January 11, 2020
In this special edition of American Consequences Daily, we continue our January cover story on portfolio manager and former hedge-fund founder Austin Root – a man who has worked with and advised some of the most powerful names in the financial world.
And of course, if you haven’t yet saved your seat to listen in – live – to Root on Tuesday evening… and want to hear about his first-of-its-kind performance guarantee for your 2020 investment returns – click here to learn more.
The Wealth Whisperer:
At the World’s Highest-Returning Hedge Fund
SAC Capital – named for its founder Steven A. Cohen’s initials – was the highest-flying hedge fund in the world. As Vanity Fair put it in 2010 in only the second interview Cohen had given up to that point…
After 20 years trading stocks in obscurity, Cohen burst onto Wall Street’s radar at the end of the 1990s, when at the height of the technology-stock bubble, in 1998 and 1999, he and his firm, SAC Capital, managed to post jaw-dropping 70% annual returns. But Cohen’s legend was truly cemented the following year, in 2000, when he bet against tech stocks before they began to dive, leading to yet another 70% return.
The reclusive Cohen built SAC Capital from $25 million to more than $16 billion… and at its peak, it made up as much as 3% of the total trading on the New York Stock Exchange.
Inside SAC Capital, Root worked at CR Intrinsic Investors – the fundamental investing group – directly with Cohen. “We were focused on actually finding great companies and owning them for the long-term. And the way it worked is, if I found an idea that I liked, I would pitch it to both Steven Cohen and then also Matt Grossman, who was the one that ran Intrinsic.”
Root notes that both Steve and Matt would trade the book. “You’d see your position, and there would be two balances. There would be what Matt bought and what Steve bought. And Steve’s would move around, because he’d be trading in and out of it. And they were both curious at the end of the year which would do better. Because Matt would just kind of hold your position, and Steve would try to use his own prowess to go in and out of names.
“Steve’s returns were almost always higher.”
Root credits Cohen with learning how to trade.
“To be clear, I still believe that you make your most money by finding great companies and owning them for the long term. But Steve showed me that you can improve returns by being more tactical and strategic… especially if you understand market sentiment and what factors will really move stock prices in the short term.”
Root notes that the firm had a big investment in Xerox while he was there. “I doubted the long-term quality of the company, and frankly I think Steve did too. But our thesis was that profits could be greatly improved by cutting costs and focusing on growing its consulting and managed print services. More important, Steve saw a cheap stock with big trading volume that he could trade around as market sentiment on the name shifted. We made more money on his tactical trading in Xerox than we did from the simple increase in the stock price itself during our ownership period.
“And today, we do the same thing with Apple. It has had a strong year-and-a-half. It’s up about 30% from its previous high in 2018. But in the portfolio I manage, we made more than 100% gains on Apple in 2019. That’s because we waited until overly bullish-market expectations were reset and went long in the stock in January after it cratered.”
However, that was when Root’s family had their first child. “My father had just passed away, and my wife was really ‘nesting’ and wanting to find a more permanent home. We had to get closer to one of our sets of family… That’s when I reached out to the Tiger Network and Julian. And he suggested I work for one of the Tiger Cubs.”
Making 40% Before Losing 50%
DLH Capital was started by David Henle, the former head of global-wealth management at Goldman Sachs. “But his focus and expertise was financials,” says Root. “So I helped round out other things – I mostly ran the non-financial book and the shorts.
“Believe it or not, we were up 40% in 2007. Because although the U.S. was cracking, we were long a lot of emerging-market financials – our biggest position was the largest investment bank in India. But if you look at the chart, the decade high in that stock was December 31, 2007… and we were down more than 50% in 2008.
“I remember having meetings with Julian to discuss DLH’s change in performance. And he’d say, ‘Well David, what exactly are you trying to do? Why aren’t you hedged?’ And David would point to a lot of the shorts that I had recommended.”
But the problem was, Root explained, position sizing. The shorts weren’t big enough to make up for all the huge longs that were collapsing. “That’s one of the biggest things I learned at DLH – position sizing really matters. Yes, you can be right on your trade, but have the wrong size, and produce weak returns.”
“So I went to Julian, and said, ‘I’d like to go on my own.'” Root explained the names that he worked on… from getting into Visa (V) at the IPO – up more than 1,600% today – as well as dozens of successful shorts like RadioShack and Lehman Brothers – both of which have since bankrupt.
“And he didn’t say yes, but he didn’t say no. Instead, he said, ‘Well listen. Why don’t you go find a partner? And if the two of you can convince me, then we’ll think about it.'”
Seven Bucks to $300
Root called his Stanford friend, David Rockwell. “David was really smart. And we both had private-equity backgrounds and knew the credit markets – both from my experience at Blackstone, and his at King Street Capital which was more credit-focused, fixed-income-focused. And so ultimately, Julian said ‘yes’ and gave us $25 million, which was the high end of his typical deal.”
That’s when Root met dozens more heavy hitters…
Every other Tuesday, as a part of taking money from Tiger Management, Root would attend idea lunches on the 48th floor of 101 Park Avenue with folks like Chase Coleman of Tiger Global Management, Andreas Halvorsen at hedge fund Viking Global, Lee Ainslie from Maverick Capital, Jonathan Auerbach of Hound Partners, and Charles Anderson of Fox Point Capital.
