MALE SPEAKER: We have
two very special speakers with us today, Whitney
Tilson and John Heins. Whitney and John have
collaborated together for over a decade,
putting together one of the most well
regarded value investing newsletters, Value
Investor Insight. More recently, they
collaborated and put their years of investing wisdom
and experience in investing into a new book
called "The Art of Value Investing: How The World's Best
Investors Meet The Markets." In addition, Whitney is
also the fund manager for the Case Fund,
which as beaten the markets by a considerable
margin since inception in '99. So we are very pleased to
have both of them here, share their wisdom with us. Please help me welcome
John, and then Whitney will follow on from there. [APPLAUSE] JOHN HEINS: OK, well
thank you all for coming. Just to talk a little bit
about the plan for today, I am going to start out kind
of give a cliff notes version of our book. And then Whitney
is going to talk in a little more detail about
one of the fundamental concepts that any Investor has to master,
which is how to value a stock. And he's going to
use an example. It's a case study that
of a stock that I think might be a passing interest,
which will be Google. So what we tried to do with
"The Art of Value Investing" was pose all the
questions that someone who wanted to be a serious equity
investor, all of the questions that that person
should ask and answer for themselves before they
commit their own capital or someone else's
capital to doing so. And those questions are
related to a variety from soups to nuts. What is my philosophy? What types of situations
am I going to look at? Why are those situations
ripe for inefficiency, being inefficiently priced? How many stocks
am I going to own? So we wanted to cover
just about everything you should answer before
you start investing, both from a kind of
technical standpoint, but also from a
psychological standpoint. What are the pitfalls
that I might fall in that I should watch
out for as an investor because investors are
prone to doing so? So for the answers
to the questions, we used the investors
that we've spoken to over the last 10 years
for Value Investor Insight. Every issue has two in-depth
interviews with money managers who have successfully
beaten the market, and we thought that was,
rather than us pontificating about what we thought was
the right thing to do, we listened to them. And what we also
did is we didn't assume that there
was just one right answer to any of
these questions posed. Money managers have
different styles. They have different
philosophies. They have different focuses. And you can be successful with
a lot of different focuses. So we wanted to provide kind
of the diversity of opinion and we thought that
diversity of opinion would help people
who were trying to arrive at their own
philosophy and strategy, come up with that. So I'm going to just
go through a couple-- again, not at all
comprehensive, but I just wanted to talk
about a few things that we cover in
the book, hopefully to convey some
useful information, and prompt some
thoughts on your part. So it is called "The
Art of Value Investing," so while we have a diversity
of opinion, the underlying philosophy of all the
investors that we talked to is a value
investing philosophy. And you guys, you're all
here, so you probably have some sense of what
value investing is. But there are core principles
to value investing, which we lay out in the book. I think a lot of it's captured
pretty well in this quote from Will Brown
from Tweedy, Browne. "Our entire process is
rooted in Ben Graham's simple philosophical
framework for investing. He believed there were two
values for every stock, the first being
the current market price, and the second what
the share would be worth if the entire
company were acquired by a knowledgeable buyer, or
if the assets were liquidated, the liabilities paid off,
and the proceeds paid to stockholders. He called that the
intrinsic value, and argued that
the time to buy was when there was a large spread
between the current price and that value, and
the time to sell was when the spread was narrow." "Over time we've
developed different ways of applying that, by valuing
income streams rather than just assets, by calculating
private market values, by investing internationally. But the essence of what we
do has remained consistent. Our work every
day is essentially directed valuing what
businesses are worth." Now, that may seem
kind of obvious, but the ability
to value a company intelligently is not
a trivial exercise, but it is kind of the
fundamental thing you have to master and you
have to do well to truly be a
successful investor. That's not to say there
aren't other reasons why people buy stocks. People buy stocks because my
wife works at the company, I think it's a great company,
or I love the product, or I heard at a cocktail party
that it was going to go up. Lots of stocks get
bought that way, but that's not what
fundamental value investors do. So one of the first
concepts we talk about is this notion of
circle of competence. And that is what are the--
every investor should think about OK, what are
the industries, what are the situations, what are
the geographic areas, what are the size of companies
that I'm going to look at and I'm going to become an
expert in that will allow me to get an edge over what
is a very efficient market? And I think the basic
concept is explained really well in this quote from
Julian Robertson who's one of the best, most
successful hedge fund managers of all time. "A baseball player
never really gets paid, no matter how many
home runs he hits or what his batting
average is unless he gets to the big leagues. Then he's guaranteed
to make a lot of money. But in the fund business,
you can find a minor league where you can hit
for a better average because that's what
you're paid on." "I remember one of
our guys taking us into Korea in the early
1990s and the market was so inefficient
that it was a goldmine if you knew what you were doing. My point is that to be
successful in this business, you don't have to be
better than everybody everywhere, just
better than everybody in the league in which you play. It's maybe today more
difficult to find those inefficient areas,
but it's not impossible." So the central conceit
of any investor is that you figured
something out that the market doesn't know or
the market has just got wrong. If what's priced into the stock
is just what everybody assumes and what the consensus
is, it's very unlikely that that stock is going to
be a successful investment. The price reflects the future,
as the consensus sees it. And I think that's something I
think people don't-- it's like, OK, Google is a great company,
but that doesn't always mean that investing in Google
stock is a great investment. It may be that the market is so
enamored with Google's future that the price you'd have to
pay it own a share of Google isn't a value, and it won't
be a great investment. That doesn't mean it's
not a great company and won't still
perform extremely well, but it may not be
a great investment. So I think one
quote that captured that kind of notion really
well, which is really important, was from a publisher
of "The Daily Racing Forum," of all places. He said, "The issue is not
which horse in the race is the most likely winner,
but which horse or horses are offering odds that
exceed their actual chances of victory. There's no such thing
as liking a horse to win a race, only an
attractive discrepancy between his chances
and his price." OK, so that puts a premium on
what successful investors often call the variant perception. Actually knowing what it is
or identifying what you think are the reasons a
stock is mispriced. A lot of investors may just
imagine, OK, the stock is cheap and that's eventually
going to work its way out. But I think what we found
is that a lot of the best investors go beyond
that, and they want to understand at
least why it's cheap. Why would these be cheap? What's going on that
could make this cheap? And that is the
subject of this quote that I thought said it
pretty well from Curtis Macnguyen who's
at Ivory Capital. "Why something is
mispriced is too often ignored by value investors. The general thinking is that
it doesn't really matter. If you're right that
something is mispriced it will eventually
take care of itself. We think it matters because
you can conceivably avoid a lot of pain waiting for truth to
prevail if you have a good read on why it currently doesn't." So again, just to
reiterate a little bit, just because a company
is a good company doesn't mean it's a
good stock investment. There has to be something
about your perception of how the assets they have
or how the future's going to play out that differs from
what everybody else thinks and what's built
into the stock price. So a logical question
following that would be, so why do stocks get mispriced? It's efficient market. A lot of academics
will tell you that it's an extremely efficient market
and you should not even try to beat the market. So what a fundamental
value investor who is an active
manager is trying to do is identify what's
going on that could make this the stock cheap. And I thought that was summed
up pretty well in this quote from Steve Morrow of
New South Capital. "We believe the
market often misprices stocks due to neglect, emotion,
misinterpretation, or myopia. So our value add comes from
bottom-up stock selection. We're trying to
