Hello reader, welcome to the latest issue of HX Weekly!

This week, we’re dedicating the entire issue to Julian Robertson, founder of Tiger Management.

Mr. Robertson was one of the most influential hedge fund managers of the modern era, pioneering the long-short equity strategy that became a model for countless “Tiger Cubs” who now manage billions across the globe.

His legacy lies not just in his stellar returns, but in the investing dynasty he spawned—shaping an entire generation of Wall Street talent, including our very own Enrique Abeyta.

Sadly, Julian passed away in August 2022. But his legend lives on in all those he taught and inspired.

We hope that you enjoy this special issue of HX Weekly.

Thoughts on the Legacy of Julian Robertson

Later in this special issue, we’ll share the famed Tiger Management Investment Frameworks for both long and short investments.

First, we thought we would share some of Julian’s story and what his legacy can mean for you as a regular investor.

For those unfamiliar with Robertson, he founded one of the most famous and successful hedge funds in history – Tiger Management.

After a few years in the Navy, Robertson moved to New York and joined storied brokerage firm Kidder, Peabody, and Company as a stockbroker – eventually becoming the head of the firm's asset management division.

In 1980, with $8 million from family and friends, he founded Tiger Management. The firm eventually peaked with $22 billion in assets and has one of the best track records in modern investing history.

Beyond the success of Tiger, Robertson is almost equally well known for the success of those who worked at the fund (dubbed "Tiger cubs") or others who were trained at the Tiger cubs' funds ("Tiger grand cubs"). These funds include Viking Global, Lone Pine, Maverick, and Tiger Global.

Combined, these funds now manage hundreds of billions and have probably created more value for investors than any other group in history.

I have a history with Julian and Tiger. My first buy-side job was at a firm called Atalanta Sosnoff Capital, which was in the same building as Tiger – we were just 42 floors below them. A few years later, I also interviewed for a job with Viking Global, but unfortunately, I did not get the job.

Many years later, though, I eventually worked for one of the Tiger grand cubs when I joined my old friend Rick Gerson at the founding of his firm Falcon Edge Capital. Rick had worked for the legendary John Griffin, one of the more famous and successful Tiger cubs of Blue Ridge Capital since its founding. Not to mention, he was also one hell of a human being!

At Falcon Edge, I had the opportunity to see the Tiger research process firsthand.

As we discussed earlier this week, that process revolved around the concept of value-added research ("VAR").

The idea was that investors shouldn't just rely on Wall Street's research or even what the company says, but they should find outside sources that create the most transparent picture of the company's fundamentals and competitive positioning.

This could involve speaking with customers, competitors, consultants – you name it.

It would be typical for us to speak with literally hundreds of non-Wall Street sources when developing a thesis on a significant position.

This research was coupled with trying to understand what was not widely understood by Wall Street. This was called "variant perception" and was always critical to an investment.

It was great to use outside sources to develop a clear picture of a company's positioning, but did we have an insight that was any different from what everyone else was thinking?

Another aspect of this process was that it was exhaustive and relentless!

This was no "checking the box" exercise... It was more like training as a professional athlete. As I mentioned, we would sometimes do hundreds of interviews, and our internal reports could run hundreds of pages.

Julian and his protégés have many other legacies we could discuss, but this exhaustive research process is the most powerful one and the one that I got to experience firsthand.

So, what does this mean for the regular investor?

Well, the first thing to consider is to remember that this is your competition.

These are very incentivized investment firms with lots of capital and the ability to do research at a level that an average investor would never come close to accomplishing.

This is why focusing on the big picture and long-term investing makes the most sense for individuals.

If you get the big picture right with a significant thesis, you don't need this degree of due diligence to support your thesis.

A long-term emphasis also allows you to look through some of the more minor details.

This is not to say that the Tiger firms don't also look at the big picture and the long term, but they have a much greater ability to optimize in the near term.

Individuals should be looking years out to maximize returns.

That said, understanding your investments is crucial to investment selection and having the conviction to stay invested during the most challenging times.

Do some work on what you own and make sure you understand your positions, as that ultimately leads to the best investment success.

HX Daily Redux

Tiger Management Investment Frameworks

To complement the first section above, we’d like to share Tiger Management’s Investment Frameworks for both long and short investments. We originally published these as two separate posts in June 2024.

Take notes and enjoy!

Tiger Management: Long-Term Investment Framework

When I began my career on Wall Street more than 25 years ago, there were fewer hedge funds. While a few small ones existed here and there, the industry was dominated by a select few names.

