The Big Win by Stephen L. Weiss

Learning from the Legends to Become a More Successful Investor

The great investors often talk about their mistakes and learn from them. This book features many different asset classes. Investment techniques can be applied to other classes of assets. 1) Renne Haugerud, 2) R Donahue Peebles, 3) Martin Whitman, 4) Chuck Royce, 5) Jim Rogers, 6) Jim Chanos, 7) Lee Ainslie and 8) Alfred Taubman

In addition, writing this book will allow the author to meet and discuss with great investors. Portfolio manager’s results are not publicly available. Most investment managers actually perform worse than the stock market indices. Alfred was good at mathematics and he invented the modern enclosed mall. He was extremely detailed and sharp. Jim Rogers initially partnered with George Soros on Quantum funds. After a while, he started out on his own. For Jim, investing is a way of life and one can explore need socioeconomic behaviour. Jim is also an extremely humble man. The next was Marty Whitman. The only woman included was Renee Haugerud. Lee Ainslie (he) was known for hedge funds management. Don Peebles was like an agent on behalf of the bank, dealing with property and real estate. Jim Chanos was essentially a very good short seller. Chuck Royce is an expert at small cap stocks which will grow. What makes a great investor? No emotion – Cool, calm and confident. No ego – Self confidence, yes. Ego, no. Long term investors. Discipline – Stick to one style or investment strategy. Thorough research process – Do your own research and don’t buy anything you don’t know. Passion and work ethic – Everyone must work hard. Drive – Wealth is not the sole driving factor. Drive. Passion. Process. Equanimity. Discipline. Humility.

Whale Watching means following well known investors like Warren Buffett. However, blind following is foolish as even the legends fall sometimes. The author started off at the equity trading desk of Oppenheimer and Co. He wanted to try research sales. Eventually he landed himself that role. Everything seemed good till he managed the account DG partners. Although he recommended the good stocks to them, DG partners chose the wrong time to enter and exit the market and were too short term. As a result, they lost money. However, when buying stocks, one needs to consider factors like weight of each position, holding period etc. Modern investors are not as patient as the pros and will panic when the companies’ earnings take a hit. Sometimes, professionals have a sum set aside for speculation. If an unfortunate individual follows, one could get burnt. Preservation of capital is very important.

Renne Haugerud has a 14 year old hedge fund, Galtere Ltd. She is one of the rare females in the fund management industry. She wants to demonstrate that women are good traders. Her dad was a farmer and an amateur pilot. Renee was impressed with corn futures and the fact that she could own them without owning physical corn. She understood what it meant as a young age. She had a short work stint at Cargill and made the most of it to learn. After that, she wanted to become a commodities trader. Cargill is a huge private company that deals with soft commodities. She wanted desperately to be one and impressed the HR so much that she got the job. Although sunnies were not traded at that time, she persisted and she eventually had her own sunnies desk at Cargill. Next, she needed people to transport it and used her negotiation skills to achieve that. She moved on and explored fixed income markets, equity markets and pushed for a proprietary desk. Management approved it. Finally, she started her own hedge fund. To her, almost everything nowadays is traded as a commodity. First step us to take the temperature of the market. . Define 3 to 5 themes. Having an open mind is critical in investing. Renee has a very sound risk management system. Once she predicted that gold was overvalued, she borrowed gold to short it at a rate of 1% and bought Canadian bonds that yield 9%. The third leg was the undervalued small cap mining equities. She compared the cost of production and interest rate levels to the market price of gold to see whether it was overvalued. Listen to as many views as possible. Over its 11 year performance, Galtere Ltd only had one bad year.

Risk vs reward is everything and Galtere Ltd will not put on a trade unless we can make about three times what we risk. – Renee Haugerud

If you don’t ask, it will never happen. – Renee Haugerud, on how she built success

China is going to be the next superpower. Increasing prosperity is never bad. Jim Rogers moved to Singapore so that his kids could learn Chinese and embrace China. Jim Chanos was a famous short seller, meaning he benefitted from falling prices. He runs Kynikos Associates. Chanos loved research. Shorting is when you borrow the stock and pay upfront, promising to return it sometime in the future. Crowded shorts is usually when more than 20% of the float is in the short position. There is potentially unlimited loss for the short-seller. Baldwin-United was a piano company which converted into a financial services company. He found it difficult to comprehend how the company was making money. This stock had a great following in the market. Chanos started shorting the stock. As he was junior, many were critical of his comments on the company. Soon, the stock plummeted and he was rewarded handsomely. This good trade tempted him to engage in more. This trade built his reputation. His firm shorted companies like Boston Chicken, Sunbeam, Conseco, Tyco International and Enron. Short sellers are often not the most popular people. They are basically cynics. To handle risk, he could either stop losses or employ position limits. He chose the latter as once you exit a position, it is hard to re-enter. Position limits are set at 5%. Chanos also shorted the Chinese market as he realized a lot of speculative demand for commodities came from them. People were building for the sake of stimulating the economy. This led to an overheating of the market. Supply was outstripping demand. China also had a heavy credit crunch and was over-leveraged. Long corruption, short property. There are definitely more optimistic people than pessimistic people around. Valuation shorts are difficult to pull off as the market might not correct itself in the near future. One can buy puts to protect yourself or wait for a stock to ‘break’.

