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Julian Robertson – A Late Investing Legend’s Legacy

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Last month saw the passing of one of the absolute legends of modern stock market investing with the death of Julian Robertson…

For those of you not familiar with Julian Robertson, he was the founder of one of the most famous and successful hedge funds in history – Tiger Management.

After a few years in the Navy, Julian Robertson moved to New York and joined storied brokerage firm Kidder, Peabody and Company as a stockbroker – eventually becoming the head of the firm’s asset management division.

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In 1980, with $8 million from family and friends, he founded Tiger Management. The firm eventually peaked with $22 billion in assets, and it has one of the best track records in modern investing history.

Beyond the success of Tiger, Robertson is almost equally well known for the success of those who worked at the fund (dubbed "Tiger cubs") or others who were trained at the Tiger cubs' funds ("Tiger grand cubs"). These funds include Viking Global, Lone Pine, Maverick, and Tiger Global.

Combined, these funds now manage hundreds of billions and have probably created more value for investors than any other group in history.

History With Julian And Tiger

Personally, I had history with Julian and Tiger...

My first buyside job was at Atalanta Sosnoff Capital, which was in the same building as Tiger – we were just 42 floors below them. A few years later, I also interviewed for a job with Viking Global, but unfortunately did not get the job.

Many years later, though, I eventually worked for one of the Tiger grand cubs when I joined my old friend Rick Gerson at the founding of his firm Falcon Edge Capital.

Rick had worked for the legendary John Griffin, one of the more famous and successful Tiger cubs, of Blue Ridge Capital since its founding. Not to mention, he was also one hell of a human being!

At Falcon Edge I had the opportunity to see the Tiger research process firsthand.

Value-Added Research

That process revolved around the concept of value-added research ('VAR')...

The idea was that investors shouldn't just rely on Wall Street's research or even what the company says, but they should find outside sources that create the clearest picture of the company's fundamentals and competitive positioning.

This could involve speaking with customers, competitors, consultants – you name it.

It would not be unusual for us to speak with literally hundreds of non-Wall Street sources when developing a thesis on a major position.

This research was coupled with trying to understand what was not widely understood by Wall Street. This was referred to as "variant perception" and was always key to an investment.

It was great to use outside sources to develop a clear picture of a company's positioning... But did we really have an insight that was any different from what everyone else was thinking?

Another aspect of this process was that it was exhaustive and relentless...

This was no "checking the box" exercise... It was more like training as a professional athlete. As I mentioned before, we would sometimes do hundreds of interviews, and our internal reports could also run hundreds of pages.

Julian and his protégés have many other legacies we could discuss, but this exhaustive research process is the most powerful one and the one that I got to experience firsthand.

So what does this mean for the regular investor?

Well, the first thing to consider is to remember that this is your competition.

These are very incentivized investment firms with lots of capital and the ability to do research at a level that an average investor would never come close to being able to accomplish.

This is why a focus on the big picture and long-term investing makes the most sense for individuals.

If you get the big picture right with a big thesis, you don't need to have this degree of due diligence to support your thesis.

A long-term emphasis also allows you to look through some of the smaller details.

This is not to say that the Tiger firms don't also look at the big picture and the long term, but they have a much greater ability to optimize in the near term.

Individuals should be looking years out to maximize returns.

All that being said – we do think that understanding your investments is key to not only investment selection, but also having the conviction to stay invested during the most difficult times.

So in today's essay, I'll share the famed Tiger Investment Framework...

To be honest, I don't know who originally put this together... but it was likely created in the late 1990s. The managing partner of a major Tiger Cub gave it to me in the early 2000s, and today, I'm sharing it here.

Even though the list is almost 20 years old – it still applies. I encourage you to read the list and incorporate it into your process for long-term investing.

Enjoy, and rest in peace Julian...

Investment Framework

Industry Study

  • Is this a good business?
  • What are the key success factors to superior performance in this industry? (VAR)
  • Define the market opportunity. How do competitive products address this opportunity?
  • What are the barriers to entry ("moats")? (VAR)
  • What is the relative power of: (VAR)
    • Customers
    • Suppliers
    • Competitors
    • Regulators
  • Who controls industry pricing? Does the company/sector have any pricing power?
  • How (and how much) can a good company differentiate itself from a bad one in this industry?
  • Do you understand this business? Test yourself and describe it to a 10-year-old.

Business Model (VAR)

  • What is the selling model: Razor/blades? Services? One-off contracts?
  • What are the economics of the base business unit? How does it stack up against competitors?
  • Why is the company good (or bad) at what it does? Can the company sustain it?
  • Is this company growing by acquisition? How sustainable is that?
  • Be able to easily describe the entire sales process – from order to fulfillment.

Management (VAR)

  • What is the executives' background, and what do their former colleagues, investors, and classmates say about them? Have they been successful in the past? (Very important)
  • How is management compensated? Are its interests aligned with shareholders?
  • Has management been good at allocating capital?
  • Are management members buying or selling stock? How much as a percentage of their holdings, and why?

Company/Cultural Issues (VAR)

  • Is this a great company? Is it built to last? What could change this assessment?
  • Can you imagine holding stock in this company for 20 years?
  • If you had access to unlimited capital, how would you feel about your chances of successfully competing against this company?
  • Compare to a weak competitor in the same industry. What is the difference and why?

Financial Measures First Step: Check against all the accounting shenanigans in Howard Schilit's book Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports.

  • What is the company's capital structure, and how does it compare to its peers?
  • What are the trends in inventory turns, days payable/receivable, and working capital?
  • What are the company's coverage ratios on interest payments?

Cash Flow

  • What are the company's capital requirements and cash flow characteristics?
  • How is the company choosing to invest its capital? Capital expenditures? Buybacks? Acquisitions?
  • Does the company need to access the capital markets? How soon/often?

Earnings/Profitability

  • Regarding the company's sales model, how visible are earnings quarter to quarter, and year to year?
  • Is this a fixed or variable cost business? How much cost leverage?
  • Do earnings grow as a function of unit sales growth, price increases, or margin improvement? How sustainable is this growth?

Valuation

  • Looking forward, what is the company's valuation in terms of:
    • Market value/earnings
    • Enterprise value ("EV")/earnings before interest, taxes, depreciation, and amortization ("EBITDA")
    • Free cash flow ("FCF") yield (after-tax FCF/market value)
    • Market value/sales
  • What are the company's growth rates in terms of earnings, EBITDA, and FCF?
  • What are consensus earnings estimates versus your own expectations?
  • What are the key leverage points in our own and the Street's earnings models?
  • What has to go right, and where is the most chance for surprise?
  • Are the company's accounting policies conservative and in line with its peers?

Risks

  • What are the big unknowns? How much can the company control/influence these risks?
  • What could cause this investment to be a total disaster? How bad could it be?

Other (Timeline/Timing Issues)

  • What are the catalysts (triggers) for the company's proper valuation to be realized?
  • What good news and what bad news will affect the company in the coming year?
  • Who owns the stock? Momentum funds? Big mutual funds? Hedge funds?
  • How difficult is it to build a significant position (float, volume)?
  • Draw a timeline of expected events and dates. What might go wrong and when?

I hope you find this framework and these questions useful in your own investing process.

Regards,

Enrique Abeyta


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