Julian Robertson announced at the end of last week that he was closing down Tiger Management. Less than two years ago, Tiger was the largest hedge fund group in the world, with $22.8 billion in assets, and had compounded investors' money at 32% annually for nearly 18 years. But dismal performance over the past year and a half, which triggered massive investor redemptions, has led to Tiger's demise.
It's remarkable -- and somewhat disconcerting for a money manager like me -- to see how quickly the tide can turn. Tiger was up 69% in 1997 and an additional 17% through the first three quarters of 1998. But an ill-fated short position in the yen led to an 18% decline in October and Tiger ended 1998 down 4% for the year. It got worse in 1999, as Tiger fell 19%, trailing the S&P 500 by 40 percentage points, and in the first two months of this year, it was down another 13.5%. That's a 43% decline in less than six quarters, during which the S&P surged 35%. Ouch! Despite ending with a whimper, Robertson's 20-year track record was spectacular, as he generated 25% annualized returns (versus 17.5% for the S&P) over that period.
In his parting words, Robertson claimed we are experiencing "an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum.... The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid scheme destined for collapse.... There is no point in subjecting our investors to risk in a market which I frankly do not understand."
Hmmm. Famed value investor expresses skepticism about a manic stock market and predicts a severe correction. But the investor loses 19% last year and posts double-digit losses in the first two months of this year, triggering the flight of all but the most faithful investors. Media vultures circle. Sound familiar? This description fits not only Robertson, but also Warren Buffett and his investment vehicle, Berkshire Hathaway (NYSE: BRK.A). How this market has humbled even the mightiest value investors!
Robertson's action raises the obvious question: Should Buffett follow his lead and call it quits? My answer is an emphatic no -- not surprising, given that Berkshire Hathaway is my largest holding -- and I'd like to explain why.
The Difference Between Buffett and Robertson
Buying the shares of even the worst company at a low-enough price can be financially rewarding. Still, as a general rule, I'm skeptical that there's much genuine value in companies trading at low multiples but with poor financials and weak future prospects. Buffett agrees. In his latest annual letter, he wrote: "If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price." If Buffett can't find an exceptional business priced attractively, he'll just let cash and bonds accumulate until he can find a fabulous investment opportunity.
Perhaps Robertson at one time practiced a similar style of value investing, but as valuations have soared over the past few years, he appears to have fallen into the trap of buying companies of increasingly lower quality in order to continue paying the prices to which he had become accustomed.
The contrast today between Buffett and Robertson is evidenced by the major U.S. public stock holdings of Berkshire Hathaway and Tiger Management:
|Company||P/E||Cash/Debt||Net Margin||ROE||5-yr. EPS||Steady Rev. Growth?||Steady EPS Growth?|
|Company||P/E||Cash/Debt||Net Margin||ROE||5-yr. EPS||Steady Revenue?||Steady EPS Growth?|
|BOW||38||3%||5%||5%||neg. in '94||No||No|
|U||11||60%||6%||3%||neg. in '94||No||No|
Source: Value Line, 3/30/00
Pretty stark contrast, isn't it? Every one of Buffett's picks are characterized by steady growth (recent hiccups at longtime steady growers Coca-Cola and Gillette notwithstanding), high margins, solid balance sheets, and returns on equity that exceed the cost of capital. (These attributes would also generally be true of McDonald's and Disney, Buffett's largest sales in the past few years.)
While Tiger's holdings are much cheaper in terms of average P/E (Buffett, of course, bought his stocks at low prices as well), as a group, this is a lame collection of companies. Lots of debt, low margins, poor returns on equity, erratic growth -- this group of companies deserves to trade at a low average multiple!
US Airways Case Study
"When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: 'There's really nothing to it. Start as a billionaire and then buy an airline.'" -- Warren Buffett's 1996 annual letter.
Tiger owns 23% of US Airway's shares, representing Robertson's largest position by far. To my knowledge, this is the only stock in Robertson's current portfolio that Buffett has ever owned (in 1989, he bought $358 million of USAir preferred stock). Here is what Buffett wrote about this investment in various annual letters:
"There is no tougher job in corporate America than running an airline: Despite the huge amounts of equity capital that have been injected into it, the industry, in aggregate, has posted a net loss since its birth after Kitty Hawk." -- 1991 annual letter.
"A competitively-beset business such as USAir requires far more managerial skill than does a business with fine economics. Unfortunately, though, the near-term reward for skill in the airline business is simply survival, not prosperity." -- 1992 annual letter.
"Mistakes occur at the time of decision. We can only make our mistake-du-jour award, however, when the foolishness of the decision become obvious. By this measure, 1994 was a vintage year with keen competition for the gold medal. Top honors go to a mistake I made five years ago that fully ripened in 1994: Our $358 million purchase of USAir preferred stock, on which the dividend was suspended in September. In the 1990 Annual Report I correctly described this deal as an 'unforced error,' meaning that I was neither pushed into the investment nor misled by anyone when making it. Rather, this was a case of sloppy analysis, a lapse that may have been caused by the fact that we were buying a senior security or by hubris. Whatever the reason, the mistake was large." -- 1994 annual letter.
Ironically, as Buffett was writing those words in early 1995, USAir was beginning a remarkable rise from the ashes. From its low in late 1994 to its peak in mid-1998, the stock rose more than 2,000%, which allowed Buffett to exit his investment profitably in 1997.
But not long afterward, Robertson began to buy, inexplicably ignoring the awful cyclicality and economic characteristics of this industry that Buffett had so clearly laid out in his annual letters. As the stock fell, Robertson refused to admit his mistake and, in fact, worsened it. According to an article in The Wall Street Journal:
"When US Airways began to teeter, Mr. Robertson stuck to his guns, investing even more, to the point where Tiger owned so much that one analyst at Tiger who covered the airline proclaimed, 'We're too long to be wrong,' said one person familiar with the matter. Mr. Robertson still hasn't sold a share of US Airways, faithful to the airline."
What a contrast between Buffett's humility in being willing to acknowledge and rectify his mistake, and Robertson's stubbornness! While Buffett is also known for his unshakable faith in certain stocks, at least he picked fine companies in which to place his faith.
Robertson's recent statement that "This approach isn't working and I don't understand why" shows how badly he has lost his way. Today's market is punishing the stocks of poor-quality businesses, but that's not irrational, it's sensible. Regarding the low valuations of Robertson's stocks, I think Robertson, not the market, has been making the mistakes.
Robertson once summarized his investment strategy as "buying the best stocks and shorting the worst." Though I have no idea what stocks Robertson was shorting, in my opinion, he appeared to be doing the opposite.
-- Whitney Tilson
Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. To read his previous guest columns in the Boring Port and other writings, click here.
Brian Graney, 3/31/00: An Investing Tiger Calls It Quits