36% CAGR over 20 years

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David Tepper, Founder, Appaloosa Management, USA

The king of spotting and investing in rags that turn to riches. Value investor with a contrarian twist who swoops down on troubled assets when the world shuns them. Always a first mover, leader of the herd. Among the wealthiest hedge fund managers in the world - in 2016 alone, he personally earned over US$ 1.2 billion (that's over Rs. 7,800 crores). Between 1993 and 2013, he delivered a whopping 36% CAGR over a two decade long period. That's David Tepper for you: one of the wisest investors in the world today.

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Early days

Tepper was born in 1957 in a middle class family in New Jersey. He was a good student in school and obtained a degree in economics from the University of Pittsburgh, paying his own fees by working at the Frick Fine Arts Library. Actually, one can say that he began his career in investing when still in college. His father tipped him off about a couple of stocks, which he bought, while one of the companies went bankrupt. Maybe this early experience taught the young Tepper to look for bargains in companies that are bankrupt or nearly so.

On completion of his degree, he joined Equibank in the Treasury department as a credit analyst. Concerned about career growth, he quit his job to do MBA at Carnegie-Mellon University. Upon graduation he joined Republic Steel and after jumping ship a couple of times, he joined Goldman Sachs in 1985. His ability to spot companies with troubled assetssoon enabled him to outperform his rivals in the company and indeed in the market. He made humongous profits for the company in the eight years he worked for it.

In 1993, answering a call from the depths of his heart, he left Goldman Sachs to start his own investment management business, Appaloosa Management.

Investment Philosophy

The basic investment philosophy of David Tepper can be said to be that of a value investor with a contrarian twist. He says the method of making profitable investments is quite clear-cut. One must do proper research of the market, and of the companies and assets one intends to buy. One must also be mentally prepared to withstand and hold firm against the panicked reactions of the general investing public, in their responses to market movements. Giving into the fears of others would cloud one's judgement, he says.Again one must be ready to back one's own ideas even if it meant short term losses.

Says Tepper, "for better or worse we're a herd leader. We're at the front of the pack, we are one of the first movers. First movers are interesting, you get to the good grass first, or sometimes the lion eats you." (http://www.quoteswise.com/david-tepper-quotes.html)

Investment Strategy

Tepper's strategy is to buy corporate and emerging market debt instruments which trade at huge discounts to face value. The rationale is that if companies have enough good quality assets, then, even if they go broke and usually they don't, bond holders would likely get more money than the normal assumptionsmade by market players. This will boost the prices of the bonds, leading to a tidy profit. Another factor is that he seeks companies that generate high revenues. This ensures that sooner or later, stocks and bonds of such companies recover and start rising in value. Equally, he takes big positions in the shares of companies he thinks are valued below normal by the market.

"We don't really buy high-flyers. We buy before they get high-flyers," sums up his attitude to investing. (http://www.quoteswise.com/david-tepper-quotes.html)

Notable victories

In the twenty years between 1993 and 2013, Appaloosa Management generated annual returns of a whopping 36%. If one had invested $1 million in 1993, then after deducting fees, the investment would have been worth $149 million in 2013. Currently, Appaloosa manages $14 billion worth of investments while he has personally amassed $11 billion.

Algoma Steel, in 1993, was a company that had just come out of bankruptcy. Tepper bought its bonds secured against its hard assets at a trifling price of 20% of the face value. The bonds tripled in value within the year!

In 2001 during the dotcom bust, Tepper clocked a fantastic 61% annual return by doubling down on bonds issued by financially hard pressed companies.Similarly during the 2009 crisis, Tepper had the foresight to guess that banks were just too big to fail and that the government would not allow them to go under. Just to recall, the crisis had started in the banking sector and at a certain point in time all transactions were frozen due to lack of confidence in derivatives. Following the US government'sannouncementthat banks would be recapitalised rather than nationalised, Tepper threw conventional wisdom to the winds and started investing heavily in bank shares, then trading at very low prices. Some of the banking company shares surged 330% in a few months, netting Tepper a tidy $1 billion profit. In his own words, he generates his remarkably consistent profits by investing in the diciest of companies, such as Mirant, MCI, Conseco and Marconi, keeping the market "on edge". (Hedgethink.com, By Paul Milnes, April 9, 2014)

An American insurance company Conseco Inc., filed Chapter 11 bankruptcy in 2003, cancelled its stock and gave a big part of the ownership to bond holders. David Tepper bought huge quantities of low priced bonds of the company. Later the company managed to avoid bankruptcy and Tepper marked his all-time highest return of 148%.

In roughly the same the 2001-2004 period, electricity companies inCalifornia became stressed, mainly due to the fact that the state government had imposed price controls and industry had to sell power for a loss and soon ran up debts of $ 20 billion. Their credit rating sank to junk status. The government then stepped in to save the distressed companies and nurse the sector back to sound health. Tepper bought large numbers of shares in the two most affected companies of Edison Electric and Pacific Gas, and, Electric and Edison International, which were then trading in the early teens and then sold the shares in 2004 when the price reached the mid-twenties, thereby garnering huge profits. He took similar advantage of the Enron and Worldcom bankruptcies as well.

The story was repeated in 2011 when he turned his attention to the housing sector. He bought shares in companies like KB Homes, Ryland Group and Pulte Group amongst others. While these companies were not anywhere near bankruptcy, still their shares were available at very low prices. In a short while, as economic recovery began, share values went up substantially, allowing Tepper to make big profits.

Tepper Quotes

  1. I'm not tepid, I'm Tepper.

  2. I think when it comes to decisions, I try not to be emotional. To drown out the noise and look at the important facts.

  3. I'm just a regular upper-middle-class guy who happens to be a billionaire.

  4. I'm buying a little bit today. It's a big company with a lot of revenue so we probably will end up making money.

  5. [May 2010] We keep our cool when others don't. The point is, markets adapt. People adapt. Don't listen to all the crap out there.

Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.

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