buy at low prices relative to our current
estimate of intrinsic value, and we want to believe that
intrinsic value will grow." So neglect, emotion,
misinterpretation, or myopia. Those are the types
of things that can lead a stock not
to reflect accurately what's going on in the future. Howard Marks of
Oaktree Capital who is a longtime very
articulate investor puts it this way in
a more general way. "Investment markets follow
a pendulum-like swing between euphoria and
depression, between celebrating positive developments and
obsessing over negatives, and thus, between
overpriced and underpriced." "There are few things of which
we can be sure and this is one. Extreme market
behavior will reverse. Those who believe the pendulum
will move in one direction forever or reside in
an extreme forever eventually will lose huge sums. Those who understand
the pendulum's behavior can benefit enormously." So what kind of
situations can lead to neglect, emotion,
misinterpretation, or myopia, and therefore, potentially
inaccurate stock prices? A lot of things can
make that happen, but there tends to be change. There tends to be uncertainty. And quite often
there tends to be a problem or multiple problems. These are things that
can throw off or cloud what the future may
hold to a greater degree than if everything's
kind of going OK. Again, I'm doing this
because I think the people that we interviewed say
it better than I would, so I'm going to quote John
Jacobson from Highfields Capital where he
talks about where he looks for opportunities. So what is the fertile ground
for potential mispricing? "Two kinds of events
create volatility, which creates opportunity. The first revolve around
individual companies, such as earnings misses,
unexpected news, M&A activity, restructurings, and legal
issues-- things that can make prices and valuations
change relatively quickly. We want to understand
what made the price change and then figure out
whether the facts have changed as much as the price. To the extent they haven't,
that can be an opportunity." "The other major
source of volatility is when a macro event or
trend causes markets to move. The market reflects
at any moment what investors think
XYZ's business is worth. So if macroeconomic factors
force people to buy and sell its securities, but we believe
those factors have nothing to do with the underlying
fundamentals of the company, or less to do with
the fundamentals that is being reflected
in the share price, that can also be
an opportunity." You guys probably notice,
even looking at Google stock, if you look at a Google stock
chart over the last five years, you'll see it moves. It moves quite a bit. And it moves a lot
more, one could argue, than the actual fundamental
reality of what's going on at Google
at any given time. And it's that if this is what's
going on at Google at any time and this is the
stock price, there can be opportunities to buy the
stock when it's inefficiently priced. So while most discussions
of stocks talk about what can go right about a
stock-- everybody's talking about what's the upside,
this is going to be great, it's going to double. One thing that I think
distinguishes value investors somewhat is that they
pay a lot of attention to what could go wrong,
what's the downside. And that's well
captured in this quote from Ragen Steinke of
Westwood Management. "The very first thing we do when
we start to analyze a company is to ask ourselves
how far the stock price would fall
if we were wrong. It's not some back of
the envelope calculation, but a full assessment looking
at liquidation asset values and stressing the business
model and valuation levels under any number
of bad scenarios." "If the downside is more
than 30% from today's price, it's unlikely we'll
invest, regardless of the upside potential. If we can't establish a concrete
downside number, which probably means it isn't far from
100%, we absolutely won't buy the stock." "Going through this
first sets the tone we want to set in our research. Rather than start looking
to convince ourselves why we should buy
something, we start out trying to prove why
we shouldn't buy it. We try to keep that
level of skepticism alive throughout the process." I think that's a hallmark
of value investors, that kind of-- any investor
has to have some optimism. You wouldn't invest
if you weren't optimistic about a
company's prospects. But skepticism is
kind of a hallmark I think of a good
investor, and really thinking about what
could go wrong. It's great if a
stock could double, but if that stock
could go to zero, you should think about that. So Whitney will
speak in more detail about how smart investors
go about determining what a stock is worth. But even if you're
able to do that well, there are a lot of things that
can trip you up as an investor. And a lot of that revolves
around anything doing with money can set off all
kinds of irrational responses on people's parts. It could be you're assuming
that what just happened is what's going
to happen forever. Or you're panicking because
your stock went down and it feels really bad to
have money evaporate like that. You could be that you're only
looking for evidence that confirms what you already
believe and you're really ignoring evidence that
disconfirms what you already believe. So these are the types of things
that can throw people off, and this is the reason why it
is so hard to beat the market. People make a lot of behavioral
and emotional mistakes. And I think one
of the things that sets really good
investors apart is they're able to deal
with that pretty well, however they do it. Whether it's just
innate wiring or it's they've learned
it over time, you have to control your
basest instincts somewhere. I have a couple
quotes here from two very longtime, very successful
investors, one of whom is Seth Klarman of
the Baupost Group. "As Graham, Dodd and
Buffett have all said, you should always
remember that you don't have to swing
at every pitch. You can wait for opportunities
that fit your criteria, and if you don't find
them, patiently wait. Deciding not to panic
is still a decision." And that's just-- I mean
everyone's probably felt it. Like if you were an investor and
you lived through 2008, 2009, it feels really bad. Reading the paper was really
hard, and it feels bad. And there was a
really strong tendency in those cases to
just want to get out. Make the pain go away. And that's perfectly natural. It's evolutionary
in a lot of ways, but it's not the greatest
thing to do as an investor. The person who panicked
and sold in March of 2009 and then was so scared
that they haven't gone in for the last five years,
they've left a lot of money on the table and
that's a big mistake. This is another
quote from a guy who is a very longtime investor. He's in his 70s and he
still really does well, and he just very
matter of factly said, "I honestly don't feel any
of the emotional ups and downs from the market's
day to day activity. I just don't worry about
short-term volatility." I think that's something
as an investor you have to learn how to deal with. I guess my last thought is
just one about humility. There's no question that
confidence and conviction are essential elements
to being a good investor. But as we say in the book,
like pepperoni pizza and fine scotch, too much of a good
thing can cause problems. So the message is
not to ever think you've got it all figured
out as an investor, and that's probably
true in life. But don't assume you've got it,
you've got this thing nailed, because the market will
inevitably humble you. So here's a quote from
Kyle Bass on that. "You obviously need to
develop strong opinions and to have the conviction
to stick with them when you believe you're right,
even when everybody else may think you're an idiot. But where I've seen
ego get in the way is by not always being
open to questions and to input that
could change your mind. If you can't ever
admit you're wrong, you're more likely to
hang onto your losers and sell your winners, which
is not a recipe for success." So I'm going to turn
it now over to Whitney who will try to shed some light
on whether Google stock is worth owning today. WHITNEY TILSON: Good
afternoon, everyone. Thanks for joining us. So let's talk about Google. And I have a history
here with Google. And before I show it--
and I run a hedge fund. Started-- this is my 16th year. This is my track record
after my usurious fees, net to investors. And the only reason I show it is
I'm not here promoting my fund, but rather I'm going to show
you how spectacularly wrong I can be. And I just want you to not
think I'm the world's stupidest investor. So very, very few investors
beat the market over time, and so I think it's
a good track record. It's not a spectacular
track record, but it's a good track record. Very few managers
beat the market over a long period of time. I've done so, despite every
once in a while making a spectacularly bad call. So a little over 10
years ago in an article I wrote for The Motley
Fool called "The Tech Stock Opportunity," I wrote actually
something reasonably smart here initially that I think
the tech sector offers fertile ground for
value investors. A lot of great companies
growing rapidly, strong balance sheets,
and very importantly, a lot of crazy investors. If you are a sound
and rational investor, you want to go to
places, you want to compete with
irrational people. Because a company misses
an earnings estimate and they drop the stock 50%,
