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… But I also felt like I needed to get a rigorous corporate finance background.
“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.”
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.
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 and 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…
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 [Cohen] showed me that you can improve returns by being more tactical and strategic…
“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.”
Position sizing really matters. Yes, you can be right on your trade… but have the wrong size and produce weak returns.
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.