had been giving advice that incinerated all of their readers. And then there was me. And I'd been pounding the table for over the course of dozens of articles. I was writing, at least, 1 article a week-- sometimes 2 or 3 a week and with a pretty consistent message-- listen to Warren Buffett, buy Berkshire Hathaway. The internet is a bubble, get out of these overvalued tech stocks.
One of my favorite articles back then was called Cisco, Apple, and Probabilities. It's still on the internet today. Just google Whitney Tilson's Cisco, Apple, and Probabilities. And basically, Cisco was the market darling at that time for a while anyway-- had the biggest market cap in the world.
To this day, 20 years later, still a great company. The stock has not reached the peak that it hit 20 years ago. And meanwhile, Apple-- and this is after Steve Jobs had come back in sitting on a big pile of cash, basically not losing money but wasn't making any money yet. But you had Steve Jobs and the Apple brand, a lot of loyal customers, and a big pile of cash.
So you had a clean balance sheet. Apple was trading-- if I recall, it had something like a $3 billion enterprise value-- $3 billion for a company today that's about $1 trillion, right? And I said, I'm not arguing that Apple is as good a company as Cisco. What I'm arguing is, is that Apple the stock at three times earnings is a better buy than Cisco stock at 150 times earnings.
So that was the kind of message out there. So as the internet bubble burst, the Motley Fool promoted me to 1 of their highest profile writing positions called Fool on the Hill. So I was the Fool on the Hill every week. And so that really got my name out there and helped me build my business combined with the good numbers I was putting up.
So my fund grew and grew. And basically for the next 10 years or so up through the housing crisis and all, I was consistently beating the margin. I think 10 of my first 12 market, I should say-- 10 of the first 12 years I was ahead of the S&P. Money was coming in. I nailed the internet bubble. I later nailed the housing bubble-- ended up on 60 Minutes.
It was a piece on the housing crisis that ended up winning an Emmy. And I was sort of the featured guy who predicted it. There's few things that are better publicity than being on 60 Minutes when they're trying to make you look smart. You don't want to be on 60 Minutes' bad side. So know that got me up to about $200 million under management.
At my peak, I brought in a partner a few years earlier. And the 2 of us were sort of off to the races and $1 billion under management. And having retirement money for ourselves was sort of next in line. And then the wheels fell off the bus. And over the next couple from middle of 2010 through 2012, the next 2 years, we were down 25% in a plus-50 market. And it was due to a bunch of different factors. But--
ED HARRISON: So in hindsight, what factors would you look at as the most important factors?
WHITNEY TILSON: Yeah, well, any great train wreck generally has what Charlie Munger calls Lollapalooza effects. In other words, it wasn't just 1 thing. It's a whole series of things. Our portfolio in terms of the partnership I had, we didn't have clear lines of responsibility. And there was no tie-breaking mechanism.
So 1 areas, our portfolio became very bloated. He had all of his favorite stocks. I had all of my favorite stocks. So we were wildly diversified. But then, almost counterintuitively, we were overly concentrated in some of our favorite positions. And a couple of them-- some iridium warrants-- we got sucked into the Ron Johnson JC Penney story.
So we had a couple bad stocks. But it wasn't fundamentally bad stock picking. But 1 lesson I certainly learned is, is that I did not fully appreciate early in my career is the importance of portfolio management, as opposed to stock picking. I always just thought, look, if you pick good stocks, you're going to do great-- full stop.
And for my first 5 or 10 years or so, that was generally true, because all I did was own a dozen stocks and didn't have any short positions. And so that was it. What I realized, though, is, is sort of as we got smarter, we started short selling. We started buying options and warrants.
Our prime broker was very happy to have us go out on margin. So we started levering up with our favorite positions. And we started to trade around our positions more. So