when the value of the company has not changed by
50% in all likelihood. Similarly, you want
to buy something where the stock might rise
back to intrinsic value, but then investors get euphoric
and give you the chance to hang on, and it'll
trade at double or triple or quadruple intrinsic value. That's where you really
make a lot of money. So that's what I was
pointing out here. But then I digressed
in this article to a company that had recently
gone public named Google. And this is what I
wrote about Google. I said, "There's a huge
difference between Dell and Google, both are lumped
into the tech sector. I'd argue that Dell is primarily
a manufacturing, assembling, sales and service business,
not a technology company. Dell doesn't care which
hardware and software products wins the
technology wars. It simply buys, assembles,
and sells and supports whatever its customers want." "So in short, I think the odds
are very high, say 80% to 90% that Dell is a major computer
company in 20 years." And that actually has
been proven right I think. And by the way, I wasn't
recommending the Dell stock, which was very
overvalued at the time, and that was correct as well. However, then,
eating crow, I said, "Google, in contrast,
more typical tech company, one that must invest heavily
to remain on the cutting edge or its customers
will quickly and easily flock to competitors. Just as Google
came out of nowhere to unseat Yahoo as the leading
search engine, so might another company
do this to Google. I admire Google and what
it has accomplished, and I'm a happy user, but I'm
quite certain that there's only a fairly shallow, narrow
moat around its business." Making it worse,
I then continued. "Think about it. What are the odds that
Google is the leading search engine in five years,
much less 20 years? 50-50 at best I
suspect, and I'd wager that odds are at least 90% that
its profit margins and growth rate will be materially
lower five years from now. Yet investors appear ready
to value this company as much as $36 billion." I guess this was on
the eve of the IPO. "Nearly 200 times
trailing earnings. And by the way, about
12 times revenues." Google at the time had about
three billion in revenues. "Ha! Google with the same market cap
as McDonald's, a stock I own? Ha! I believe it is virtually
certain that Google stock will be highly disappointing to
investors foolish enough to participate in its
over-hyped offering. You can hold me to that." Remember John was just
talking about humility? This is a business
that keeps you humble. So by the way, the
margins actually have sort of been stable, maybe
even declined a little bit, so I wasn't completely
wrong that margins would come under
pressure over time. But where I was spectacularly
wrong was the growth. Revenue has gone up more than
20x in the last 10 years. It's been one of the most
spectacular growth success stories over time. So if you can go
to the next slide. And that has translated with
a little decline in margins, but basically that growth
has fallen straight to the bottom line, and earnings
from continuing operations have gone up to
over $12 billion. That's translated into
earnings per share, excluding extra items, of
almost $20 a share. So not surprisingly,
the stock has followed. Stocks over time tend
to follow the earnings, and the stock has been
approximately more than a 10-bagger since I
said it was wildly overvalued and should be
avoided at all costs. So what did I miss? And by the way,
just as a general, there are a lot of
companies out there today, small companies, three
billion in revenues trading at 12 times revenues
and 200 times earnings. Salesforce.com has about four
billion in revenues or so, trending toward five and
1/2 over the next year. Trades about eight
times revenues, 120 times next year's earnings. And so investors
are sort of betting that that's going to look like
Google over the next 10 years or so, and I think the odds
of that are extremely low. In general, you guys
are the outlier. As a general rule, 99
out of 100 companies that grade at such
extreme valuations turn out to be lousy, if not
catastrophic investments. So I'm not convinced
I was necessarily wrong to say a prudent value
investor should probably not speculate in a very hyped IPO. Statistically speaking, it was
probably pretty sound advice. But you guys were the outlier. You guys were the one in
100 that did pull it off. So what did I miss? I missed Google's moat. It seemed to me that anyone
could just easily switch, and so forth. And theoretically,
someone easily could. But on the other hand,
people get into habits, tend to be very sticky, and
if you have a better product, you're constantly innovating,
stay ahead of your competitors, that moat can build over time. And I missed the very powerful
virtuous cycle at work with Google. A large user base translates
into large advertiser base, better monetization,
more R&D dollars, yielding a better product,
which a better product is a high barrier to entry,
which then attracts more of a user base, et cetera. By the way, I made nine times
my money in the last two years on Netflix. I was initially at
one time shorted. And by the way, at least
I was not stupid enough to short Google. OK, so I've never lost
any money on Google. I just haven't made
any money on it. Netflix I was dumb
enough to short because I thought anyone
can stream movies, whatever. And then I came to
realize, Netflix has a similar
virtuous cycle going on where they have
80% of the streaming customers in the world. They then take all that
revenue and buy great content, which then attracts
80% to 90% to 100% of every incremental new
streaming customer on earth is joining Netflix, which they
can reinvest in better content. And the price of
admission now, Netflix is spending over $3
billion a year on content. The price of admission
is now very, very high. Even if a much bigger
company-- a Google. Amazon is trying to do it. If Google wanted
to try and do it, it's now going to cost billions
and billions of dollars. And from a company that's
generating no revenue, to even open your doors
and start a service, you've got to license $3
billion worth of content. Whereas Netflix has
50 million paying subscribers paying
for that content. So Netflix I thought
was a commodity business is looking like a
winner-take-all business. You guys looked like
a commodity business, and I think in
many of your areas you are a winner take
all business because of this kind of virtuous cycle. It's very, very
powerful and something I didn't appreciate 10 years ago. I appreciate it more today. So let's talk about
the stock today. It's a couple days old. It closed today, its right
around 5.37 right now. $368 billion market cap. You've got a ton of
cash, sliver of debt, $316 billion enterprise. Like most tech companies,
a large expense is stock-based compensation. Accounting rules
require you to expense that as if it were cash,
but it is a non-cash charge. So Google, like a lot of
tech companies, analysts, they report earnings excluding
the stock-based comp. I tend to figure I don't care if
a company pays cash or dilutes me via options that are worth
a certain amount of cash. So I tend to be
pretty conservative. But these numbers will be
lower, about $5 a share lower than the earnings
per share numbers that you might see, because
about $5 a share of earnings are in non-cash, you guys are
partially paid in options. So reasonable people
can disagree about that. If you want to x that out
and use EBITDA number. So Google's trading right now
at about 26 and 1/2 times this year's priced earnings,
multiple, 21 times next year's. Those multiples. That would come
down by a few points if you exclude stock-based
comp, which most analysts do. And then EBITDA numbers,
multiples as well. So what is it saying
is we're in the market probably 16 times
earnings for the S&P 500. So any way you could
it you guys are at some premium to that,
but not a crazy premium. But you guys are growing
your revenues 20% a year. Average S&P company's growing
their revenues maybe 5% a year. So you guys have
massively higher margins, returns on capital, et cetera. So it's a far superior
company trading at a premium price, but
not a crazy premium price. So that's sort of interesting. I typically like buying out
of favor companies where a sentiment is
extremely negative, stocks near a 52-week
low, et cetera. Sort of betting on a
stabilization and/or turnaround. That's typically what I do. But every once in a
while-- I bought Netflix after it crashed from 300
down to around $50 a share. When I thought, look, they
can't fix the business. Somebody should buy
them for $3 billion. I think, by the
way, Google has made a number of very savvy
acquisitions over the years. Somebody should be kicking
themselves at Google. You didn't buy Netflix when it
had a $3.2 billion market cap. It was a great business. It is a great business. So I'm actually sort of
intrigued with Google. The other thing,
by the way, is it's such a big company with
such a large market cap it's hard to make a
lot of money buying things with multi-hundred
billion market caps. I mean just size is
sort of an anchor. I run a pretty small fund. I tend to look for
smaller companies. But it's pretty interesting. I'm intrigued by Google. I'm going to do some
more work on it. So let's just talk about
last quarter's earnings. You guys have probably
already seen this, but revenues grew 20%. Margins got squeezed. Expenses rose a little