Short sellers arguably are the ultimate capitalists. Without us pointing out failures, the capital markets won’t function as well. – James Chanos

Lee Ainslie was always interested in technology. He used the BASIC program to track his stocks. He worked with the Tiger Management Corporation and subsequently, Maverick Capital. Lee conducts a great amount of research, unlike other companies. Episcopal High School was known for their top students which had good ethical values and meticulous discipline. Julian Robertson founded Tiger Management. Instead of joining the big banks, Lee joined Tiger. Lee focused on tech stocks. Tiger focused on the best businesses with top management, with a long term view. In 1997, Lee had a controlling stake in the firm, Maverick. He started to invest in overseas markets. The firm was developed based on a teamwork model and encourages independence. The firm works based on a partnership model. Information sharing sessions are extremely common. ‘Our goal is to know more about every one of the companies in which we invest than any non-insider does.’ Lee Ainslie, on their competitive advantage. It takes many months for this information gathering process. Potential hires are tested rigorously. The Big Win for Lee was an Indian company which performs outsourcing work for tech processes for banks. The name of the company was Cognizant. Many companies in the US were looking to outsource processes to Cognizant. Cognizant had a lower operating margin as compared to its peers. To buy an overseas stock, one needs to be aware of the local regulations, operating environment, etc. Emerging markets are highly volatile and an investor has to ready for it. The author gave an example of NII Holdings, where it was incorporated in the US and its customers were all overseas. Due to the lack of analysts following the stock, it was not very highly valued. In emerging markets, the news could occur during your sleeping hours. This makes it harder to follow company related news.

‘We’re a team of peers. There is no king of the hill. There are many talented people who do not enjoy such a team-oriented environment.’ – Lee Ainslie

Chuck Royce knew what he wanted to do when he was just 6. Since young, he has stuck to that goal and has never wavered. Royce picks stocks, especially small caps. He started his own firm, Royce and Associates. He bought Syntex – a manufacturer of birth control pills. He also betted on horses. He joined Chase Manhattan Bank as a research analyst. Due to the boring nature of the job, he headed to Blair and Co, a smaller firm. There was a period when his fellow partner at the mutual fund they had set up, Pennsylvania Mutual Fund left. This was a stressful period of his life. He almost completely lost all his wealth during 1973 and 1974. You can use measures like the S&P 600 growth and value or the Russell 2000 to define what small stocks are. He knows value when it sees it. He treats his purchases as buying into businesses. Do not try and buy the glamour stocks. He looks out for debt levels and return on capital. For the Royce fund, they strive for absolute performance and do not want to lose money in any market condition. The big win features Ritchie Bros Auctioneers, which is a Canada-based industrial equipment auctioneer. They sold equipment from various industries. This business had a particularly large moat to compete. Royce’s company researched everything there is with RBA. RBA had a very strong compounding rate. Royce uses EBIT/EV, which is an approximation for cash flow. EV is the stock price*outstanding shares, plus debt and preferred stock, less cash and cash equivalents. Also, look into the EBIT growth rate.

If you lose 50%, you have to make 100% just to get even…Unless you’ve experienced it, you cannot fully grasp it… My vivid centerpiece of my investment style is not to lose money. – Chuck Royce

The small-cap world is so large that you can do virtually anything you want with it. You can avoid clichés, can subsector the class any way you like to weed out things that don’t fit and reduce volatility. The general perception is that small-caps are all growth all the time, with lots of volume. But the reality is much more varied, more nuanced. – Chuck Royce

But if it is work you have wanted to do since you were 15, then no matter your age, you are passionate about doing it. It is the kind of passion that keeps a person focused – acutely, intensely, relentlessly. – Chuck Royce

