Comments
Transcript
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CWI didn't know he is the foremost expert in value investing. How can you blow up funds if you are buying it at "value"?
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GBThe siren song of Tilson. Guys like this are great at telling a story and terrible with their judgment. The fact he has this many thumbs up goes to show there is always a bull market in lemmings.
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KATilson is such a putz
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LTI guess Tilson doesn't feel compelled to check the facts on some of his longs. On AWS, the actual truth is that operating margins fell from 31% to 26% YoY in 2Q19, and earnings were flat despite robust (but decelerating) revenue growth of 37%. Competition is heating up from Google & MSFT in particular, both of whom are now growing faster than AWS and represent formidable competitors. AWS is a great business and it will continue to prosper, but it's going to be incrementally harder moving forward. In addition, retail operating margins also dropped sharply in 2Q19, and a significant step-up in competition is coming. WMT has got it's act together and is growing online fast, and is now planning to offer logistics/fulfillment services to 3rd party players. B&M are all taking Amazon threat seriously and investing hard. Shopify etc are offering alternative platform for B&M to fight back. AMZN might yet still win, but it's going to get a lot tougher and it's more likely margins fall than rise. WMT has to win this fight - their long term survival depends on it - and they have enormous financial resources to duke it out. With retail margins only about 2%, AMZN actually doesn't have that much margin to play with. The idea spinning out AWS would be value accretive is flawed. AWS's value is a huge part of the reason AMZN is a $1tr company and it's valuation is well recognised, and the reality is that Amazon is going to need AWS earnings to help subsidise growing losses in it's retail business as competition intensifies from AMZN. Without an AWS subsidy, AMZN runs the very real risk of losing the retail fight, as they have significantly less margin to play with. What AMZN has really done over the past two decades is buy a lot of market share. WMT is going to do the same moving forward. It still remains to be seen how profitable this is going to be - especially with online losing sales tax & US post cost advantages, and competition heating up. $80 in EPS in a few years time - US$40-50bn in profits including stock dilution - is fanciful imo. I'd be surprised if they were making a lot more than they are now given that margin & competitive headwinds are emerging in all their operations at present, and offshore retail expansion losses in particular are likely to significantly increase. On Freddie & Fannie, good discussion & mostly agree, but only a spin doctor could try to argue that the taxpayers are better off with only 80% of the profits instead of 100%. I agree with the illegality of the net worth sweep, but it's just flat wrong to say it's in taxpayer interests to relinquish 20% of profits to minority investors instead of 0%. It shows how even smart people can make very obviously bad arguments where there financial incentives tilt that way.
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KDLove Ed’s interviews. As well as being very open about his interesting journey, I though Whitney was a great story teller – time flew past. Talk about encyclopaedic knowledge too. Thank you. Rick Bensignor mentioned a few times about how losses hurt your psyche – so true. It struck me that that was Whitney’s experience as well (and mine). Obviously it caused Whitney’s whole career direction to change. So I thought it would be worth Real Vision doing an interview dedicated to rebuilding confidence, performance & enthusiasm after big / damaging losses. Everyone talks about it, i.e. trade small, go back to basics etc, but actually I think it’s a much bigger subject. May be a series of short interviews, say “how did you get back on the bus”. FWIW
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BEEd Harrison is a genius interviewer. He comes armed with expert knowledge and intriguing questions, that elucidate unexpected and supremely useful avenues of discussion. He also has the intuitive gifts of allowing for a perfect flow of conversation rhythmically. And when a topic is well-explored he makes great, clear, pivots in a fresh direction. He could have his own channel.
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PCYet another class interview from Ed Harrison - his questions are focused & cut straight through the noise. Also so much wisdom & honesty from Whitney - one to bookmark for me.
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SSExtremely well spoken. Owning his mistakes, working hard creates opportunity (luck), riding the big wave, then confessing the big wave crashed, is the mark of the person with strong character traits. School of hard knocks. I love it. Not a fan of these nut ball Democrats (their narrative is insane) taking offices just to profit on the potential of splitting up certain companies. Love this interview.
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NRFANTASTIC interview, candid and filled with nuggets. A successful person has my admiration, a successful person who publicly recognizes both some of his/her success is due to luck and also that he/she has fucked up along the way has my respect. 👍🏻
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PBSuperb conversation Ed & Whitney! Thanks!
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csProps to Whitney Tilson for being honest and open about his success and especially failure.
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MHLong FNMA & FNMAS. But any additional ideas on how to play a restructuring of the GSEs (ie any mortgage LPs, banks, REITS or fixed income securities to play?)
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SSVery interesting comments on GSEs, WeWork and FAANGs. Ed did a great job as the interviewer. I hope Whitney comes back soon.
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NSHedge fund structure and buffet type mentality hasn't worked for many. BRK underperformed index for 10 year sequentially, and survives. Hedge funds cant.
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MKI wish he told us what he really thought of WEWORK. ...Now do TESLA!
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PPI just watched this and I don't think he really understands how to value businesses based on his comments about Amazon. He didn't understand how to value it until basically today. He only knows old school valuation based on PE multiple etc....he doesn't understand the value creation reinvestment model. He blew up his hedge fund badly, twice I think. Now he wants to sell you an expensive newsletter/research service. This is typically the last stop of these guys who couldn't perform in the business. Keep that in mind. There are lots of them floating around.
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DRThis was amazing! Thank you!
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DPGreat interview but can't take the stock-picking of Amazon seriously without a better macro analysis than 'we might have a recession'. We're highly likely at the turn of a business cycle here where even a great company like Amazon will get hammered.
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PPI am debating whether to spend an hour watching this? His track record is not good.
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RMCan anyone rate his newsletter? Has a 30 day trial but pricing on high end unless you are an institution.
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SGWhitney was great, very open and honest. Didn't try to blame anyone for his underperformance. Refreshing to see that from money manager.
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REWill Value ever work again? I'd love to see heated debate between Mike Green and Whitney (or another value guy).
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SBExcellent!
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MvThanks RV, Ed and Whitney! Last year I had the privilege to sit in on Whitney’s Kase learning classes. Really appreciate the down to earth way he shares the incredible knowledge, learnings and network he’s built up over the years. Everyone can just subscribe to his (free) newsletters at Empire Financial Daily if you want to read/know more.
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PGThe story and transparency makes me believe in him! Loved the interview
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