faster than revenues, which squeezed margins. Depending on whether
you want to look at non-GAAP or GAAP
earnings, earnings either went up or down a little bit. But the real questions
to think about is can the company
continue to grow at least sort of
high teens, 20% rate, and will those margins
at least stabilize? And when you think about
Google, by the way, if Google were to separate
itself out and spin off Google Fiber and the
self-driving car stuff, like Google is-- a
lot of those expenses are investing in things that
are currently not generating any revenue. It's just straight out losses. Like actually, I
think a reasonable way to think about Google would
be to sort of take out all the money losing stuff
where-- these pie in the sky things-- where Google actually
has a pretty darn good track record of developing really
valuable things down the road. And I might give
Google credit for that and say, how much is their
core business really earning, x-ing out all these expenses. And it might be quite
a bit of expenses, and you might actually
say Google's core business trading for 15 times earnings
or something like a market multiple, and then you're
getting a free call option on stuff that--
self-driving cars. If you guys nail that, that
could change the world. That's a worldwide game changer,
and you guys will own it. I'm not sure I'd give
Microsoft much credit for that. They have a horrible track
record of just pissing money away over the years, and
projects and acquisitions that just create no value. And Microsoft shareholders
are sort of rebelling. But you guys seem to be
a lot better at that. So again, that would
be the argument for owning Google stock
is is that it's really not as expensive as it appears
because they're expensing-- a lot of their expenses,
their core business is actually even much more
profitable than it appears. One of the world's
greatest businesses. And then they're investing
in a lot of new stuff where there's
likelihood to pay off. So this gives you a sense--
by the way, again, what I sort of missed is is companies
that have a lot of optionality to get into new businesses,
make acquisitions, et cetera. So this was the three
billion revenues when I was disparaging
the company. And the core business grew 10x. But then stuff that didn't
even exist back then doubled to 20x revenue growth. So this is cool, right? And if you think this kind
of thing can continue, things that don't exist, don't
generate a dollar of revenue today, like Google Fiber,
self-driving cars or whatever, and that this kind of
thing continues again, this stock may look
really cheap today if you can develop some amazing
stuff and start to monetize it. So I think this
is the last slide and then we can do Q&A,
which is if you make a case for the stock today is
look at the pieces overall. You continue to grow
your revenues 20% for the next four years, if
your margins just stay flat, that means the earnings
go up 20% a year. That's a double in four years. A 20 multiple or so, if you
can continue to grow at 20% is a reasonable thing to assume. Might go up, might go down, but
that's actually probably not unreasonable. And therefore, the stock just
follows that same trajectory. And making 20% compounded
over the next four years isn't spectacular, but
it's pretty darn good. If I thought this
stock was very likely, with low risk of downside,
very likely to be a double in four years, I don't know
all day, on a real high quality company where I think I can
double my money in for years. So that's sort of what I'll be
digging into because there are very few companies this size
that can grow at that rate. Already at $66 billion, already
at a $300+ billion market cap that can double again
from there in four years. That's pretty rare, but you
guys have been doing it. So I certainly wouldn't
bet against it. The question is is for a
guy who only owns 15 stocks, is this one of
the best 15 stocks in the universe I can find? That's the real question. So with that, do you
want to come up, John. We're happy to take questions. AUDIENCE: I'd like to ask you
how to learn from mistakes. So you said that Google
was one of your mistakes, but you also said that it's
like buying a lottery ticket. Like even if you
win the lottery, it doesn't mean that it was
a right decision to make. So I just want to ask if
you make a wrong decision, do you learn from it,
or do you say, OK, this is just how it happens? WHITNEY TILSON: Yeah. It's hard. In the investing world-- the
analogy I would give you is is if you walk through
a dynamite factory with an open torch, and you
get through to the other side safely, was it a good idea? And the answer's of course not. It was an idiotic thing
to do, and the fact that you didn't die
was just good luck. But you should
never do that again. So the investing
world has-- you can learn a lot of false lessons
in the investing world. You can totally screw up
the analysis and make money, and by the way, can do good
analysis and lose money, right? So learning from mistakes isn't
as simple as simply saying, well, did I make
money or lose money, because the goal of investing is
to make high probability bets. But even the highest
probability bets sometimes work against you. So the lessons-- but here,
I do think one of things I've learned, like I was
trained as a traditional value investor in the Warren
Buffett kind of school. You don't look at tech
stocks, et cetera, et cetera. And I was trained to think
about the competitive moats of companies-- Coke's brand
or Costco's low cost service or whatever. And what's happened
in the last 10 years, the kind of companies that
have been created that are almost like
virtual companies, that can grow very rapidly to
become global companies with enormously
high profit margins without the need to invest
incremental capital. So you guys can grow to
countries all over the world and you don't have
to manufacture stuff, you don't have to ship
it, you have no inventory. These are light business models
that create returns on capital at a rate and a scale and
a scope, a global scope, and a speed that has
never existed in history. And it really requires you
to-- you can either just say-- you can be
like Warren Buffett and just say I don't
understand any of this and I'm just going to stay away. I'm not going to short it, not
going to long it, go long it. I want to understand
it because I plan to be investing
for another 50 years. And so the real learning
here, from getting my head handed to me, being short
Netflix before finally appreciating it and making
nine times my money. I flipped around. So in other words, my
learning from getting killed on the short side is I
went and did a lot more work. And losing millions of
dollars focuses the mind. So losing millions
of dollars forced me to rethink what
I was missing here. Now sometimes you're
not missing something. Sometimes a short runs against
you and you're absolutely right and you've just
got to be patient and your thesis will eventually
play out, because being early and being wrong look the same,
either long or short, right? But in the case
of Netflix, you've got to keep an open mind,
and I did keep an open mind in this case, developed a
much greater appreciation for the company. So when I covered-- I've
short it from 80 to 200. I covered my short. It went to 300. I felt pretty smart. Then it felt eventually to 50. It fell 80% in a matter
of about three months. And I want to kill
myself, because everything I predicted in my
short thesis came true. And I said, Whitney, you idiot. My learning was is don't
get scared out of a short. You have conviction
in it, right? But that actually
wasn't the right learning, though,
because Netflix was a massively better
company than I thought. And the key pillars
of my short thesis were there's no moat
around the business, and sort of wacky
management, and competitors are going to come in
and eat their lunch. All of my pillars of my
short thesis were wrong. I was right to cover, no matter
what happened to the stock. But what it did is is by gaining
appreciation of the company, I was ready to pounce
when the stock collapsed. And so that's a great example. I wish I were that
open-minded and learned and had great experiences
like that more often. So that's a good case study. Anything to add, John? JOHN HEINS: I would
say a lot of it is understand why
you made a mistake. It may be that you didn't
really make a mistake. The analysis was
good, it was sound. And then something else
happened that made it go wrong. And so you shouldn't
necessarily-- if you understand why
you made the mistake, you shouldn't
necessarily just not do that exact same
thing again next time. AUDIENCE: Sorry. I have two questions. The first one is your
portfolio has about 15 stocks. It has a very small
number, right? So how do you screen off
the thousands of stocks? What are some of the
top three or five factors you use as filters? That's number one. Number two is my
general impression is that the market tend to
ignore balance sheet items. So just like a lot of cash,
investment, the P/E number, totally ignore balance sheet. What do you think? How do you think
about that issue? WHITNEY TILSON: Well, I use
a four-step-- I actually have it taped to the
wall next to my desk. My four-step process
is first, when I look at any new stock
is circle of competence. Do I know something
about this industry? Is it knowable? Is the future predictable here? It's almost like
a yes or no thing. There is some gray