Alfred Taubman has made a fortune in retail real estate development. He saw things that others did not. He invented the modern shopping mall. He has a net worth of $2.5 billion. When there was a population shift of people from cities to the towns, he identified a business idea. Where would the people shop at? He revamped the original layout and allowed visitors to interact more with the shop-owners. He built shopfronts with curves so that shoppers could spot it from a distance. In 1950, he started the Taubman Company. His big win was the enclosed mall and the Irvine Ranch. He wanted to expand his business into California. Irvine Ranch was 5 times the size of Manhattan. Initially, Mobil wanted to own this plot of land. After realizing there was much hidden value with the plot development, he upped his bid to outbid Mobil. Alfred sees himself as a developer. His core competency is that of retail real estate development. Learn to cover your downside. When it is risky, spread the risk to others. His company engages in both high and the low end, but not the middle. He met little threshold resistance and dared to redesign shops and combine them to form a mall. He engages in many philanthropic activities as well. Also, he tackled the problem of adult literacy rates in Detroit. He believes in giving others a shot at life if possible. Alfred’s model is as follows ‘Due Diligence à Assess Risk and Reward à set objectives and monitor investment’. He has good knowledge on customer preferences. His firm believes in good cost management. He is an extremely loyal man

It is good karma to share wealth and opportunity, particularly with similarly mined and resourced individuals. – Alfred Taubman

James Beeland Rogers Jr was someone who was always on the move. He was like an explorer waiting to discover new worlds. He started a bottle cap collection business when young. He won a scholarship to Yale. Obsessed with grandeur, he took part in the Oxford-Cambridge rowing contest. After he started out with investing, he fell in love with investing. After his national service, he worked at Arnhold and S Bleichroeder, an investment firm. His co-founded Quantum Fund with George Soros. He retired by 37. He rode on his bike over the 6 major continents in the world. By travelling, James noticed the world for investment possibilities. Jim Rogers was now fixated on China To him, they were the nation of the 21st century. People in China were toiling, saving a lot of their money and studying English. They seemed very driven. He moved his entire family to Singapore. He invests heavily in the Chinese stock market. Jim rarely spends much time in Singapore. He also has a supremely happy life. Be proud of what you like, don’t be ashamed if it’s not the latest trend. Since there was a glut in the finance industry, he predicted that commodities will flourish instead. Jim now invests in commodities. China has an incredible growth rate and is getting very affluent.

If you come to a country and you see things that are going to be great in the country, my reaction was to go downtown and see if there was a stock exchange. And if there was, then I’d start making investments. – JBR

I will spend as much money as I need to make sure my little girls go to Chinese schools, because the best skill I can give to two people born in 2003 and 2008 is to know Asia and to speak Mandarin fluently. – Jim Rogers

Don Peebles was a millionaire by 27. He runs the Peebles Corporation, an African American real estate development company. This man has a lot of connections to make it big. He did not face any limitations to become what he could today. His parents divorced when he was 5. His parents held decent jobs, but they had to work very hard. This man wanted to seek out for the stars. He believed greatly in his own ability. ‘In America, there are no limitations on what you can do.’ He was born in the 1960s. He had an apprenticeship in real estate and then became a real estate agent. As real estate involved politics, he knew he had to be involved. He worked for a particular Mayor Barry and became chairman of the property tax appeal board shortly after. This helped him achieve many potential clients. He bought a plot of land to develop and convinced many to lend him money or to have a stake in it. To him, barriers are self-constructed. Currently, he has even provided advice for the Obama administration. He likes transformational projects, projects with symbolism. The Royal Palm Hotel project was his next win. He is a very calculated risk taker. He also entered luxury residential development. His next aim is New York. Don’t simply dismiss investment opportunities. Be brutally honest with yourself. Decide for yourself, even those it is alright to seek advice sometimes.

Martin J. Whitman started at the top schools in the US. He even has a school named after him. He was granted for education and what it had done to him. Martin liked Russian history when he was young. When he acquired Equity Strategies, he regretted his decision. Martin had a great knack for analysis, and started analyzing the balance sheet. Soon after, he learnt about control investing. In the 1970s, he realized that corporate finance was his thing. Shortly after, he became an expert in bankruptcy cases and litigation. He eventually entered distressed debt investing. He also performed bankruptcy organization services. He had four criteria when selecting businesses. They had to have decent disclosure, good financials, good price an excellent prospects. Investors can only guard against investment risk, not market risk. Know what you are investing in. Martin also gives back to his alma mater. He is a man of strong values. Bankruptcy cases is his field of expertise. Bondholders get a better chance of a payout during bankruptcy than stockholders. Distressed debt investors will buy these bonds before reorg is announced. Usually it pays off. Value investing is very hard work.

Be wary of value traps along the way. It does not mean that when a share price falls, it makes it cheaper to acquire. One needs to analyse the fundamentals. Observe the PE as well. – Martin J. Whitman

Every one of the above investors is an entrepreneur in his/her own way. Even a retail investor is an entrepreneur as their objectives is to maximize returns while limiting risk. The five principles that investors should adhere to are a well-defined strategy, introspection, discipline, a strict risk discipline and a detachment from emotion.

The big Win



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