AN EXTRAORDINARY INTERVIEW
Steve: Gentlemen, great to meet you both. Let's jump right in, here. Bryan…let's talk about how it works and why it works?
Bryan: Sure. First, we're excited to be working with Forbes, in what we think is the perfect synergy—the Forbes history in identifying and valuing the net worth of the world's richest—and our expertise in identifying what these folks are investing in, how they think…and how they're positioning to grow and protect their wealth, whether we're in a good economy or a bad economy…a bull market or a bear market.
So let me start by emphasizing the power of getting big themes and trends right before anyone else understands the opportunity. This is really the key ingredient in an extreme scale of wealth creation. If we look back at how these billionaires became billionaires—it's often because they see an opportunity before anyone else does. They think differently.
As you said, Steve, if we think about the past 15 years, the average investor has been hurt bad, while the rich have gotten richer…and some of the smartest investors have actually become billionaires during this period—one of the worst 15 year periods for stocks on record. What most have seen as a threat to their wealth, these guys see as opportunity. They like risk, because risk represents a chance to make a lot of money.
William: Right, think about John Paulson betting on the collapse in housing. He made $8 billion shorting financial stocks. Meanwhile, while stocks were getting crushed, Bill Ackman owned a stock that went up 5,000%.
David Tepper, a billionaire hedge fund manager that has done nearly 40% a year (gross) for the past 20 years, stepped into bank stocks in 2009 when the world thought the banks were dead. He returned 210% that year, while most investors lost half their money and then moved to cash, paralyzed by fear.
Ray Dalio bought the bottom in Treasurys in 2011 returning 30% while almost every single investor on the planet lost money. Tepper stepped in again in 2012 and bought the struggling airline stocks making as much as 600% over the next two years on the trade. Everyone had left them for dead. Everyone knows Warren Buffett as a conservative investor. But he became a billionaire by doing just what these other guys have done. Buffett bought Bank of America at $5 in 2012 and it tripled to $15 a little over a year later. George Soros bought Japanese stocks in 2012, just before they took off. And don't forget Carl Icahn in 2013 with his massive winner in NetFlix. He made nearly 10x on that trade. These are all examples of how these guys are acting, while everyone else is running scared. And that's precisely what has made them billionaires.
Bryan: So this is a good time to talk about what they do differently. They think differently. When Tepper bought bank stocks in 2009, the Fed told him (and everyone) that they were there ready to support the banks. To him, it was a greenlight.
There was a great study on billionaires last year by Ernst and Young, and by UBS. Both found that billionaires have a few key traits…
KEY TRAITS OF BILLIONAIRES
- They like asymmetric risk.
- They take risk! But they do it when they have an edge—when they have control or when they see something before anyone else does.
- When they have done the work and are convicted, they bet big! They like concentrated bets. They will double or triple their investment when they are confident.
This statement from a billionaire interviewed in one of the studies says it all: "If you want to be successful in a big, big way you have to go where the biggest risks are, because that is where the biggest opportunities are."
These three traits are key, but perhaps most important in the study, billionaires want to invest in areas where they have an advantage. If they don't have an advantage, they don't want to invest. They like to bet on sure things—it's not a game of chance. These studies confirm what we've known for a long time, following billionaire investors–this is boilerplate behavior for them. The macro events they take advantage of are a little different, but for the most part, they want control—and when they have control and they can use their influence, they can control their own destiny.
Many times in life, you find that the norms that are engrained in society put you on the exact opposite path of your goal. And in no industry is that more true than in the investment industry. The Wall Street mantra has always been, diversify, buy good, strong stocks and build wealth. That formula leaves people, after fees, with around 3% annualized long–run returns. That keeps you on pace with inflation, which means there is zero wealth creation. Conversely, billionaires have built fortunes by finding places where they have an edge, identifying asymmetric risk/return opportunities, and betting big!
William: The bottom line is, you only make real, consistent money in trading and investing if you have an edge! It doesn't matter what market it is. You must have some edge to beat the rest of the market. After all, markets are a dog fight. It's me against you.
So, to win…to be the best, you have to have an edge. And our edge is simple. We align ourselves with the very best…the 1% if you will. In fact, a tiny fraction of the 1%. We have some of the most brilliant people in the world picking stocks for us. Carl Icahn is a Princeton grad and is worth $21 billion. Bill Ackman is a Harvard grad. He had a near perfect SAT score. He's worth $2.6 billion. That's our bench and I'll put that up against anyone's.
We run with the guys that have the power, the connections and the influence on Wall Street. What they do, we do.
Steve: So how do you find out what they are doing?