area where maybe I don't know it very well, but
I think I can do some research and get some. So circle of competence. Then it's do I like the company. And I look at financial
characteristics, cash flows, return
on equity, et cetera. So I evaluate the company. And by the way, I'll invest
in sort of crummy companies if it's cheap enough. But ideally I'm looking for
higher quality businesses that I can compound over time. Then I look at the industry,
because a good company in a crummy industry,
eh, is going to struggle. So it's a company and industry
analysis, then management. And that's really important. Both, do they run
the business well? Do they allocate capital well? And do they treat
shareholders well? And here's the thing. I can find-- right now I can
find hundreds of companies that I understand really well,
great industry and company dynamics, wonderful management,
treats shareholders great. So what's the problem? The stock's not cheap. Everybody else on
earth can understand it and likes the company and the
industry and the management, and therefore, the
stock price reflects it. The real key is to then just
sit there and sit there and sit there and sit there and be
super patient until I can find a situation where the stock
price is well below what I think it should be,
based on my analysis. And usually what
that requires is is for there to be
some-- the market thinks one thing, the variant
perception that John talked about. To make money investing you
only need to do two things. You need to bet against the
crowd-- that's the easy part. And then you just
have to be right. That's the hard part. Because the crowd
is usually right. The crowd was right on Google. If anything, the crowd didn't
appreciate Google enough. We now know, stock
was an 11-bagger. So that's the hard part. It just means being super,
super patient, and recognizing that nine out of 10 times
where you think your variant perception is right, nine out
of 10 times the crowd is right. The crowd is very wise
and powerful and smart, because there are a lot of
really smart people picking over. And every time you
think, oh, this company's a really great company
and the stock's been unfairly beaten up, nine
out of 10 times you're wrong. The company's in full scale
collapse and it's a value trap. So what I try and do
is once a month, once every two months
or three months, I look at a lot of
different things. It's like a pitcher
pitching to you in baseball. You sit there and they
don't call balls or strikes. You can just sit there and
take pitches all day long and don't swing at anything
that's a little iffy. Wait till just something
that you just in your gut you know that I know I'm right
on this one and the market's wrong on this one. And that's when you swing. JOHN HEINS: His second question
was about balance sheets? Is that your perception
that-- I don't know if that's universally held,
the idea that balance sheet assets are ignored. Actually, it's one of the--
it is a way value investors I think find value is that
there isn't a recognition. There isn't a recognition
that, well, the stock's really pretty cheap when you
take out the cash, or maybe that there are assets
on the books that are just wildly more valuable than
they currently trade. So that is a typical
way in which investors do assess something to
be inefficiently priced. So I wouldn't say it always
happens, but it certainly it is a way to find value. WHITNEY TILSON: I
mean historically, Ben Graham was a balance
sheet investor-- just buy things net nets. Things trading at discount
to readily ascertainable liquidation value, excluding
property, plant and equipment. Just like accounts receivable,
cash, minus all liabilities, et cetera. And Buffett moved away from
that for a very good reason. They tend to be super
low quality companies. A lot of value traps. Difficult to do if you're
managing any kind of material pool of capital, because there
tend to be nooks and crannies. Every once in a while,
late 2008, early 2009, they are statistically cheap on
a balance sheet basis companies where you could have gone and
just bought a basket of them and made quite a bit of money. But it's hard to do. Only once every 10 years
does that sort of work. So usually during times of
market panic, and at that point you're probably better off
buying higher quality companies that you just don't
buy for a quick double, but if all the stocks
are really depressed, you can get a long run on them. Is there a question back there? Or here. Go ahead with the microphone,
and then you next. AUDIENCE: Yeah. Thanks for the talk. I was wondering if you could
add some commentary on books like "A Random Walk On
Wall Street," or companies like Wealthfront,
which talk about well diversified balanced portfolios,
as opposed to maybe trying to choose 15 stocks or whatever. WHITNEY TILSON: Yes. Most of my recommendation
for all of you would just be just
buy some index funds and then hang on to some of
your Google options or whatever, as long as you don't let it
be 80% of your net worth. In all likely is
probably not a good idea. But my parents have
some money with me, and they have some
money in index funds. It is hard. Boy is it hard picking stocks. And doing it without a lot
of training and experience, as a part-time thing, is
probably not a good idea. I don't try and write code. Why should you guys
try and pick stocks? Trust me, I know a lot
more about it than you do. I spent 16 years getting
scars on my back, and I graduated from
Harvard Business School in the top of my class. Whatever, right? Like I've got a lot of training,
plus a lot of experience. This is an experience-based
business, and very, very-- and it's a business that 80+% of
people engaged in the business full-time really don't
know what they're doing, and are going to do
worse than an index fund. So I'd like to think
I'm in the 20% that has enough experience
and enough training, is sort of smart and
clever enough to do better for my investors
than index funds. But as a general rule,
it's hard to pick stocks. It's hard to pick
managers who are skilled at picking
stocks over time. Because I can tell you we've
had a six year bull market. There are a lot of bull market
geniuses out there right now who have just been piling in
to the most speculative stocks, and they've been
rewarded for that. And so they have the
best track records over the last six years. And a lot of them weren't
running money in '08. So the most important
thing I tell you in looking at a manager is look at how they
did in '08, and that can tell you what kind of risk takers
they are and how they might form in a down market. But the problem is the
average money manager hasn't been in
business six years. And so therefore, you can't
see how they did in '08. So that's why I'm a
big fan of index funds. Those books are
right, by and large. But there are also outliers
that is not random. Warren Buffett's track
record is not random. He's just that
good, and there are some guys who are that good. AUDIENCE: I just
finished your book and it was very, very excellent. One of the things I
noticed is that a lot of these excellent
stock experts are very forthcoming with their
ideas and their philosophy, and very much in detail. And yet, it seems like the
vast majority of people don't invest that way. So I was wondering based
on your experience, what do you think are the three
major personality traits or qualities required to
really understand it and do it? Because it seems to me
that a lot of people think it has to do with being
very good at math and so forth, but it seems like the
psychological aspect and the discipline aspect is
actually as important or maybe more. JOHN HEINS: And I can
start with that one, and that's what I would
say is that I think what-- and I think even these
great investors would say it's not because they
graduated first in their class at Harvard Business School. It's because they
have a strategy, they have a philosophy that
they believe will work, and it's credible
that it will work. And they are able, through the
discipline of their process, through the discipline of
their buy and sell mechanisms, they're able to stick with
that through thick or thin. And that is really hard. Joel Greenblatt-- he's quoted
several times in the book, and he talks about it's
really hard, because you can be wrong for-- a
lot of value investors are struggling now. Market's gone up for
five straight years, so they're struggling, they feel
out of sync with the market. And you want to just fix that,
but you have to resist that. Because fixing it means
going against what your discipline is, and
what your process is, and what you believe in. And so I think an ability
through the hard times to stick with what
you believe in and execute it without
cutting corners in a real disciplined way. It's really kind of basic
blocking and tackling. But I think that's what sets
a lot of these people apart. Obviously, they're very smart. Warren Buffett always
talks about it's not the person with the highest
IQ that wins in investing. But clearly, Warren
Buffett is pretty smart. So yeah, it doesn't hurt. WHITNEY TILSON: So this
article I wrote three years before the infamous
Google article. July, 2001, "Traits of
Successful Money Managers." I framed it in two things. To be a successful stock
picker or money manager, you had to do two things. You have to have
the right approach, and then you have to be
able-- the right temperament. You have to be able to execute. So you have to have the right
