Here is a fun project I plan to do in the coming weeks, I want to go through the 13-Fs of major hedge funds that have decent track records. Then I will add up their stock exposure and calculate the exposure as a % of their AUM. To me this will tell me what they think of the economy, markets, global risks and how much opportunity there is FAR more than what they said in public. Quick example, David Tepper said a while back that markets might have reached their peak for the year, yet his 13-F shows that with US stocks ALONE he has 50% of AUM. If you misread into what he says, you get the wrong impression, but looking at his 13-F says a lot about what he really thinks. This will help me look at how these investors are calibrated and how are they weighting the data
Here is a quick estimate using the 13-Fs. The Stock exposure represents the bare minimum exposure, the actual exposure can be higher through the use of derivatives (I know that Tudor is big on using stock futures to get exposure, rather than actual stock picking) and also through non-US stock purchases. Greenlight and Pershing numbers were taken directly from their communications with clients rather than 13-Fs The avg exposure is 61% minimum. 50% if you net out the shorts
In terms of negative people attracting other negative people and positive people attracting positive people, a great example is Buffett with his two lieutenants Todd and Ted. Buffett seems like a happy and positive person, he also said he would not work with a 'lemon' or people with bad attitudes. Because of who he is, he was able to attract these two fellows vastly underpaying them (since they could make way more by running a hedge fund). And these two folks have been a positive influence in Buffett (I'm sure the opposite has been true as well). The AAPL stake that BRK has was an idea from one of his lieutenants (I dont recall which). Buffett loaded up and AAPL went into a tear. So much so that now AAPL represents 10% of the market cap of BRK. It has been a big winner. But more importantly, these two guys are a lot YOUNGER than Buffett. They have been positively influencing him in terms of thinking more about tech and how to incorporate Buffett's system into the tech sector. Buffett almost about a $3B stake in Uber and just recently did a $300M VC type investment in a India payment company (Paytm). I'm sure there will be more coming. He found some folks who helped him to see tech differently than how he did his whole life so now he feels comfortable going there. If Buffett was some competitive contrarian douche, I doubt he would ever even meet Todd and Ted, never mind work with them
New highs are a sign of more stock gains to come US leading economic indicators are pointing to growth, S&P500 forward PE is around 17ish and there was a 10% drop recently (which cleaned out speculators and weak hands). Things are looking pretty good for the next 12 months
Lets say a stock market is trading a 5000 and an investor expects an 8% long-term return at that level, a quick rally to 5576 would decrease the expected return to how much? Answer: to 7.1%. And that assumes the rally did not reflect any positive change in the fundamentals I try to remind myself of these sorts of exercises when I refuse to "chase" a stock or ETF at much higher levels from where I passed because the price is 'too high'. It might be too high psychologically, but from a expected value perspective, often the change is quite modest
The move from 5000 to 5576 mirrors the move from 2600 to 2900 on the SPX, which I alot of people will have a hard time buying, after having sold or passed at the lows of the year. But math wise it can still make sense. It isn't my case (I'm own as much in stocks as I can tolerate, if anything going forward my plans are to decrease my exposure) but I'm sure a lot of people will just continue to watch
So I was reading Einhorn Q2 letter and what struck me is his comment of 'we have increased the usage of put options in the short book' (instead of short sales), he also mentioned managing down his position sizes. This COULD save his career, although given the positive outlook for US equities and his 70% short exposure in many of the bull market leaders, he is still at risk But his strategy and struggle seems a very good example of what I was writing about before. Since longs have many ways to win -Bull thesis is correct -Bull thesis is wrong but speculation drives the investment -Bullish surprises or other things (Dumb M&A, etc) Furthermore the long gains are infinite and exponential while short gains are very limited while losses are unlimited The threshold one needs to get bullish on something should be lower than to get bearish. The threshold one needs to get short something should be extemely high (unless its a quick trade). And when you are short 50-80% of your portfolio as Einhorn tipically does, how many positions will you have? usually 10-15. 10-15 different companies that you need to master, many different industries. Shorting is so hard that if you get involved in the auto sector (for example) you need to be an expert on it. Not only an expert but probably a top expert. If you become a 1month expert by reading articles and maybe a few books, that's not enough because of the structural disadvantage outlined above. But also, you need to be a good market reader/timer. That way you can know whether that speculation is taking place and get out of the way. Effectively you need to be amazing and with 10-15 positions, its hard to be amazing because you get a few things wrong here and there and you will be losing 100/200% of capital invested in the short a few times. I guess what I'm realizing is that long short funds (at least done in the way Einhorn does) are just flawed, they cant possibly work. And he is realizing it himself by buying puts and decreasing his short positions. We know that by put call parity a put option is the same as a short position plus a call option. So effectively Einhorn is buying calls in NFLX, AMZN, TSLA and other stocks. As well as buying stock in those companies (through short covering). He is trying to "buy convexity" be it through options or common stock because he was too "short convexity" before. I called him "convexity blind" in the past, it looks like he is realizing that. I dont know if its too late and I do expect he will continue to lose money in a lot of that short book but at least its a step in the right direction
Einhorn seems to be a great example of someone blindly applying Buffett principles to other forms of investing that Buffett did not endorse his method to. He is a pure fundamentalist trying to apply that strategy to shorting. Now, maybe Einhorn is completely and 100% right about the fundamentals of his shorts (that is, he removed the first way longs can win, by being fundamentally correct) but he still has 2 other ways to lose (speculation, bullish surprises) and he is the furtherest from being an expert on those. He is not a market timer or market reader and doesn't seem to understand or even care about trying to predict prices using historical data, sentiment or anything like that. Also, its pretty hard to predict bullish surprises, since that is pure optionality, I doubt he can do that (I certaintly learned my lesson in that third way when I was short FMCN, a Chinese fraud, and they got bought out at a premium). So he is getting clobbered as a result of that What Einhorn should have done instead was to have applied Buffett principles to the first way bulls win(fundamentals) and then applied someone's principle to the other parts, and only when they aligned and said short, THEN you would short. A great Jim Rogers rule is to only short when you have a catalyst. Another one (From someone else, I dont recall who) is to never be short a stock that is making a new all-time high. Simple rules like that would protect capital in the 2nd way longs make money (speculation). You still can get hurt in the 3rd way but at least you contained the problem to a greater degree
What is interesting about NFLX, AMZN, TSLA and some other tech companies is that they do have products and services that people love. The result of that is that it probably makes it MORE likely that the 2 other ways longs make money (speculation, bullish surprises) will end up playing out. People see the great product and buy the stock, or the big funds take the fact that the product is great and extrapolate in a very irrealistic way. Or someone else does that and buys out the company or merges with them. Or they come up with an even greater product that smashes expectations (a bullish surprise), if they did it once they can do it again. Effectively, stocks with great products are stocks where the 3 ways that longs make money are turbo charged against the shorts. And Einhorn is short them across the board. Ouch! There is a great anecdote from Stan Druckenmiller he gave to CNBC a few years back. He had some of his funds being managed by a short seller. The short seller gave him a presentation on why TSLA was a short. Druckenmiller was impressed by the presentation. Then he drove a Tesla, and was amazed by the quality of the car. He immediatly asked for his funds back and fired the short seller. "I dont like to short companies with great products". I guess he instinctively knows all of this