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.
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 differentiated returns. To even create five per cent of outperformance as an industry would require finding opportunities on a scale that usually do not exist.
But quite possibly there is a larger intellectual malaise that has led so many hedge funds to repeatedly jump on the same investment bandwagons. It is no surprise that so few seem able to think creatively about markets when so many of their employees are so similar.
Vast numbers of portfolio managers studied the same subjects at university, and then went to the same business schools where they learnt the same tenets of modern financial theory. On leaving education, they have had the same career trajectories, working as analysts in investment banks or investment houses, and they live in the same areas of New York and London. They eat in the same restaurants, they read the same books.
It is not hard to see how this intellectual monotony has contributed to the industry’s problems.
Whitney Tilson: How to Get Away With Insider Trading
4) Prof. Coffee is right that we need stronger, broader and clearer insider trading laws/rules:
The “personal benefit” rule makes ignorance bliss. The sophisticated trader will understand that he is insulated from liability so long as he does not learn that a personal benefit was paid or promised. “Don’t ask, don’t tell” may become the new industry code of behavior. The rule overlooks how the “favor bank” can work in a cozy industry like finance.
The Newman decision is making prosecutions harder. Since he became United States attorney for the Southern District of New York in 2009, Preet Bharara has won more than 80 insider trading convictions in just a few years, but in the wake of Newman, at least 14 of those convictions have been overturned, and that number is likely to rise.
Although the S.E.C. has resisted defining insider trading for decades, legislation now seems the best answer. We should eliminate the need to prove a “personal benefit” to the tipper, but not overrule the rest of the Dirks case. Thus, a trader who knows (or recklessly disregards) that his information was wrongfully obtained should be liable regardless of the benefit to the tipper. But someone who trades on market gossip or an analyst’s projection should not be liable.
A workable reform bill is not hard to draft. I worked on one such bill, introduced last year by Representative James Himes, Democrat of Connecticut, with Republican co-sponsors, that does basically what has been outlined above.
If a presidential candidate of either party wants to show that he or she has not been “captured” by Wall Street, the best signal would be support for insider trading legislation and a promise to prod Congress to enact it. If Washington can ever agree on anything, Washington can agree on that.
5) I’ve been pounding the table on this for years, so this is great to see:
The U.S. agency charged with protecting consumers from financial abuse unveiled a proposal on Thursday that would limit short-term borrowings known as “payday” loans, which can carry interest rates as high as 390%.
The Consumer Financial Protection Bureau’s proposal includes having lenders determine if some borrowers can afford to take out debt. It also calls for restrictions on loan rollovers.
Payday lenders typically cater to low-income borrowers who need cash in a pinch but cannot access financing from mainstream banks. The name comes from the idea that a borrower would take out an emergency loan and repay it with the next paycheck. Since the loans often are not collateralized, lenders take the risk of not being repaid and charge higher rates.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” said CFPB Director Richard Cordray in a statement, calling the proposal “mainstream” and “common-sense.”
“It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”
Whitney Tilson: New Rules Could Dramatically Alter the Payday Loan Market
6) My friends at Stansberry Research are hiring:
Stansberry Research is hiring a Senior Resource Analyst (with a focus on precious metals) and a Value Analyst to join our company’s biggest and fastest-growing franchise.
The ideal candidate for both roles is excellent at conducting research and performing relevant industry analysis, has a keen mind, is intensely curious, lives and breathes the world’s markets, and writes great stories.
You must be willing to travel the world to build contacts and find the most compelling investment opportunities for our readers.
If you’ve ever wanted to make a living reading, writing, and thinking, please send us:
- A basic resume. Tell us what you’ve done before. We admire people who aren’t afraid of hard work or odd jobs.
- A writing sample. Tell us about an investment opportunity. We’re interested in the fundamentals of your best idea, not something based solely on charts.
Experienced applicants only. If interested, send your resume, cover letter, and a writing sample via e-mail with the subject line “Analyst,” to [email protected]
About Stansberry Research:
Stansberry Research is an independent financial research firm, delivering unbiased investment intelligence to self-directed investors seeking an edge in a wide variety of sectors and market conditions. Stansberry experts produce a steady stream of timely research that covers topics such as value investing, maximizing income, energy-sector investing, resources, biotech, medical technologies, financials, technology, short-selling, macroeconomic analysis, and options trading. Stansberry’s unrelenting and uncompromised insight of market trends and analysis has made it one of the most respected and sought-after research organizations in the financial sector.
Founded in 1999 and based out of Baltimore, Maryland, Stansberry Research has nearly two dozen analysts and researchers– including former hedge-fund managers and buy-side financial experts – who publish proprietary insights to more than 500,000 individual subscribers in more than 100 countries.