Ken Griffin's Citadel dominated the convertible arbitrage side. Steve Cohen of SAC Capital Advisors already had a reputation as a legendary trader. On the macro-investing side, George Soros was the 800-pound gorilla famous for taking on the Bank of England and being partially responsible for the collapse of the British pound.

On the equity side, though, one name stood apart...

Steeped in history – and a bit of Southern twang – this fund and the funds it eventually spun off would become the most significant center of equity hedge-fund excellence.

I'm talking about Julian Robertson's Tiger Management.

Robertson was a former U.S. Navy officer from North Carolina who began his career as a stockbroker at seminal brokerage firm Kidder, Peabody & Co. He eventually became the head of the firm's asset-management business, but he left in 1980 to start Tiger with just $8 million in capital.

By 1996 – the year I started my career in the hedge-fund business – Tiger was managing more than $7 billion in assets and was potentially larger than all of its equity peers combined.

My introduction to Tiger was around this time, as several of my salespeople also covered it or some of its descendant funds – known as "Tiger Cubs." In fact, my first hedge-fund job was in the same building as Tiger Management (101 Park Avenue in New York City), but we were about 20 floors below Tiger – in both altitude and assets under management ("AUM")!

I also became one of the founding members of a Tiger "Grand Cub" called Falcon Edge Capital, which we eventually grew to more than $3 billion in AUM.

Throughout those years, I was always incredibly impressed with the thorough research conducted by the Tiger funds.

While my investing is as much focused on the stock as the company fundamentals, it's critical to understand the drivers of how investors will react to those fundamentals.

The Tiger funds not only put together a well-defined process but, almost uniquely, they also focused on those drivers rather than the fundamentals alone. Don't just figure out what you and others know, but also what you know that others do not know. Develop a "variant perception" to understand how and why a stock might perform differently than the consensus.

They also focused on something they refer to as "value-added research" ("VAR"). This goes beyond just reading reports and talking to analysts and management. It includes "boots-on-the-ground research" – visiting manufacturing plants, customers, competitors, etc... and conducting interviews to verify knowledge and develop that variant perception.

I'm incredibly proud to call myself an alumnus of this lineage. In my five years at Falcon Edge, I learned as much about company analysis as I had in the previous 15 years combined.

So, today I'll share the famed Tiger Investment Framework. I don't know who originally put this together, but it was likely created in the late 1990s. The managing partner of a major Tiger Cub gave it to me in the early 2000s, and today, I'm sharing it here.

Even though the list is almost 20 years old – it still applies. I encourage you to read the list and incorporate it into your process for long-term investing...

Long-Term Investment Framework

Industry Study

• Is this a good business?

• What are the critical success factors for superior performance in this industry? (VAR)

• Define the market opportunity. How do competitive products address this opportunity?

• What are the barriers to entry (“moats”)? (VAR)

• What is the relative power of: (VAR)

  • Customers

  • Suppliers

  • Competitors

  • Regulators

• Who controls industry pricing? Does the company sector have any pricing power?

• How (and how much) can a good company differentiate itself from a bad one in this industry?

• Do you understand this business? Test yourself and describe it to a 10- year-old.

Business Model (VAR)

• What is the selling model: Razor blades? Services? One-off contracts?

• What are the economics of the base business unit? How does it stack up against competitors?

• Why is the company good (or bad) at what it does? Can the company sustain it?

• Is this company growing by acquisition? How sustainable is that?

• Be able to easily describe the entire sales process - from order to fulfillment.

Management (VAR)

• What is the executives' background, and what do their former colleagues, investors, and classmates say about them? Have they been successful in the past? (Very important)

• How is management compensated? Are its interests aligned with shareholders?

• Has management been good at allocating capital?

• Are management members buying or selling stock? How much as a percentage of their holdings, and why?

Company/Culture Issues (VAR)

• Is this a great company? Is it built to last? What could change this assessment?

• Can you imagine holding stock in this company for 20 years?

• If you had access to unlimited capital, how would you feel about your chances of successfully competing against this company?

• Compare to a weak competitor in the same industry. What is the difference, and why?

• Financial Measures First Step: Check against all the accounting shenanigans in Howard Schilit's book Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports.

• What is the company's capital structure, and how does it compare to its peers?

• What are the trends in inventory turns, days payable/receivable, and working capital?

• What are the company's coverage ratios on interest payments?

Cash Flow

• What are the company's capital requirements and cash flow characteristics?

• How is the company choosing to invest its capital? Capital expenditures? Buybacks? Acquisitions?

• Does the company need to access the capital markets? How soon/often?

Earnings/Profitability

• Regarding the company's sales model, how visible are earnings quarter-to-quarter and year-to-year?

