Value Investing

Graham & Doddsville Interview With Leon Cooperman

Graham & Doddsville’s latest issue is out featuring an interview with Lee Cooperman among other highlights – see below for more

At the end of 1991, following 25 years of service, Lee retired from his positions as a General Partner of Goldman, Sachs & Co. and as Chairman and Chief Executive Officer of Goldman Sachs Asset Management to organize and launch an investment management business, Omega Advisors, Inc.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

At Goldman Sachs, Lee spent 15 years as a Partner and one year (1990-1991) as of-counsel to the Management Committee. In 1989, he became Chairman and Chief Executive Officer of Goldman Sachs Asset Management and Chief Investment Officer of the firm’s equity product line, managing the GS Capital Growth Fund, an open-end mutual fund, for one-and-a-half years. Prior to those appointments, Lee spent 22 years in the Investment Research Department as Partner-in-charge, Co-Chairman of the Investment Policy Committee and Chairman of the Stock Selection Committee. For nine consecutive years, he was voted the #1 portfolio strategist in Institutional Investor Magazine’s annual “All-America Research Team” survey.

As a designated Chartered Financial Analyst, Lee is a senior member and past President of the New York Society of Security Analysts. He is Chairman Emeritus of the Saint Barnabas Development Foundation, a member of the Board of Overseers of the Columbia University Graduate School of Business, a member of the Board of Directors of the Damon Runyon Cancer Research Foundation, a member of the Investment Committee of the New Jersey Performing Arts Center, and Board Chairman of Green Spaces, a committee organized to rebuild 13 parks in Newark, NJ. Lee received his MBA from Columbia Business School and his undergraduate degree from Hunter College. He is a recipient of Roger Williams University’s Honorary Doctor of Finance; a recipient of Hunter College’s Honorary Doctor of Humane Letters; an inductee into Hunter College’s Hall of Fame; and a recipient of the 2003 American Jewish Committee (AJC) Wall Street Human Relations Award, the 2006 Seton Hall Humanitarian of the Year Award, the 2009 Boys & Girls Clubs of Newark Award for Caring, and the 2009 UJA-Federation of New York’s Wall Street and Financial Services Division Lifetime Achievement Award. In 2013, Lee was inducted into Alpha Magazine’s Hedge Fund Hall of Fame and was honored by the AJC at their 50th anniversary with the Herbert H. Lehman Award for his professional achievements, philanthropic efforts, and longstanding support for AJC. In 2014, Columbia Business School awarded Lee its Distinguished Leadership in Business Award, and Bloomberg Markets named him to its fourth annual “50 Most Influential” list (one of only ten money managers globally to be so honored, selected “based on what they’re doing now, rather than past achievements”). He was inducted into the Horatio Alger Association in April 2015. Lee and his wife, Toby, have two sons and three grandchildren.

Graham & Doddsville: What is it about stock picking that excites you?

Leon Cooperman: It’s a hunt. To be successful, you must love what you do. It is both my vocation and my avocation (as well as a means of supplementing my income).

G&D: The last time Graham & Doddsville spoke with you, it was the fall of 2011. What has surprised you the most since then?

Leon Cooperman: I would say at Omega we have been on the right side of the market. Our basic view is that every recession leads to the next economic recovery, and every recovery ultimately leads to the next recession. It was predictable to come out of the 2008 recession. I believe in the symmetry of cycles, so the length and duration of an upcycle probably bears some relation to the length and duration of the downcycle. We had the most severe recession, so having a longer—not necessarily stronger, but longer—recovery than average would probably make some sense to me.

But the growth of passive management is greater than I would have predicted six or seven years ago. I understand what’s behind it, but it’s something I would have thought would have passed by now. I look at it as being transitory. There’s a role for passive management, but I don’t think Warren Buffett got to where he is using an index fund. The same goes for Mario Gabelli, myself, and others who have been successful in money management. I’m committed to active management.

Some time ago, I went to a seminar entitled “Closing the Gap,” looking at income disparity and how to deal with it. A futurist who spoke at the conference said that in his opinion, the biggest problem facing the economy is that 45% of all jobs are going to be replaced by automation, with no alternative for those displaced workers. I thought about it, and perhaps our industry’s “automation” is passive management.

Passive turnover averages about 3% a year; active turnover, about 30%. If everything goes passive, that implies a huge reduction in liquidity and in the pool of available commissions. Passive management commands a five basis-point fee. So that’s a huge reduction in the pool of money available to active money managers.

But everything in the world is cyclical. I show people an article titled “Hard Times Come to Hedge Funds” and everybody thinks it’s contemporary. The article was written by one of the most distinguished writers of Fortune magazine, Carol Loomis, in 1970. At the time, the largest hedge fund was under $50 million. The second largest was A.W. Jones at $30 million. The entire industry was under a billion dollars.

