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“I don’t ask people to do what I’m not prepared to do myself.”
– Leon Cooperman
MiB Interview: Leon Cooperman, July 4, 2015
On July 4, 2015, Leon Cooperman visited Barry Ritholtz for his Masters in Business podcast to talk some investing. Cooperman was born April 25, 1943, and is the founder and CEO of Omega Advisors, an hedge fund managing $5.2 billion as of July 31, 2016.
The ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More
The Art of Selling a Stock
The following is my own transcript of the part of the interview where Cooperman discusses the four reasons for selling a stock, starting at about 59:50 and ending around 1:00:00.
Number 1: Price Appreciation
LEON COOPERMAN: If you’re a value investor and if you like something at 10 you should like it more at 9 or 8. But there are those times where something has tangibly changed, and the circumstance have changed and you gotta make a different decision. So the way I’d like to answer the question is we sell. You know, a typical question from a customer coming into our shop is; “What is your sell discipline?” Okay, and I say. We sell a stock for one of four reasons. The first and of the highest quality reason, is that we bought a stock at X ’cause we thought it was worth X plus 30 or 40 percent, and it goes up 30 percent. Nothing has changed. We sell.
BARRY RITHOLTZ: So even, even once it hits your price objective, even if there’s no change in circumstances?
LEON COOPERMAN: No after there’s no change in circumstances. So I’ll give you a perfect example. I bough 25 million shares of Boston Scientific between 5 and 6 dollars a share. We thought it was worth 12 or 13. It got there. We didn’t see circumstances had changed. We sold. Unfortunately it’s a mistake because I think it’s 18 or 19 now. Okay, but so the first reason just generically…
BARRY RITHOLTZ: Is it always a full sale or is it ever; “Well, let’s sell half of it and see what happens?”
LEON COOPERMAN: Well, it varies. Again, depending upon the company, depending upon the characteristics. And look, I’ve got a leeway of looking at charts you know.
BARRY RITHOLTZ: You do?
LEON COOPERMAN: Absolutely. It’s one of the ingredients because I think the stock market is highly quality leading indicator, and you know oftentimes when it’s coming out with bad earnings and the stock has come down before the earnings, and they come away with blow-away earnings the stock is up before that. You know, the market has a way of knowing. There’s some type of secretary typing a press release for some CEO who’s got a cousin, or who’s got a wife, who’s got a relative or whatever. So the market…
BARRY RITHOLTZ: So the discounting mechanism is out?
LEON COOPERMAN: Yeah, yeah. Exactly. So the first…
BARRY RITHOLTZ: But you’re not, we would never consider you a technical analyst, or chartist. You’re not making buy and sell decisions based on… ’cause Dough said. Dough Kass said; “Ask Lee if he believes in voodoo?”
LEON COOPERMAN: No, we are deep dive fundamental investors. We work hard to dig up our information. I look at a chart because of the confirmation of what you think, and raise a question when the charts are going the wrong way. You know, because again the stock market is a leading indicator, and so stocks tend to give you some indication of what’s going on. So, the first reason we sell a stock, which is the highest quality reason. We bought something at X because we thought it was worth more than X, and it appreciates and nothing has changed, we sell.
Number 2: Things Not Unfolding As Anticipated
LEON COOPERMAN: Second reason we sell something is I tell my guys and gals to “Stay on top of your companies.” Not everything unfolds the way you anticipated. So talk to suppliers, talk to competitors, talk to companies. You know, follow what’s going on in the economy. If you get the sense things are unfolding differently than you anticipated, let’s sell before we get murdered. ‘Cause it’s hard to make up 20 or 30 percent losses in this kind of environment.
Number 3: New Idea With Better Risk/Reward Characteristics
LEON COOPERMAN: The third reason we sell is that we’re not the Federal Reserve Board, we cannot print money. So sometimes you come up with a new idea that has a much better ratio of reward to risk than something you currently own. So we’ll rotate out of something that has a modest attraction to something we think has greater attraction.
Number 4: Change Our View of the Market
And the forth reason we sell is we change our view of the market. Okay, and you know, you can deal with futures or options for a while, but at the end of the day if you’ve gone from bullish to bearish, you want to take your exposure down to 50 or 60 percent, you gotta sell inventory. So you sell a stock ’cause you wanna get at arms way. And we did a poor job in 2008 when we missed the significance of Lehman. But by and low, those are the four reasons we sell. Price appreciation, it hit our target, we get out. Second is things are not unfolding as anticipated, get out before you get murdered. Third reason we sell is we’ve found a new idea better than the one we had. And the forth reason is we’ve changed our view of the market and we want to reduce exposure.
About the Author
The pseudonymous Hurricane Capital was Born in the 80’s, lives in Sweden with a Masters of Science in Business and Economics from Stockholm University. Got interested in value investing and devotes his free time and investing. The main goal through the Hurricane Capital blog is to learn about different investing topics, investors and business cases for investment.