sort of philosophy, right? So you're not trading
electrons or whatever. You're buying companies, you
only buy when it's on sale, you sort of ignore the market,
focus on avoiding losses, only invest when the
odds are in your favor, don't worry about macroeconomic
factors, et cetera, et cetera. So you have to have
the right approach. And then you have to
be the right person. And so what does that mean? You're a business
person and you're thinking about you're
buying businesses. You have the private
equity mentality. If I could buy this entire
business for the market cap, which I am buying one
share of this business, that's what I would do. You have to be really smart. You have to have a lot of
intellectual horsepower, for sure. But then once you
reach a certain level, the ability to crunch
numbers, mathematical ability, is a pretty low importance
above a fairly basic level. And then it comes
to the mental stuff that you were talking about. So you have to be simultaneously
confident and humble. Nobody gets into this business
without a lot of confidence. It's just that's the
nature of the business. Your track record is public. Any time you're betting against
1,000, a million other people, that is an act of arrogance. The purchase of a stock
is an act of arrogance because you're saying
I think I'm right, and all those million
other smart people and plus their
supercomputers are wrong. It's an act of arrogance. So you have to have
that kind of confidence. But at the same time, you
have to have the humility to recognize when something's
outside your circle of competence. To recognize if your
investment thesis is wrong, and to accept
disconfirming information and change your mind. And sometimes very publicly
admit that you were wrong. And then you have to just
be really independent. It doesn't matter if everybody
else loves the stock. If everybody else hates the
stock, you have to not care. You have to do your own
analysis, value the company, and then buy it--
be patient enough to buy it at sort
of half that price. And lastly, sort of be
patient-- long-term greedy. Most human beings are hardwired
try and get rich quick. Who doesn't want to
get rich quick, right? You've got to have
the patience to be willing to get rich slowly. And you will make money faster
with the get rich slowly approach than with the
get rich quick approach. And lastly I'll
just say the people who are really good at this,
they love what they do. Like I was talking with
Richie earlier and said, people here at Google, like
a lot of people I work with and so forth, they love
tackling challenging intellectual problems. They love what they do. They're not here for
the money, primarily. They love what they do. I can tell you in my business,
the successful investors love what they do. It happens to be
extremely lucrative, and nobody minds the
money, I suppose. But if you took away the money,
every single investor I know, the good investors, would
still keep investing, because they love the
game, the challenge, the intellectual
challenge, the feedback you get in fairly short order,
like if your analysis is right or not. I think there was a
question back there. I don't want to
miss your question. AUDIENCE: So I wanted to
push a little bit more on one of the previous questions
about practical advice. And I feel a little bit
stuck because on one hand value investing is
super attractive. It sounds really attractive,
like I want to do that. But I know I have
a full-time job and I'm not an expert,
so I won't do it myself. And then finding the
right investor is another full-time job,
and like you said, maybe I can't do that either. And the alternative is
to invest in index funds, and that's not value investing. That's the opposite of that. So that doesn't
sound that appealing. And plus, it worries me
that the owners, the market is really just the mutual fund
guys and the pension fund guys, and they have the
wrong incentives. So when the market
crashes they're fine because everybody
else crashes, and they all jump on the
train when the market grows. And so I don't feel very well
protected in those funds. And so I feel kind of stuck. And should I just say,
OK, until I'm super rich and I can invest in hedge
funds and get the right advice to find the right ones, I just
have to live with index funds? Or is there anything that's
smarter for the average person? AUDIENCE: Average
Google investor. AUDIENCE: Right. Yeah. Exactly. With a full-time job,
that's not an expert. JOHN HEINS: I'll
speak, because I'm not a professional investor. But I am an active investor,
and I care a lot about it, and I've always paid a
lot of attention to it. And I would say a couple things. One, I still hold out the
belief that there are people who can beat the market, and
that you can, with some work, you can identify who you
think can beat the market. And it's clearly not easy. And if you look at academic
studies of how well people do with that, it's
not impressive. But personally, I have
chosen to believe that, just like there are better brain
surgeons and better airplane pilots, there are
better investors. And there are
things you can look at in terms of what's
their philosophy. So a clearly articulated
value investing philosophy, run by people who have been
through up markets and down markets, and have, over time,
performed extremely well. I'm still willing
to say I believe that that can beat
an index fund. So I'm not giving advice. I'm just telling
you what I would do. So I believe you can do that. But you have to
have a philosophy. Like you have to believe
that investing makes sense. You have to be able, when you
read all the materials that XYZ company value investing
money manager talks about, you have to really believe
that they can do it. That they're describing a
philosophy, and a process, and a discipline
that they can do it. AUDIENCE: Are you talking
about mutual funds? JOHN HEINS: That
would be mutual funds because those are
available to everyone. So yes. There are, if you're
a value investor, there are more passive
value investing funds. So there are ETFs, DFA, if
you know that brand name. DFA funds. They'll buy a ton of
stocks, but the factors will be value investing
related factors. So you can have a very
diversified portfolio, but its value investing. So it's in between a
pure passive investing and pure active investing. So that's an option. So that's one thing I would say. The second thing I've
learned since I've been doing this-- I've been
doing this for the last 10 years-- is I used to have
more individual stocks than I do now, partly
because I enjoy it. And I think my instincts
are fairly good. But I have learned in spending
the last 10 years talking to really smart investors that
they should be a lot better at it than I am. I mean they should be. They're spending their entire--
I have another job-- they're spending their
entire time doing it. And where I really
fall down is I think my instincts are
good on the buy side. I can recognize a
situation that I can understand why
this is beaten down. I can have a contrarian opinion. I can have a variant perception. But where I'm a little
bit lost is selling. I don't when to sell. The only way you can
really know when to sell is if you are, on
a regular basis, valuing what you think
the company is worth. I'll admit, when he's talking
about his stupid mistake with Google, I had Apple stock. And my son, who is now 22
years old, when he was born. I put it in his
college savings fund. And I had Apple stock that
did nothing for years. And I'm thinking
oh, and I'm reading in Barron's that this
stock, it's doomed, nobody's going to use
Apple products anymore. Microsoft is long. And I'm holding this Apple
stock, which was quite a bit at the time, and I was thinking,
OK, well if anybody figures out this interaction between
technology and media, Apple has a chance at it, so
I'm going to let that play out. So I'm flat for like five years. They launched the iPod. Stock goes from 10--
really, like 10 to 12. And I go, oh, wow, 20%, great. Sell it. [LAUGHTER] And I calculated
a couple years ago when the stock-- I think
maybe it was a year or so ago. The stock was about
where it is now. And I calculated that my stake
in my little baby's college fund would be
worth $1.3 million. So anyway, talk about trying
to learn from lessons. The lesson there
was I actually was-- I was pretty smart
about Apple, but I just had no idea how to think
about when to sell. So anyway, that
has, as a result, I have shifted way more
of my kind of equity, personal portfolio
of equities to I still use actively managed
funds, whether they're hedge funds or mutual funds. And the piece I keep
in individual stocks, I do it because I like it and
it's interesting and it's fun. But it's not what I'm counting
on living on in retirement. WHITNEY TILSON: I'll just
add three things to that. Number one, before you
even think about investing, there's a great old book. It's now 15 years old, called
"The Millionaire Next Door," and it's a study of
millionaires in this country. And it turns out
being clever investors is the least most
important thing. The single most important thing
is live beneath your means. If every year-- in
turns out teachers are far more likely
to become millionaires than doctors relative
to their income. Because for whatever reason,
teachers tend to-- my parents were both public
school teachers. So when I was born-- and met
and married in the Peace Corps and have never earned very much. But we wore secondhand clothes. My parents never owned a
