January 10, 2020
Recently, I met a fellow with one of the most impressive backgrounds I’ve ever seen.
Yet, not long ago, he left Wall Street to focus on Main Street investors – helping the sort of folks who make up the backbone of America, rather than the coastal elites who fill the halls of Washington D.C. and New York City.
The reason why is incredible, and I hope that my interview – part one of our January magazine cover story – does it justice.
And next Tuesday, you have an opportunity to hear from him firsthand. But you must click here to reserve your seat.
Then, read on for the story behind the man who some call…
The Wealth Whisperer
By Steven Longenecker
Portfolio manager and former hedge-fund founder Austin Root has worked with and advised some of the most powerful names in the financial world…
- Steve Schwarzman, the founder of Blackstone.
- Hedge-fund billionaire and controversial political contributor George Soros.
- Blue Ridge Capital founder John Griffin.
- Embattled billionaire Steve Cohen, founder of SAC Capital and inspiration for Bobby Axelrod’s character on Billions.
- And Julian Robertson, the Tiger Management billionaire who spawned dozens of the world’s top hedge funds.
Yet there was no hint of the typical Wall Street stiffness as we got out of the car and into the Las Vegas heat.
Instead, he was grinning like a six-year-old. “Give me your phone,” he says. “I’ll get a picture as you’re boarding. It’s your first time, right?”
The night before, I thought I’d be getting on a Southwest flight bound for the American Consequences office in Baltimore somewhere in the middle of a cattle-call boarding group. Then, the invite came… Would I like to fly back to Baltimore on a private jet for a free-ranging conversation – all on the record – with a few independent financial minds?
The Dassault Falcon 900EX comfortably sat eight… and I settled in across from Root. We were still on the ground when he pulled out a deck of cards. “Spades?” he asked the other two folks sitting across the aisle.
The trick-taking card game needs four players, but the fellow sitting diagonally to Root hadn’t played much before. “Not a problem, it’s simple to pick up,” Root says.
Of course, Root is competitive. He winces when his partner overtrumps a hand they were already winning. “Did you mean to do that?” he asks mildly.
That focus and intentionality are evident when you look at his 20-year career in finance.
His story starts like a typical “Midwest kid heads to New York City to make it” tale. And his résumé reads like a who’s who of Wall Street.
But today, in a rare twist, Root has traded in his former hedge-fund life with billions under management… to return to his Main Street heritage by helping thousands of individual investors run their own portfolios.
From Columbus to Charlottesville
Root grew up in Columbus, Ohio… which bills itself as the “biggest small town in America” and is one of the few cities in the Midwest that has continued to grow into the 2000s.
“I was a big comic book and sports card collector,” Root says. “I would go to shows with a little bit of money and try to trade up. Like, I remember I bought an Incredible Hulk comic where it was the first time that Wolverine is introduced. It was like a $100 comic. And then, I sold it for $200 to another dealer down the way. So I came home with more money and comics.”
Of course, this “double your money” trade might have been better as a buy-and-hold investment. A near-pristine Incredible Hulk #180 was sold at auction this January for $8,600.
Root’s baseball-card instincts didn’t go quite as well. “They’re not worth that much more now than they were back then, because the market just got flooded. Though I do have a Michael Jordan rookie card…
“From there, I knew that I wanted to go into business. So I only applied to places that had undergraduate business schools or good economics programs. That led me to the University of Virginia.”
Designed by Thomas Jefferson, the University of Virginia is one of the most beautiful campuses in America. It’s what university campuses aspire to. Its Rotunda, at the north end of the main green space (better known as “The Lawn”), is exactly half the height and width of the Roman Pantheon. And it was there that Root began seriously investing…
“I’d go to the computer lab to trade… I bought a few things that I liked and knew,” says Root. “And with that experience, I started working at the McIntire Investment Institute – the student-run investment fund founded by UVA alum John Griffin.”