Here we are in 2017 and the industry is $3 trillion. And there are many hedge funds that run tens of billions of dollars. The golden period for hedge funds was 2000 to 2007. Why? They were outperforming the indexes and conventional managers. CNBC brought them a tremendous amount of publicity. Money was pouring in, and they became cocktail-party talk. “I'm with Omega.” “I'm with Glenview.” “I'm with Third Point.” “I'm with Jana.”

Then suddenly, the 2008 cycle hits, and even though hedge funds lived up to their expectations, people were dissatisfied. A lot of people who went into hedge funds had no idea what they were doing. In 2008, the S&P was down 35% or 36%. The average hedge fund was down 16%, but people said, “Hell. I didn't know you could lose money. I thought it was a question of how much money I’m going to make. Well, give me back my money.” A lot of hedge fund managers either gated capital by not giving back the money on time, or retired because they didn’t want to work with a high-water mark and only for a management fee.

In 2008, if I told you we were about to begin the longest, most impressive bull market in history, you’d probably have me locked up. People blamed the government. They blamed the insurance companies. They blamed the bankers. Nobody blames the individuals for not doing a good job managing their own financial affairs. It’s as if they have no responsibility.

In 2008, the people that stayed in hedge funds elected to be in an absolute-return, not relative-return, vehicle. If you’re running a hedge fund and you’re less than fully invested, then you’re shooting for absolute rather than relative returns, and you can’t keep up with a bull market.

People become dissatisfied and say, “Well, if I’m not going to beat the index, why do I want to pay you some variation of two-and-twenty? I want my money back.” Then they go into index products where they don’t have any idea what they’re buying.

It will take a bear market to end such behavior. Until there’s a bear market, my guess is this thing will play out. But you must be patient. It creates a challenge for the hedge fund industry because if you’re an absolute-return guy in a one-way market, you can underperform. Plus, you have an asset base that’s very transitory. It’s hard to be an investor if you have to constantly look over your shoulder at looming redemptions.

G&D: So we need a bear market to slow down the move to passive?

Leon Cooperman: That’s my view, but I could be wrong. Just like in 2008, hedge fund performance was below expectations—it was down less than half of the S&P, yet people were dissatisfied. Now they’re going into indexes because the indexes are outperforming active management. When they lose money, they’ll have the same attitude they had in 2008. They’ll want to get out. And believe me, there’s no liquidity in the market to absorb these ETFs. It’s going to be a blood bath. The S&P will be down more than 100 points in one day.

Graham & Doddsville: Your analogy suggests the move to passive is more cyclical than secular.

Leon Cooperman: Everything is cyclical. It’s just a question of when. In 1987, with portfolio insurance, investors thought they could insure their portfolio and get out. It was exposed as being bogus. In 1972, the new big thing was the Nifty Fifty. J.P. Morgan and U.S. Trust had this philosophy of not caring what they paid for a business so long as it grew at above-average rates. IBM, Merck, Xerox, Avon, and those kinds of companies traded at 70x earnings.

In 1973, OPEC increased the price of oil tenfold. We saw a huge escalation of inflation, and the market collapsed. It took stocks over a decade to recover. Some of them never recovered. Avon’s today a $3 stock; it used to be a $70 stock. My philosophy is: invest in any stock or bond at the right price. Their philosophy was: only the right stock at any price. To me, price is the key. I am willing to buy anything as long as management is not crooked. I am looking for above-average yield, above-average asset value, or mispriced growth. I think that over time, buying stocks at 50-60x earnings is not going to pan out.

Graham & Doddsville: Can you tell us more about your entanglement with the SEC?

Leon Cooperman: All I’ll say here is that we settled the case for a fraction of the government’s initial financial ask (less than $5 million), with no industry suspension or bar, no officer-and-director suspension or bar, and no admission of wrongdoing, on terms that permit me to continue running my business. Beyond that, under the terms of our settlement, I can’t comment on the specific facts of the case or on the merits or strength of our defenses. We settled because doing so saved us what were projected to be enormous legal costs, and a substantial diversion of time and attention over possibly years more of legal wrangling, had we gone to trial. I am still conflicted over that decision, but it’s water under the bridge.

I will say, however, that the entire experience has left me with a highly jaundiced view of our federal regulatory system, which I think is in desperate need of remediation. Given the vast resources of the federal government and the prospect of potentially ruinous legal costs (and collateral damage) that confront any defendant, it is little wonder that so many opt to throw in the towel and settle, rather than risk the vagaries and expense of extended litigation. On the positive side, at least my reputation remains intact. To many money managers, I’m something of a folk hero. Cold comfort!

See the full PDF below.