Whitney Tilson’s email to investors discussing the 10th anniversary of the market bottom.
Today is the 10th anniversary of the day stocks bottomed during the Great Recession.
Q4 hedge fund letters, conference, scoops etc
For those of you who didn’t live through it as an investor, it’s hard to convey the degree of total panic at that time. The S&P had been cut in half in the previous 17 months and it seemed like stocks would never stop falling. Remember last December? It was like that…but 10 times worse!
I remember during that time calling my friend Lloyd Khaner of Khaner Capital and asking, “How’s it going?”
“I’m under my desk wearing a flak jacket and a helmet!” He replied with a grim laugh.
Any stock with even a little risk had been totally decimated. I remember when we bought chemical maker Huntsman (HUN) around $8 in November 2008 after Apollo Management had walked away from a peak-of-the-market deal to buy it for $28 a year earlier. We thought the stock was a 50-cent dollar and couldn’t possibly go any lower – yet it went to $2 only four months later. We bought it all the way down – and then it soared 10x to $20 in a little more than two years!
Or consider General Growth Properties. Its lenders wouldn’t roll its heavy debt load during the financial crisis so even though the cash flow from its malls was stable, the company was forced to file for bankruptcy in April 2009. It was the largest real estate bankruptcy ever at the time.
But Bill Ackman saw that, unlike the vast majority of bankruptcies, in this case the value of the assets exceeded the liabilities – it had filed for bankruptcy due to illiquidity, not insolvency. So he bought a ton of stock well under $1, hired the best lawyers, and showed up in court to fight for the equity.
Soon thereafter, he gave one of the greatest presentations I’ve ever seen, The Buck’s Rebound Begins Here, at the Ira Sohn Conference on May 27, 2009. In it, he made a compelling case that the stock was worth at least $10 per share and perhaps as much as $30. I piled in – and made 15x my money in less than two years.
Even the safest stocks were getting crushed. Berkshire Hathaway had been nearly cut in half and was trading below investments per share – you were getting Warren Buffett, Charlie Munger and ~75 operating businesses for free! It was one of six stocks to which we dedicated a chapter in our book, More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, which I wrote in six weeks in early 2009 and sent to the publisher on…you guessed it…March 9th. I’ve posted the chapter on Berkshire Hathaway here.
And then the market turned…
Never in my wildest dreams could I have imagined 10 years ago that sentiment would change so quickly and investors would soon become incredibly complacent and risk seeking – something that has continued, pretty much uninterrupted, to this day, as the S&P 500 has more than quadrupled.
I nailed the crisis as it unfolded, for which CNBC nicknamed me “The Prophet” (see the video clip here). I turned bullish a little early and suffered some losses in late 2008 and early 2009, but I saw that Mr. Market was offering me the investing opportunity of a lifetime, so invested all the way down and made a killing during the rally thanks to stocks like Huntsman, GGP and Berkshire.
But then I made three fateful, related mistakes:
First, while I could see that the economy was slowly recovering, stocks were soaring, which led me to conclude at pretty much every point that the market was ahead of the fundamentals.
Second, even though I’d navigated the downturn better than most, it had still been so traumatic that I now realize it had left scars. Because I was fearful that another calamity might be just around the corner, I prepared my ship for a storm that never came.
Lastly, from a bottom-up perspective, I had become accustomed to buying stocks at incredibly cheap prices. Thus, when I found stocks trading at, say, 30% below intrinsic value, I typically didn’t buy them, even when they were high-quality, growing businesses that ended up performing exceptionally well. Instead, I waited to buy them at half or less what they were conservatively worth, but very few of them fell to such levels as the market continued to rally.
As a result of these three mistakes, I turned cautious way too soon and:
1) Trimmed and then exited positions I should have held (most painfully Netflix);
2) Failed to reinvest the cash generated from my sales and instead sat on large cash balances; and
3) Maintained a big short book, which had saved my bacon during the downturn but mostly crushed me during the long recovery (with a few notable exceptions, like Lumber Liquidators).
These mistakes led to meaningful underperformance year in and year out, and ultimately led me to become so frustrated and demoralized that I closed my funds…
I have only myself to blame. My #1 Immutable Law of the Universe, which I regularly preach to my daughters, is: “If you are a dumbass, there will be consequences.” (This was the theme of the commencement address I gave at my alma mater, the Eaglebrook School, in June 2016. You can watch it here or read the transcript, which has extended appendices that didn’t make it into my speech, here.)
But don’t shed any tears for me. I have a great life for which I am thankful every day, filled with adventure, meaning and love, so I wouldn’t trade positions with anyone.
And from a business perspective, I’ve never been in a better place. After I closed my funds in late 2017, I spent more than a year studying the “lessons from the trenches” I learned over two decades running multiple funds and teaching them to students from all over the world (they’re available on video for only a few more weeks – click here for details).
Now, as I discussed in an email last month, I have teamed up with my old friend Porter Stansberry and his team at Stansberry Research to launch a new venture, Empire Financial Research. We aim to provide advice, commentary and in-depth research and analysis to help people around the world become better investors.
While I miss some aspects of running a fund, I think what I’m doing with Empire is an even better fit with what I am good at and love to do.
Thanks for joining me on this new (ad)venture!