Griffin also founded Blue Ridge Capital, the legendary hedge fund that was shuttered two years ago. As Bloomberg reported then, Griffin started Blue Ridge with $55 million… and then returned 25% a year for the next 13 years… enough to make him a billionaire several times over. Today, Griffin runs Blue Ridge as a private family office to manage his own wealth.
“I took his first hedge-fund class at UVA. That’s also where I got to meet Julian Robertson for the first time,” Root mentions. Robertson, of course, is one of the best-known hedge-fund managers of modern history.
“It was the spring of 1999,” recalls Root. “It was a crazy time in the market. And if you’ll remember, Tiger Management up until ’99 was the biggest hedge fund in the world… $30 billion under management. But Julian was short all of these crazy, money-losing tech stocks. It was shocking to watch. Here’s this legendary investor who’s getting his face ripped off in the market. And he ultimately was right, but he closed down because he thought the markets no longer made sense.”
During that meeting, Root pitched a stock to Robertson and Griffin – Electronic Arts (EA) – that was the only video-game company that wasn’t a boom-or-bust, hits-driven model. “EA had all the sports,” says Root. “It had Madden, which fans bought every year. So it generated strong, predictable profits, and it could afford to invest into other games and produce more big winners than competitors.”
Root’s college stock-picking was a fantastic bet… despite plenty of ups and downs, EA has soared more than 1,000% since then.
“From that experience, I realized that I really, really enjoyed investing,” says Root. “But I also felt like I needed to get a rigorous corporate finance background.”
He notes back to when he was a kid, helping his grandfather with home maintenance projects. “He’d always tell me that half the solution to any job was having the right tools.”
Want to fix the plumbing for a bathroom sink? “You can spend an hour scraping your knuckles and cursing if you try to do it with a simple set of pliers. But break out a plumber’s wrench, with its long neck and angled head, and you can hook up those pipes in a matter of minutes.”
“That’s exactly how I feel about investing,” says Root. “You need to have the right tools. And to me, one of the most valuable tools in any investor tool kit is a basic understanding of corporate financial statements.”
His First 15 Minutes on Wall Street
Root wasn’t on Wall Street for more than 15 minutes before he received a crushing message…
He had taken a job at Blackstone – the venerable, secretive, and powerful firm started by legendary financers Pete Peterson and Stephen Schwarzman.
Today it’s the largest alternative-asset manager in the world, with more than $550 billion in assets under management… and it provided the initial capital to start BlackRock, the world’s largest asset manager, with more than $6 trillion in assets.
“I had just moved from Ohio to New York,” says Root. “When I arrived at 345 Park Avenue that morning, I was immediately escorted to a large conference room.”
Joining him there were a dozen other new banking hires – mostly from Ivy League schools – all wearing their best suits and eager to start their Wall Street careers.
That’s when Schwarzman walked in. “The room went silent,” says Root. “And he delivered a message I will never forget.”
I’ve seen all your resumes and college transcripts. You’re an impressive group… But it hasn’t all been perfect, has it? Most of you got some A-minuses in school. Some of you averaged A-minuses. Let me tell you something right now. The Blackstone Group is NOT an A-minus firm. A-minus work will NOT cut it here… So you had better turn it up a notch if you are to succeed. Now, let’s get to it.
“As harsh as that first speech was, it was exactly what we needed to hear. With brutal honesty, Schwarzman set the tone right from the outset. He let us know that Blackstone was a special place and required more from us than a typical job.”
At Blackstone, Root focused on troubled companies. “The appeal of this job was, if I could advise troubled companies – and help turn their operations around – then I would likely be able to identify the truly mission-critical business metrics that would help good businesses succeed and do even better.”
“We’d be engaged by companies that were either trying to emerge from bankruptcy or avoid bankruptcy. Or they knew they were going to go in, and they wanted to figure out the best way to save their bacon. So we would either advise the company themselves or the debt-holders that were looking to minimize the issue.”