William: First, we have a proprietary database that we've developed through the years of 30–40 of the top hedge funds in the world—of that, we've narrowed it down to about the 10–20 that we think are the best of the best. And we're constantly updating it.
Second, we pour through legal filings every day. This is where we find what these funds are acquiring, what they are selling, etc.
Bryan: Right, we know who the best are. We know what they are buying. We buy what they buy.
It's that simple. And most importantly, we sell when they sell. Selling is probably the most important difference between making a lot of money, and making a little, if any.
Steve: Of course, they don't mind the coattail riders, right?
Bryan: Not at all. Mostly, when they buy a stock, they WANT others to know about it. They want more support. And often, other big billionaire investors are first in line to follow along.
Steve: Support. So tell us what you mean by that.
William: Well, we primarily focus on a niche area in the hedge fund business. We follow funds that buy a controlling interest in a stock.
When they have controlling interest, they can then force the company to do what they want.
Let me be clear here…they like to invest in sure things. They aren't the gambling type.
They only buy companies that they know can be far more valuable, if a key decision is made by management—like selling a bad business line, selling off property or merging with another company, perhaps.
So when they buy enough of the company's stock to have official, controlling interest, they make that "key decision" happen. They force their will on the company. And therefore, they "create" the value they want in their investment.
In short, they control their own destiny.
The investment is a "sure thing" to them, because they start with the end in mind—they have a very structured game plan on just how they will unlock value in the company. And a very large majority of the time it works…and the payoffs are huge!
Most importantly, because we know what they are buying, we go along for the ride…for free!
Steve: Great. So this is the edge you're talking about. They have an edge because they have total control.
William: Exactly.
Steve: You sent me some charts earlier. Let's look at some of those examples.
William: Great, let's start with General Growth Properties (GGP).
Now, there are a variety of reasons these billionaire investors get involved in what's many times a beaten down and left for dead stock. The primary reason is they think there is an opportunity to fix it and make a lot of money. In those cases, we want to be on board. And a lot of their peers want to be on board too.
So the first chart here is General Growth Properties, ticker GGP.
Now, this one is of the "home run" variety. They certainly don't come like this all the time, but when they do; it's a lot of fun.
Our guy was buying these shares, as the world was falling apart, at between 25 cents…and a dollar (editor's note: the yellow box in the charts represent where the funds were found acquiring the stock).
So the world is imploding, and he's pouring hundreds of millions of dollars into a penny stock—THAT GETS OUR ATTENTION!
This stock went up 46–fold! That's $460k for every $10k invested.
Steve: That's a huge winner.
William: Right, that's the advantage of buying low priced stocks, which much of these guys like to do. You get more bang for your buck. You get a trade like this right, and you could be well on your way to becoming a billionaire. That was the case for that particular hedge fund manager—he's now worth $2.5 billion.
Steve: Ok, how about Office Depot. That's a different animal.
William: We followed one of our favorite activist investors into Office Depot. This guy is one of the most detailed there is, and executes to perfection. When he takes a big stake in a company, he often writes a detailed letter to management. In that letter he lays out a game plan on unlocking value in the stock and usually gives target price for the stock—a price he thinks is justified if his changes are made.
In the case of Office Depot, this guy homed in on their assets in Mexico. He made the case for selling those assets and using the proceeds to buy back stock. And he supported a merger of Office Depot with Office Max. Both happened. And the stock doubled in a little more than a year.
We got in at 2.50, and exited at 5.27 for a 111% gain.
Steve: Okay, how about Novavax?
William: Right, this is one of the funds we follow that specializes in bio–tech companies. As we know this sector can have massive winners—Vivus (VVUS) was is a good example of that. So here, this fund was acquiring Novavax between under $2. When we see a bio–tech stock like this, trading at such a low level, with one of our big hedge fund guys leading the way…that's one we definitely want to be involved in. Sure enough, shortly thereafter, the stock jumped nearly 165%.
Steve: Clearly, they knew something.
William: Absolutely. These guys have Ph.D.s on staff that know these drugs, and the pipeline within the FDA, better than anyone. And they have the influence to make things happen, within their time frame.
Steve: Okay, tell me about MedAssets.
Bryan: Sure, we followed Starboard Value again here. Remember, these guys are the best at articulating a plan to management and then making sure it gets executed. Jeff Smith and his team entered MedAssets looking for a sale of assets, among other things. The company was taken over for a nice 33% premium in just two months. Because we bought it cheaper than Starboard did, we made 43% in two months—an annual equivalent return of more than 700%.
William: Can we look at Voltari next?
Steve: Sure.
William: Okay, so this is a Carl Icahn stock. This is what we like to call the "Icahn Effect." Icahn publicly disclosed a position in Voltari at around $2. Just the mere presence of Icahn and the stock took off like a rocket–up 10x in just 14 days.
