Whitney Tilson in his email discusses his commencement address at Eaglebrook School on Friday; GSE analysis; Hedge fund managers betray glory days with groupthink; How to Get Away With Insider Trading; New Rules Could Dramatically Alter the Payday Loan Market; Stansberry Research jobs and how he got arrested in Zimbabwe one time.

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Whitney Tilson: Commencement address at Eaglebrook School on Friday

1) “If you are a dumbass, there will be consequences!”

Believe it or not, I used that line (what I tell my daughters is the “#1 Immutable Law of the Universe”) in my commencement address on Friday at my alma mater, Eaglebrook, a private 6th-9th grade boarding school in Deerfield, MA. In 7th and 8th grades in 1980-81, I was a day student there, and it was a transformative experience for me: for the first time, I experienced what a first-rate education was.

Over the years, I’ve kept in touch with the school and was deeply honored when the headmaster invited me to give the address at this year’s commencement. There were just under 100 graduating students, plus younger students, family, friends, teachers, etc. – a total of maybe 400 people. This is what I saw from the podium:

I’ve done so many TV appearances and speeches over the years (mostly about investing and education reform), but this was the first time I’d spoken to young adults. Oh, the stress – what could I say that was both meaningful and memorable to 15-year-old boys?!

I worked really hard on this speech – and was making major edits right up to the very last moment. I’m very happy with how it went and have gotten lots of nice feedback.

Below are excerpts and I’ve posted the entire 7-page address here, including an appendix (8 pages) with all of the things I wrote and wanted to say, but didn’t have time.

Enjoy!

PS—My partner at Value Investor Insight, John Heins, took a few excerpts from the appendix and came up with this, aimed at investors:

One of my few claims to fame is that, when I was six years old, I was one of approximately 600 children who participated in the famous Marshmallow Experiment, which was being conducted at Stanford University, where my dad was doing graduate work at the time. You’ve probably heard of it: the researchers brought the youngsters like me into a room, where there was a yummy marshmallow. They told us if we waited 15 minutes and didn’t eat the marshmallow, when they came back to the room they’d give us another marshmallow. It was basically a test of self-control – did we have the willpower to delay gratification?

They’ve been following all of us for more than 40 years – they even gave my oldest child a battery of tests about 10 years ago. (By the way, they’ve never told any of us if we ate the marshmallow or not, and I don’t remember.)

This all came to mind as I prepared a recent commencement speech for the graduating class at Eaglebrook School, a private school in Deerfield, MA where I attended 7th and 8th grade. One of the messages I wanted to convey was the importance in life of playing defense. Life usually isn’t a steady upward climb – there are steps forward, steps back, and long periods of time that are flat, when you live in the same place, have the same job, earn roughly the same income, hang out with the same friends, and so forth. And then an opportunity comes along to take a huge leap forward like marrying the right person or making the jump to an incredible new job.

During those flat or down periods, you have to keep doing all the right things – expanding your mind, taking care of your body, working hard, building your relationships and reputation – because all of these things lead to the great opportunities that only come along periodically.

I’m going through one of these flat periods in my business right now. After a great 12 years from 1999 through 2010, my funds’ returns and assets under management (not to mention my personal wealth) have been, at best, flat. It’s been frustrating and not a little embarrassing, but while I’m doing my best to turn things around, I am also trying to be patient and not take excessive risks. That’s what I mean by playing defense. I’m 49 years old and hope to live to be at least 100, so I figure that I’m only 17 years into what I hope will be at least a 70-year investment career. From that perspective, holding out for that next marshmallow, figuratively speaking, isn’t so hard.

Whitney Tilson: GSE analysis

2) If you’re interested in Fannie/Freddie, I highly recommend this 8-page summary of what the newly released documents show the government did to them in Aug. 2012 (via the Third Amendment), and how the government has been lying and covering up ever since. The PDF is available at the following link: http://www.nakedcapitalism.com/wp-content/uploads/2016/05/GFCo.-GSEs-Former-WH-Officials-Involved-in-GSE-Scandal.pdf

Here’s Fairholme’s summary:

The release of fifty-three additional documents pertaining to the 2012 “Net Worth Sweep” reveals “a brazen attempt, by a group of former White House, United States Treasury, and Federal Housing Finance Agency officials, to apparently violate the spirit and perhaps letter of the law, [and] exceed their statutory authorities […]” explains GSE analyst Josh Rosner in a document published this week.

Whitney Tilson: Hedge fund managers betray glory days with groupthink

3) A very interesting article about groupthink among hedge funds:

The hedge fund manager — the highest-paid professional in contemporary finance — takes pride in an ability to think differently about markets. Over the past three years, many hedge funds have displayed a remarkable tendency to think in exactly the same way as each other.

Wall Street titans invested billions of dollars into the pharmaceutical company Valeant, only to lose large chunks of those billions when the company’s accounting had to be revised. Hedge funds that specialise in trading on economic events piled into shorting the Japanese yen against the dollar, meaning that their returns largely looked the same. These are just two examples of many.

This now well-documented “crowding effect” makes no one happy. Crowded trades lead to average investment returns on the way up and tears on the way down as funds rush to reduce their positions all at once.

Each week, there is evidence to show that their clients are tiring of paying a fancy price for what is increasingly looking like a mass-market product. Paul Tudor Jones, one of the industry’s father figures, has been forced to cut his fees due to several years of underwhelming returns. This week, yet another US pension plan, the New Mexico State Investment Council, said it was overhauling its hedge fund programme due to high cost and poor performance.

So why in an industry that offers such large rewards to those able to think differently have so few been able to come up with something new?

Part of the problem is the hedge fund industry’s sheer size. With an estimated $3tn of assets in the hands of hedge funds, there is a strong case to make that it has simply become too big to generate any meaningfully

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