Martin Shkreli Finance Lesson Part 20 (Archive cut)

Martin Shkreli (0:00)

Hi, everyone. September 18th, 2016 Thanks for coming. Welcome to Finance Class. Got about 150 of you here. I'm sure thousands more will watch and replay. We're here to talk about, continue our sort of thematic lessons. We're gonna spend the first half an hour or so delving on kind of a light topic just to get you warmed up. And that topic these days has been in various investors and their styles. These are people, not only to learn from their successes, which is often hard, but I actually think one of the best things you could do is get familiar with these names such that you can build your network, which again, this series is tailored for people who want to be professional investors. And a network is rather important when becoming a professional investor. If you have dreams of being a professional investor, or maybe you are already, or you want to become an even more professional investor, or maybe you're not in investing, so to speak, but you're in some other part of finance, you want to become a more proficient investor. So anyway, let me just do this. I've updated the share drive, so there's all kinds of goodies in there. If you want to, any of you really want to go in there and study it, you might find some cool stuff. So last time we talked a little bit about a hedge fund called Tiger, and I have added some slides here. Let me just find them about this hedge fund kind of complex. And before we get to that, I mentioned last time that hedge funds today are a little bit different from the way they were 10 or even 20 or even 10 years ago. Fees are a little less important. Performance is a little less important, I should say. Fees are always the most important thing, and I'd say that a hedge fund would much rather be a $20 billion fund with lower performance than a $2 billion fund with high performance. And if you do the math, that makes a lot of sense. Pedigree is certainly still an important predictor of success. It's not the only predictor, but it's important out there. I wanted to mention this trend, and when we go to the hedge fund we're going to be talking about today called Viking, this trend of more and more hedge funds being involved in private equity is very important. I think that without this sort of shift is emblematic of an important systematic factor in hedge funds, which is a search for performance that is often coming up dry. And then finally, activism, which was sort of the old private, the sort of the old, sort of put in here, 2000 to 2010, source of extra alpha. And then here, maybe it's 2011 to 2020, source of extra alpha. But I think it's safe to say that activism as a source of investment return is sort of dead. But, you know, there a lot has been written on that, besides what I have to say. So anyway, there's a, we talked a brief amount of Tiger about Tiger last time. I kind of introduced it to you guys. There's a book, I don't necessarily recommend it, but it kind of chronicles Julian Robertson, who started the Tiger Complex. It's called Tiger, Julian Robertson, A Tiger in the Land of Bulls and Bears. And it's by Daniel Strachman. And again, it's not an exceptionally good book, but if you're really a hedge fund aficionado, you can read it. There's actually a link to the book in this PowerPoint. I don't advocate that you click that, but it was interesting that I found that online when I was Googling around. So if you want to read that book, you can just click that link. But again, you know, do so at your own risk. So the Tiger Funds operated from 1980, not 1998, 1980 to 2000 And so they had about a 20-year track record, and they returned about 32% over 20 years, which is really a remarkable result. And there are only a few down years, and none of them were too terrible. So this was one of the greatest track records ever in hedge fund history. This is why Julian Robertson is a bit of a legend in the investment field. Julian is about, oh, gosh, 82, 83, something like that. Last time I saw him was four years ago, when Mitt Romney was running for president. I know Julian is a huge fan of Mitt Romney. So Tiger closed in 2000, but it kind of closed in a weird way. It sort of closed in the sense that it wasn't a hedge fund anymore, but 32% every year. So CAGR is a Compound Annual Growth Rate. So you could do the math on that. It's, think of it like this. One times one plus 0.32 to the 20th power. It's a 258 multiply, multiple of your money. So pretty incredible. $1 million would become $258 million over 20 years. So 32% rate of return. Of course, the Renaissance hedge funds are slightly even better than that. But yes, that's probably one of the greatest hedge fund returns of all time. And that's why TAGR is so adored and important in the hedge fund community. So in any event, when TAGR closed, there were a number of TAGR funds that left the... Well, I can just briefly tell you what kind of money that means at its peak. TAGR managed, say, 20 billion. But let's pick one year where they managed 15 billion. Let's say they made 30 percent. So they 32 percent. So that's... or say just say 30 percent. So this is their assets, 15 billion. This is their profits. And traditionally, you keep 20 percent of those profits. So this is the management fee. This is $900 million. And this is, let's just say 2 percent or one and a half percent of the assets and management is also a fee. This is the management fee. This is the incentive fee. So in a year like this, say this was, I don't know, 1998 or 1987, I don't know, this would be a $1.1 billion payday. Now, having said that, you do have to divide that over 100 employees or so. And obviously, not everyone gets the same amount, maybe $500 million goes to Julian Robertson, and $500 million gets split up amongst 100 people, which is $5 million a person. But obviously, those 100 people aren't all created equal. Maybe there's 50 managers, and they all get $10 million each, something like that. That's sort of how a hedge fund works. So in any event, what's interesting is this is sort of, even today, this would be one of the biggest hedge funds in the world. If you think about that number, say $500 million, and this is a phenomenal year. Very few hedge funds return 30% anymore. You can think of it really as, let's fast forward to 2016 Let's say you earn 10%, and the total fees were $525 million. And say, by convention, half of that goes to the founder, $250 million for the founder, or the CIO, or what have you. I think what's interesting is that if you think about what's easier to make $250 million, building the world's biggest hedge fund, or one of the world's biggest hedge funds, over 20 years, and then having a good year, or is it easier to actually start a company worth $250 million? And I actually think, I did this math many years ago, and I actually think it's much easier to start a company that's worth $250 million than start a hedge fund, and have that hedge fund create all this value. Now, you could argue that there's equity value in the hedge fund, and we can discuss that later, but in any event, that's sort of one thing to think about as you think about these fees. This is obviously an enormous amount of money, but at the same time, it sort of makes you wonder if a guy like, I don't know, obviously there's only one Mark Zuckerberg, but if you can think of companies, we'll talk about salesforce.com in a minute, and we'll talk about companies that salesforce.com acquired. We can talk about, is this really the easiest path to making money? That's why I often say that hedge funds and professional investing isn't always a really great choice to create wealth. All right. So when Tiger closed in 2000, there were a number of so-called Tiger Cubs that launched, and we're going to talk about all of them. Today, we're going to talk about Viking, which is one of the funds that started in 1999, right at the end of Tiger's long, majestic run. And then there are a bunch of newer so-called Tiger Cubs, and some of them are called Grand Cubs, Great Grand Cubs. There's now four generations, I think, of Tiger Cubs. It's starting to get a little silly, but it tells you how pervasive this field is with Tiger pedigree, and we'll talk about those at some point. But in general, Tiger funds are value-focused. They're generally equity-focused, and sometimes macro-focused, but really generally equity-focused. The book has a fun little thing from Julian Robertson about things to look for. I know that Tiger still does sort of these pseudo IQ tests where they seem to prefer these folks who can quickly add and subtract numbers in their head. They do these tests of numeric calculations. It's just a little interesting. And then sports is pretty important. Virtually all of these guys had some success in sports or some other competitive field. So these are the two that stick out. I think the rest are all kind of out there.