We've seen the Icahn Effect on Apple (where he's gotten a double), with NetFlix…he exited NetFlix with a 5x return.
Steve: Carl has the Midas touch, and has for a long time.
Bryan: It boils down to creating change. As you know, Icahn is among the best at it. The bottom line is you don't get rich buying stocks at tops and selling them at bottoms. You can get very poor doing it though, and unfortunately it's a mentality that the Wall Street media machine has formed and perpetuates. They warn of bubbles and crashes when stocks tick down and then predict new stock market records when stocks tick up.
You can get rich, though, buying or adding to deep value stocks when they move lower for no fundamental reason. That's a recipe for really big returns.
William: That's the difference between making 8% a year, what the stock market gives you over time…and compounding at 20% or 30% a year. The wealth creation is dramatically different. For perspective, Carl Icahn has returned 31% annualized since 1968. That would turn every $1,000 invested with Icahn into $325 million today or every $20k into more than $2 billion. If we look back to the past 15 years, one of the worst stock markets in history, Icahn has still returned 20% annualized for the period. That compares to just 4.5% annualized for the S&P 500—beating the S&P by 4 to 1. That's how you get rich.
Bryan: These examples are just a very small sample. The reality is, this is what this type of investing is all about. It's about big winners. It's about getting a partner on your side that is hell–bent on making money—big money…and that's what the billionaire investors we follow represent.
Market–beating returns used to be driven by an "information advantage." That no longer exists. Now it's about CHANGE. Change is what revalues stocks. And that's precisely what our influential investors specialize in. And that's why they have such a tremendous advantage and why they post consistent superior returns—and, in turn, build tremendous wealth for themselves and their investors.
William: For most of the guys we follow, what has made them billionaires is putting up a huge year and getting a windfall share. And then, when you put up consistent 20%–30% returns, the assets come rolling in—and fees they make get bigger and bigger.
With the profit share incentive that they get, these guys fight like heck to get their stocks to play out within inside of a year. After all, their all competing for assets, but mostly for pride…and annual returns are everything.
So they can't sit and wait five years for an investment to work out, like a mutual fund or endowment might.
They buy stocks they know they can take control of…to unlock value, to impose their will.
Bryan: Their will is to make money…a lot of it.
Steve: So let's talk about when to sell. How do you know when to sell?
William: Sure. When we find these funds liquidating the positions or a catalyst has occurred, we sell.
Steve: And how many stocks do these guys that you follow typically hold in their portfolios?
Bryan: Great question. They have very concentrated portfolios. Meaning, they don't hold a bunch of stocks. Mutual funds might hold between 30 and several hundred. But the guys we follow typically hold between just 5 and 10 stocks.
And like I said, with such a concentrated portfolio, they have to be right!
Remember, we follow the absolute best. The billionaires that have amassed wealth from their investing prowess. They didn't become billionaires by collecting management fees, but they did by taking a nice cut of the profits that their funds produce.
They eat their own cooking.
Steve: How frequently do you identify these types of opportunities, and how frequently do you distribute your research to your clients?
William: We're constantly scouring legal filings and going through our process, and we tend to uncover picks like these at least a few times a month. And we're in touch with subscribers at least once a week, to either recommend a new addition to the portfolio, or to update them on current stocks, developments in the portfolio, and the key macro influences on broad markets.
Steve: Great stuff, guys. I must say, I've been deeply involved in the world of investing and working with investors my entire life. I've seen hundreds, if not thousands, of strategies for picking stocks and building wealth. Some have worked out better than others, but I don't know that I've ever seen a strategy as simple…clear…easy to use…and brilliant…as this concept.
Quite candidly, if I were starting my investing career all over again, I think I would start right here as a new member in our brand new Forbes Billionaire's Portfolio.
Bryan and William, I'm super excited to work with you on this new elite service.
Bryan: Thank you, Steve. We are excited to be working with Forbes.
Steve here, again…
I'm so glad we were able to share this call with you. As you can see, having an edge in investing is what it's all about. It's the key ingredient in the wealth creation stories behind the billionaires you read about. When you can compound consistent, double digit returns, you can indeed get rich fast. These billionaire investors have proven it.
Stay tuned for more exciting announcements surrounding our newForbes Billionaire's Portfolio service. In the meantime, you're cordially invited to register for a FREE upcoming webcast from Forbes—8 Billionaire Surprise Predictions for 2016 on December 15th at 12:00PM EST.
In this exclusive 30–minute presentation, we will reveal the areas that billionaires are zeroing in on and the positions they're taking to grow even richer in the months ahead.
Yours,
Steve Forbes
President
Forbes Media |
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