Portfolio managing, of course, is more than just knowing how to identify and help a troubled company…
How to Find the Right Stocks
“I went to Soros Fund Management right after that, with the private-equity group there,” says Root.
At the time, George Soros was far better known for “breaking the Bank of England” with his massive short sale during the 1992 Black Wednesday currency crisis – where he personally made $1 billion in a single day betting against the British pound – than for the extensive political funding he’s made since.
“George’s son, Jonathan, was in our group. But George would kind of just come in on the big projects,” says Root. “He encouraged us, actually, within the private-equity group to make bigger bets when we saw something that was really interesting.”
“We took that to heart and doubled-down on our investment in JetBlue.” And ultimately, Soros Fund Management would both become its largest shareholder and provide the company with capital to expand its route network across the nation.
“We also made a big investment to buy a health insurer and began to roll up a fragmented part of the industry focused on government-sponsored managed care services – like Medicaid and Medicare. I was intimately involved in this investment that went on to become WellCare Health. It was the largest single investment at the firm at the time.”
Both investments eventually went public and were big winners for Soros.
“I debated staying at Soros for longer,” says Root. “But I figured I’d apply to a couple business schools and, if I was lucky to get into them, I’d do that. And so, I got into Stanford.
“Stanford has more of a growth equity and new technology bias. And for the most part, having done restructuring, having done private equity – which while it was growth-focused, I still spent most of my time looking at more old-economy companies… And so I wanted to see more of the growth side of the world.”
That’s also when Root had the chance to meet Warren Buffett and Charlie Munger.
“One of my professors was an early investor in Berkshire Hathaway and set up the trip for a handful of us. We came into Omaha the day before. And we checked out some of Buffett’s businesses like Nebraska Furniture Mart and the jewelry place, Borsheims.” Root notes that he took the opportunity to buy his wife a watch as a wedding gift there.
“The next day, we spent at Buffett’s offices – he spoke to us and answered questions about investing for hours. Then, we went to lunch at Gorat’s, the old steakhouse that he likes that was terrible,” Root laughs. “But it was fun. Slathered gravy over this two-dollar steak, and it was great.
“I tried to get a game of Bridge going with Warren after lunch, but the other folks I was with admitted they weren’t very good and that you need four to play.”
Root earned his MBA at Stanford – and expanded his personal rolodex.
“There were lots of great investors and entrepreneurs in my class. Two of my classmates started Trulia and made hundreds of millions of dollars… Another one, she’s super smart and a triathlete. So instead of coming back to New York to a hedge fund or private-equity firm like a lot of us, she decided to stick out West where she could train full-time for the triathlon. So she worked at a promising little company called Facebook (FB) and crushed it. There are lots of stories like that.
“That’s also where I became really good friends with a guy who ultimately became my business partner for my hedge fund. And that triathlete… she later invested in my hedge fund.”
But first, Root was intrigued with learning from the best traders on the planet…
We’ll have the thrilling conclusion to Root’s story… what he learned at the world’s highest-returning hedge fund and why it can help your investing in 2020… as well as the answer to just how he went from helping Wall Street billionaires to Main Street retirees – in a special edition of American Consequences Daily tomorrow morning.
Watch your e-mail inboxes.
In the meantime, I highly recommend you reserve your seat to listen to Root this coming Tuesday as he explains the guarantee that he’s making to all investors who read his work in 2020. Click here to learn more.
Now here are some of the stories we’re reading…
What is at stake is not just losing wars… or losing money… or a crash in the stock and bond markets… or a depression… We’re talking about a hellish collapse of American society itself…
No matter how much politicians and pundits may imagine otherwise, prosperity springs from economic freedom. Always. China’s growth has been a logical result of government there doing less, and the growth would be even greater if government did even less going forward.
SolarReserve’s Crescent Dunes received backing from Citigroup and the Obama Energy Department but couldn’t keep pace with technological advances.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
January 10, 2020