new car their entire life. And we didn't go
out to eat a lot. And my mom's a good
cook and whatever. And so every year
they just salted away money, and you save
money-- and this is a very high cost
of living area. But there are ways to
not be extravagant. And so the single
most important thing you can do for your
long-term financial health is just live beneath your means. Certainly don't be out on
margin with your credit cards paying 25% interest. So that's number one. Number two is is unless you
really know a manager of fund well or whatever, indexing
is actually a great option. If you ask me to pick a mutual
fund to recommend to you, I know one mutual fund. Of the 8,000 mutual
funds out there, there's only one
I would recommend, and it's a guy I happen to know. Zeke Ashton runs the Centaur
total return fund or whatever. It's a relatively small fund,
but I know him personally, and I would have
confidence in him. And that's it. That's it. So just index. And I've been doing
this 16 years. And then thirdly,
you guys are sort of in an interesting position here. You guys have friends. You're in the heart of
an incredibly vibrant, dynamic area with
incredible companies. And I don't think buying Tesla
or Netflix today is probably going to be the wisest
thing, or Apple today, after they've run
up 20x or more. But it's a volatile sector. And to the extent a particular
company's stock gets killed or the whole sector
gets killed, you guys are actually in a
reasonable position if you talk to your
friends and you look at where's
the talent flowing. It is flowing out of
Yahoo and into Facebook. And Facebook got
killed post IPO and it went from 50 or something,
down to 20 or something. You guys actually might have
been able to figure that out, whereas I wasn't. Because I'm not out here. I don't know the people at all. But Facebook, I think you guys
have the second best business model in the world. I actually think Facebook may
well have the greatest business model in the world. It's a winner-take-all business. It's one out of every six people
on the planet is now a member. And it costs them nothing
to add new members. There's zero incremental cost,
so they just grow globally at no incremental cost,
and it's just pure profit. It's pretty incredible. That business model
never existed before. You guys have very
similar dynamics. So it would be close, right? Well, compare that
to a Tesla, which is I was stupid enough to short,
and then gained appreciation for it and think it's
an incredible company. But you see, they actually
have to make stuff, and then they have
to ship it, and they have inventory, et
cetera, et cetera. For them to grow it's a very
capital-intensive process. They have nowhere near the
business model you guys have or Facebook has. So you guys, I would say maybe
take 20% of your portfolio and use your networks
and relationships and where the smartest people
you know all go into work. And when that
company comes public, if it craps out post
IPO or something, don't buy at the peak. Wait until there's a crap out. And you guys should be able
to, with a very little amount of your time, just based on
your own knowledge, expertise and relationships, be able to
find a few of these beaten down companies with a small
enough amount of money that you're not going to
stress about it too much. AUDIENCE: You
mentioned earlier, when determining the
value of a company that one factor is
market sentiment, how people feel about the company. And you also mentioned the
word supercomputer earlier. So I have a question about that. One, market sentiment seems to
be, for lack of a better term, crazy these days. I mean people look at a company,
it'll go up 10% on Tuesday and down 20% on Wednesday. And maybe
supercomputers, the way they interfere in
the market now, may be amplifying
this by reacting to momentum, et cetera. So with the value
of a company being so skewed sometimes
over a very long time, is value investing harder or
less effective these days? And is that trend going to
continue in your opinion? WHITNEY TILSON: It's
definitely harder now, but I'm not sure that reflects
a long-term fundamental shift. It just tends to be hard
when markets are complacent, and stocks, the markets
are at all-time highs. But I wouldn't call the
market out there crazy. I mean the multiple of the S&P
500 today's 16 or 17 times. It was well north of 30
times in 1999, for example. That was pure insanity. There are pockets of
foolishness out there, for sure. But sort of getting
back to your question back there about how do you
invest in today's world. There's nothing real
easy right there. I mean stocks, if you
ask me the S&P 500, if you just bought
an index fund, you can make 5%, 6% a year
over the next 10 years. Yeah, that's not horrible. It's not very exciting. But when bonds are
offering you virtually nil, you just can't get discouraged,
and you can't get impatient, and you can't swing
for the fences. Can't say, you know, I'm not
happy with an index fund. I'm not happy with bonds. So I'm going to go
buy Astroturf.com when it comes public, or
do something stupid, right? So you just have to be patient. And be content. We're in sort of a
low return world, so hang out, live
beneath your means, save money, and wait for
better opportunities. JOHN HEINS: To your question
about the supercomputers, I think what a classic
traditional value investor would say is that the
fewer decisions about a stock price that are being made
by humans, the opportunity is actually better, because
there will be more volatility. Volatility is a good thing. Value investors tend to find
volatility a good thing. So if, for whatever
algorithm-driven reasons, a stock does go down 20%--
it could go up 20% too, but if it does go down 20% on
a day because of some news, and then the momentum of the
stock then forced it down farther than it
would go otherwise. If you're alert, if
you're paying attention, if you have a clear sense
of what something is worth, you can take advantage of that. So that's what a classic
traditional value investor will say. They won't say it's
easy, but the volatility is not something that
worries them or bothers them. AUDIENCE: Value
investing historically has been compared to performance
of indexes such as the S&P index. And it seems to me, as long as
they beat the market, the S&P index, for example, then
value investors are happy. But I want to question
this a little bit. So value investing has been
around for a long time. And credit should be given to
people who actually discovered it and pioneered this--
Ben Graham, Warren Buffett. But they're not
passive solutions. For example, they mention
those-- value investing fund was mentioned. So isn't that actually a better
benchmark to compare against? And a study by [INAUDIBLE],
if I remember correctly, comes to mind. And this comparison
actually didn't look very good to funds
that were cited earlier in the survey. Tweedy, Browne, for example. So do you compare
against such benchmarks? And do you think value
investing is still beneficial? WHITNEY TILSON: I
guess my first thought is is I think the
studies are correct. Mutual funds
collectively, as a whole, underperform the market by
roughly their amount of fees, plus some trading
costs, et cetera. And hedge funds
underperform even more, because they're just higher fees
and have higher trading costs. So collectively speaking, the
studies are exactly right. As for which benchmark I
choose to use or whatever is it depends on what you're
trying to accomplish and what your
investors' goals are. My investors are all
individual investors. My parents own nothing except--
no other funds other than mine. And then I've just parked
them in index funds for the rest of it,
and then some in cash and bonds-- a
little bit of that, because they're in their 70s
and they want a little cushion. So most of my investors
are individual investors and their default
option is the S&P 500. So that's what I should
compare myself to, right? But there are plenty of
institutional investors that are looking at
a hedge fund that is running a
market-neutral-- they have the same long exposure
as short exposure, and they're just trying
to be a little more clever on their longs
and a little more clever on the shorts to grind
out 8% to 10% returns. And last year when the market
was up 34 and the hedge fund was up 10%, those
investors were happy because their alternative was
a bond or something in cash, and they got 10%. But that's the kind
of fund they were investing in that was delivering
that kind of performance. So there's no right
or wrong answer here. It's just a question of
what the fund manager thinks that they're good at and
what their strategy is, and therefore,
they would say this is the benchmark we
compare ourselves to. And then investors can come
in and decide whether that's what they're looking for, and
then you evaluate the manager and see whether-- OK, do I think
the manager can execute on this and outperform the benchmark. JOHN HEINS: I still believe
that value investing works. And that value investing,
it does perform over time. It has to be executed well. But I believe it
works, and I think research would show that
executed well, it does work. Now, one can
question whether you can find the right
people to do it, but to the point, the
dimensional funds, those types of things, it is a value
investing philosophy that is different than an index. And if you believe
in value investing, you could argue that it's
