David Tepper started Appaloosa Management, a distressed debt hedge fund in 1993, and is widely admired for being a brilliant investor and generous philanthropist. Tepper comes from a relatively humble background. He graduated from Peabody High School in Pittsburgh where he was a good student but not an “A” student; however, he went on to get a bachelor’s degree from the University of Pittsburgh, and an MBA from the Carnegie Mellon University.
Tepper was first introduced into the world of investing by his father, who was a small investor. His father gave his son his first investments, Pennsylvania Engineering Co. and the soon to be bankrupt, Career Academies.
Tepper first got involved in the financial management business when he took a position with Keystone Mutual Funds in 1984. In 1985, he was recruited by Goldman Sachs Group Inc (NYSE:GS) and took a job in their high yield group. His talents were obvious, and he became the group’s head trader within six months. Tepper worked for Goldman Sachs until late 1992, when he left after repeatedly being passed over for partnership.
In early 1993, he founded the Appaloosa Management Hedge Fund, which he still runs today. He started the fund with $57 million, and now manages close to $4 billion. Tepper’s decision to leave Goldman Sachs and start Appaloosa Management was an extremely profitable one. Forbes magazine estimates his current net worth at around $10 billion.
Tepper is an expert in distressed equity and debt investing. He invests in all different classes and in all different countries. He has bought futures on the Korean Won, American International Group Inc (NYSE:AIG) Debt, Russian Debt, Bank of America equity, as a few examples.
He likes to buy into companies that are near bankruptcy. He will then sell the company’s debt when it matures or sell the stock once the company has recovered. He prefers to invest in companies that have high amounts of revenue. He is also willing to take chances on utility companies because he believes that government will keep these types of companies afloat, because it is usually in the public’s best interest.
In 2001 his Appaloosa fund generated a 61% return by focusing on distressed companies. In that year Tepper bought millions of shares of Pacific Gas and Electric (PCG) and Edison International (EIX). The companies were near bankruptcy, and their credit ratings were reduced to junk status. Tepper purchased shares of these companies when their stocks were in the low teens. After the state of California bailed out the two companies, he sold the shares when they had risen to the mid-twenties.
In 2002, Tepper bought an estimated $1 billion in debt from another distressed company Enron, which eventually went bankrupt. After the company reorganized, Tepper sold the debt and made a fortune.
Tepper also profited from the bankruptcy of WorldCom. After defaulting on its debt, he was quoted as saying, “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.”
Another bankruptcy that benefited Tepper was that of Conseco Inc.; he purchased a large amount of Conseco’s shares for cheap when the company was near bankruptcy. In 2003, the company emerged from bankruptcy and once again Mr. Tepper made a fortune. In 2003, the distressed debt specialist made a record returns of 148%. Tepper’s firm has also invested in other well-known distressed companies such as MCI, Mirant and Marconi.
In 2009, Tepper made large investments in some of America’s biggest banks. He believed that the government would not let these banks fail because it would not be in the public’s best interest. In early 2009, he bought 47.55 million shares of Bank of America at an average price of $6.73. Over the course of the year, the stock rallied and by the fourth quarter reached a price of $15.79 per share.
In early 2009, he bought American International Group’s debt for 10 cents on the dollar. After the company’s performance improved he sold the debt at 61 cents. In the same year, he also profited after buying preferred shares of down and out bank Wachovia and the bank debt of Washington Mutual. Appaloosa Management made $4 billion dollars in 2009 and had its second highest return of 132%.
Some other early investments:
- In 1995, Tepper purchased of Argentine sovereign debt, stating that “rising bank deposits portended a strengthening economy.”
- In 1997, the Korean won fell 50% during the Asian Financial crisis; Tepper bought won futures and Korean government debt.
- In 1998,Tepper bought Russian Government debt betting that Russia wouldn’t default on its debt. He kept buying as the bonds tanked further in value, and had a 60% return in 1999.
A few of his mistakes:
- In 2000, he shorted the over-valued NASDAQ. However, due to complaints of his investors he covered his short. A few months later, the tech bubble started its collapse.
- In 2002-he lost 25% largely due to a collapse in the high-yield debt market.
Tepper founded Appaloosa Management LP in 1993. The firm has been extremely successful and in June of 2011, was awarded the Institutional Hedge Fund Firm of the Year. The Hedge Fund specializes in investing in the debt and equities of distressed companies.
Appaloosa’s success over the past few decade has been nothing short of impressive. Tepper has generated gross annualized returns of 36% and net returns of 28.44% over the past two decades. Over the past five years Tepper has achieved a return of 39.34% excluding the deduction of fees. These long-term returns include at least three years where the fund posted declines of 20% or more, during the Russian crisis of 1998, 2002 and 2008. During 2013 Appaloosa returned 16.8% during the first half of the year, compared with a 13% gain for the S&P 500.
Appaloosa Management’s top ten holdings as of September 2014:
- General Mtrs Co
- Citigroup Inc. (NYSE:C) Inc
- Priceline Grp Inc
- HCA Holdings Inc (NYSE:HCA) Holdings Inc
- American Airls Group Inc
- Whirlpool Corporation (NYSE:WHR) Corp
- Delta Air Lines Inc Del
- Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) Inc
- Powershares PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) Trust
- United Contl Hldgs Inc
(Note form 13F-HR does not include cash balances.)
David Tepper is a big baseball fan and once said “I loved baseball. I lived and died for Roberto Clemente. I knew every player in the major league. You could pull a player’s card, and I could tell you the statistics.”
“It’s our contention that equity may be in the money, depending on where the liabilities lie.”
“GM will do what’s best for GM, and Delphi should do what’s good for them.”
“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.”
In 2010 David Tepper said either the “economy would improve and drive a rally, or the economy would drop and the Fed would undertake another round of easing.”
“But there is no logic to QE3 now and the only result might be more food and energy inflation.”
“Basically if I know that things were coming, if I got the right things out of Europe, I would invest in different things there,” he said. “I’d really invest more in Spain, but I’ve got to have the right things because if I don’t I’m going to get killed.”
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