“That’s where I pitched Domino’s Pizza (DPZ) at $7 a share,” says Root. And today as we go to print, Domino’s has climbed to almost $300… a more than 4,000% increase.
Root ran his fund from 2009 to 2014, a time when the market climbed the so-called “wall of worry,” as most investors didn’t trust the economic recovery. “I remember 2011, as Europe looked like it was going to go back into the soup, markets got crushed. International markets got smoked. But we were up through that.
“The key thing that we had was no down years… and really, more importantly, we made money for every one of our investors.”
‘Main Street’ Portfolio Management
Today, Root runs the Stansberry Portfolio Solutions products at financial publishing firm Stansberry Research.
Rather than giving advice to a handful of billionaires and their millionaire investors, he instead publishes the same sort of portfolio management recommendations to a group of about 20,000 Main Street investors… everyone from retired teachers and firefighters, business owners – and yes, even a few bank executives or hedge-fund managers.
Root cites three primary goals that every investor has – long-term capital appreciation… safe, sturdy income… and capital preservation.
“We have a fund that puts each one of those goals as a priority. And then we have an all-weather portfolio that does all three of those things that can be used for your entire portfolio,” says Root.
Last year, each of the portfolios Root manages beat its comparable indexes…
- The capital appreciation portfolio gained a 42% total return, besting the S&P 500’s total return of 31%.
- The capital preservation portfolio gained 13% since its launch seven months ago – outperforming most safe cash – and bond-focused strategies.
- The income portfolio earned investors a 4.9% yield for the year – more than triple the current yield of a U.S. Treasury Bill and more than double the average dividend of a S&P 500 stock. And it also delivered capital appreciation that took its overall total return to more than 27% gains – far better than most income-focused strategies, like the 21.5% return of the benchmark Vanguard Balanced Fund.
- And the all-weather portfolio beat the Vanguard Balanced Fund and the S&P 500 with a total return of nearly 33%.
These results for Main Street investors are even more shocking when you look at the average hedge-fund performance on Wall Street in 2019.
The Bloomberg Global Hedge Fund Index shows that most have failed miserably… with the average hedge fund gaining just 7.8% last year – less than one-third the return of the S&P 500.
And, of course, a typical “2 and 20” management fee means that a hedge fund takes 2% of your total portfolio each year, no matter its performance… plus 20% from any profits it might make you.
That adds up to real money quickly, no matter your portfolio size. And most hedge funds won’t even look at investors who aren’t willing to invest seven figures.
For example, if an investor put $1 million in an average hedge fund last year, they’d expect to pay $20,000 no matter what happens to their money… and an additional $15,000 if the fund they chose returned that average 7.8% figure – again, massively underperforming the market.
That $35,000 eats up nearly half – 44% – of the average hedge-fund gains for someone with a $1 million portfolio. It’s a bum deal for most Americans.
“We try to do a lot better than that,” says Root.
“Our portfolio strategies are really a ‘greatest hits’ versions of all the great research that’s being done at Stansberry Research. I identify the most attractive opportunities from all that our team is recommending, and then size up our best ideas. And then, importantly, we let our winners run. Too often, individual and institutional investors alike ‘trim the flowers and let the weeds grow’ simply because their best names are now a bigger part of the portfolio.
“At the same time, we’re also prudently managing risk, keeping the portfolios fresh and investing in portfolio protection. And we’re being tactical with our trading, while still maintaining a focus on our long-term goals.
“It’s been a fun job, and it’s also a challenging one that I take very seriously. We’re laser-focused on producing excellent long-term results to lots of folks without charging them an arm and a leg.”
It’s pouring as we land at the small airfield near Baltimore – a relentless, sideways-whipping torrent that competes with a heavy fog to see which can soak your suitcase the most on the walk between the plane and the airport. It’s miserable weather, and that means the closest Uber is 15 minutes away – a long time to stand in the deluge of wet.
But Root’s infectious grin is back. “Share a ride?” he offers.
It might be raining, but his returns are good. His readers and subscribers are making money – more than they would if they followed most of Wall Street’s advice. He and his card-playing partner lost a game of spades but won two. And he’s finally home.
Again, if you’re interested in how Austin Root serves as a portfolio manager for 20,000 Americans fed up with the typical Wall Street way of doing things, learn more here.
His readers no longer need to worry about if their investments are properly hedged… or if they’re unknowingly exposed to risk… or even if they’re staying on top of when to buy more or sell. And better yet, you stay in complete control of your money.
Now here are some of the stories we’re reading…
Music mogul Merck Mercuriadis raised hundreds of millions of dollars to buy the rights to hits by Taylor Swift, Timbaland, and Bruno Mars. Is he insane?
A wealth tax is a certain path to impoverishing not just the rich, but the rest of us for whom economic progress depends crucially on the ways in which the rich actively put their wealth to use to finance new and existing businesses.
Though the word “crisis” has become a ubiquitous descriptor, few would call it hyperbole when applied to California’s housing market. The numbers tell a panicked tale. The state’s median home price now exceeds $600,000, double the national rate. Forty-one percent of residents surpass the threshold of “cost-burdened,” defined as spending 30% or more of one’s income to keep a roof over their head.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
January 11, 2020