better than an index. AUDIENCE: So this question
is about you mentioning that you go an extra
step, and also look for the reason of
the mispricing as to why things have
been-- John mentioned that in one of his slides. So what is the
rationale behind it? Let's say there is
a stock which you think is mispriced
because of neglect. How does that help? How stringent is
this philosophy? Like if you're not
able to find a reason, do you just not invest? JOHN HEINS: I think not
everyone would say that. I chose one of the quotes where
he was talking about he really believed that that
was important. I think the thought
process is that there are a lot of things
you can miss. There may be reasons
why you missed something and it was going to
make the stock go up and you didn't buy it, or it was
going to make the stock go down and you didn't think of it. So I think it's
more of a discipline to identify, not just content
yourself with oh, it's cheap and I don't know why. Because you may miss that. You may dismiss it. I missed something
important, and so try to find out why it's mispriced. And not everyone
tells me that, but I chose that one because
I hear that often and it makes sense to me. WHITNEY TILSON:
Look, any time you buy stock you're
betting against-- you think it's cheap
because the market is failing to appreciate. The market thinks
something worse about the company
than what you think. That's why the stock is
trading less than intrinsic, and what you believe
intrinsic value is. Being very clear
and understanding what the market
believes is important so that you can figure
out what's different. That would be the
problem I would have about investing
in Google stock today. Because what do I believe that
is so much better about Google than the consensus view. Because the consensus view
is you guys are awesome, and it's an incredible
company, and it has an incredible
business model, and it's got great growth
opportunities, et cetera. So is my variant
perception that I think you're going
to grow at 25% a year over the next four
years, not 20% a year? Or that your margins are-- I
mean these are theoretical. These are things I
would want to test. Or is it my view that
a 20 or 25 multiple is too low for a company with
the world's second or best-- or world's best or second
best economic characteristics and you really should
trade at 30 times earnings and the market will
figure that out. So I'm betting on that. Or am I betting that your
margins are depressed because of these very heavy investments
and stuff that's not currently paying a return, and that
these investments are going to taper down,
and therefore, margins are going to grow a bunch. I've got to believe
one of those things to buy one of the most
widely beloved largest market cap stocks in the world today. So that's probably
just in my gut. That's just not what I do as
a value investor to think, everybody loves this company,
but I love it even more. That rarely is a good
investment thesis. And that's not to say you
can't make a lot of money doing that-- riding
great companies. But I find it's better for me
to find a company that was once covered in glory-- Reed Hastings
was Fortune's Man of the Year or something like that
when the stock was at $300. And six months later,
the stock's down 80%. And I'm thinking, now
that's interesting. Is this company fundamentally
and completely broken, or did they screw some
things up and are they actually making a
really bold and bad, and forgoing current
profitability to drive a long-term
winner-take-all global market that they could dominate? And it's a rational short-term
decision to take profitability from $4 a share to $0.20 a
share in one year, to invest, to buy streaming content. To make that
incredibly bold bet. Amazon's been doing
that for 20 years. They've never made a
profit because they have a policy of taking
every single penny of profit and plowing it back
in to future growth. And you know what, the market
hasn't destroyed Amazon stock. But Netflix, they were selling
an earnings growth story, and then they decided the hell
with earnings growth, hell with earnings at all. We're just going to
invest in the future. We're become like Amazon. And all the investors that
were in there for the earnings interest story sold the stock. But I was like, you
know what, I think this company could be
a world beater someday. So that's more the kind
of situation I look for. But being real clear
what does the market believe today, you better
believe something different, you better understand
what the market believes, you better be right
in what you believe. Yeah. AUDIENCE: So looking at
fund as a whole, if you drop 50%, that's a
disaster because you've got to go 100% up just to
get back where you were. In a situation like
today where you might think that
there's a bubble-- I mean it's hard
to find bargains. People are very optimistic. What do you do with your fund? How do you protect yourself
against a very large loss, which is much more likely
at a situation like now? WHITNEY TILSON: Well,
you have a short book. I'm a hedge fund, so
I'm short some stocks, and that will hopefully
protect me in a downturn. The problem is shorting's an
extremely difficult business. As hard as long investing is,
short investing is twice as hard for a variety of
reasons-- structural, but also your winners
become a bigger portion of your portfolio,
losses are unlimited, gains are capped. Unlike long investing, which
is the reverse, et cetera, et cetera I highly recommend that
you never short a stock your entire life. Just trust me, I've been
doing it for 12 years. I have an entire presentation. I can come back next week. I'll give you my
presentation on Lessons From A Dozen Years
of Short Selling I presented at Stanford Business
School-- to Stanford Business School students last night. Don't do it. So then, OK, well,
smart guy, the one thing that is sort of
obvious, you just have a short book
offsetting your long book. What do you do? The real answer is just buy
super high quality companies that can continue
to grow earnings and so forth, even during
economic downturns. And you buy them at
moderate multiples. And then just be willing to
accept the market pukes out, your stock's going
to go down in line with-- maybe in
line with market. Hopefully, if you buy
quality companies, it's a reasonable price, a
little less than the market. But you just have to
understand, if you're going to invest in stocks,
there's going to be volatility. And there is no such thing
as a free lunch where you get equity upside, but
you have no risk of downside. So don't invest in stocks if you
can't stomach some volatility. So there's no real
easy answer there. I don't recommend
you short stocks. I don't recommend you go out
and buy short-term S&P 500 putts and roll them every month. Some hedge funds do that. And you're just
destroying capital. Generally speaking,
during times like this, invest more conservatively,
hold more cash, and take smaller position sizes. And just be patient. The markets come
and go in cycles. And most investors
are pro-cyclical. They pile into stocks in October
of '07, and then they puke it all out because they can't
take the pain in March of '09. They piled in
April of 2000, they piled out in October of 2002. So investors'
portfolios, as a rule, tend to do worse than
the overall market because their market
timing is so horrible. You need to be counter-cyclical,
and that's important. You either need to
be steady-- look, just put $10,000 every
quarter from your IRA, just put it into an [INAUDIBLE]
fund just quarterly, and it's sort of automatic,
you don't think about, right? That's a lot better than
what most investors do, which is being pro-cyclical. But ideally, you sort of
want to be counter-cyclical and just sort of
have an instinct. Look, I'm not a
full-time investor. I'm doing my job. I'm earning an income. I'm probably not
going to get fired. But the market's crapping
out, so maybe I'll bump that to
$20,000 this quarter and take a little bit of
money and put some extra money into the market. Maybe you put a
little bit less in. If you can do that over a
lifetime, that'll help a lot. JOHN HEINS: I wouldn't
overestimate your ability to time, however. I wouldn't overestimate
my ability to time. It's very difficult
to get that right. WHITNEY TILSON: Yeah. 80% of the way there, if
you simply don't screw it up and you just do it steadily. And if you're really
clever-- I'm being-- look, I have done, in 16
years, I have done well by being aggressive in
late 2002 right after 9/11, at the bottom, late. You can actually-- there's
a public record of it. You can Google Whitney
Tilson "60 Minutes," and in December of
2008, I correctly predicted the housing, the
bursting in the housing bubble, and I was a guest on "60
Minutes," about the housing crisis. And I said, I'm piling in. Like I'm all in, because as
bad as things are out there, stocks are cheap. So having that-- I
mean I'll tell you, because when you
feel like hiding under your desk
with a flak helmet on because every single day
your portfolio's blowing up, and the headlines are so
horrible, it's hard to do. But being counter-cyclical like
that, a contrarian like that can add value. But most people can't do it. So at the very least,
don't screw it up by doing what most people
do and piling in at the top and selling at the bottom. MALE SPEAKER: We're out of time. Thank you so much. WHITNEY TILSON: OK, thank you. JOHN HEINS: Thank you. [APPLAUSE]