• Is this a fixed or variable-cost business? How much cost leverage?

• Do earnings grow as a function of unit sales growth, price increases, or margin improvement? How sustainable is this growth?

Valuation

• Looking forward, what is the company's valuation in terms of:

  • Market value/earnings

  • Enterprise value ("EV")/earnings before interest, taxes, depreciation, and amortization ("EBITDA")

  • Free cash flow ("FCF") yield (after-tax FCF/market value)

  • Market value/sales

• What are the company's earnings, EBITDA, and FCF growth rates?

• What are consensus earnings estimates versus your own expectations?

• What are the key leverage points in our own and the Street's earnings models? What has to go right, and where is the most chance for surprise?

• Are the company's accounting policies conservative and in line with those of its peers?

Risks

• What are the big unknowns? How much can the company control/influence these risks?

• What could cause this investment to be a total disaster? How bad could it be?

Other (Timeline/Timing Issues)

• What are the catalysts (triggers) for the company's proper valuation to be realized?

• What good news and what bad news will affect the company in the coming year?

• Who owns the stock? Momentum funds? Big mutual funds? Hedge funds?

• How difficult is it to build a significant position (float, volume)?

• Draw a timeline of expected events and dates. What might go wrong, and when?

Do you have an investment framework you utilize? Share with us in the comments section online or reply to this email.

Tiger Management: Shorting Investment Framework

While the firm made most of its money going long on stocks, one fascinating aspect of the Tiger process is that these folks spent most of their time looking at shorts.

So, if one of the most famous investment firms in history spent the majority of its time working on shorts, should you?

First, keep in mind that while selling stocks short can be rewarding financially, mathematically, shorts can never be better than longs. The most you can make on a short is 100% of your capital deployed. A stock can only go to zero. You can make 200%, 500%, 1,000%, or even more on a long investment. This is just math, meaning longs should always be the primary focus of your investing, especially if your goal is to make money.

Additionally, shorts are riskier. On a long, you can only lose 100% of your capital. With a short, you could lose the same 200%, 500%, or 1,000% the other way. This is what we call a "bad risk/reward."

And finally, remember that the incentive framework is stacked against you when you go short a stock. Company management and shareholders are all working to make the company a success. This means many highly motivated people are actively working to lose you money. This doesn't mean they will be correct, but it's essential to consider the incentives.

So why did Tiger spend so much time on shorts?

Fundamentally, Tiger was a hedge fund – the idea was that it could take out a lot of the overall stock market risk by having good shorts that would offset any market volatility.

And being hedged – in theory – makes you a better long investor. If the stock market goes down 10% on a political event and sends all your long positions lower, but you don't lose much of your money overall because of your hedges, you're unlikely to sell under pressure. In fact, you're more likely to make the right move, buy more of your longs, and cover some of your shorts.

Proper hedging – and good short sells are a great way to do it – can be a powerful investing tool to improve your results.

Additionally, the process of being a short seller makes you a better long investor.

Given the risks of short selling that I explained earlier, it's critical that you do even more work on a short than on a long.

Throughout my years in the markers, this is why I often spent as much as 70% of our time on the short side, even if longs made up 90% of the returns.

Understanding what makes a stock go down (and what makes a company disappoint the market) is a great way to "check" your work on the long side. It's one of the reasons I have been able to avoid many of the most frustrating positions, such as "value traps."

If you start doing the work on a long, but it begins to sound like a great short, it's time to move on.

With this in mind, I'll share the Tiger Investment Framework for shorting.

While incorporating shorts (or hedges) into your investment portfolio needs to be done thoughtfully and carefully, incorporating the short-selling process into your investment process is a no-brainer...

Shorting Investment Framework

Is this a bad business?

• Who has the power – customers, suppliers, or competitors?

• What are the barriers to entry?

• What kind of reinvestment of capital is needed to grow?

• How is the business changing?

• What is the historical and current rate of success in this business?

• What are the major risks to the business plan?

What is the major misperception?

• Why does it exist?

• Who is responsible for it?

• What stakes do the various parties have in keeping the stock price high?

• How popular is the industry? A rising tides lift all boats... for a while.

Assess management

• What's the industry reputation?

• Look at past history of success or failure.

• Is management straightforward or cunning?

• Check out insider ownership and selling.

Ratios

• Earnings before interest and taxes ("EBIT") to enterprise value ("EV")

• Earnings before interest, taxes, depreciation, and amortization ("EBITDA") minus capital expenditures ("capex") to EV

• Growth of inventories to cost of goods sold – are inventories rising faster?

• Growth of accounts receivable ("AR") to sales and accounts payable ("AP") to sales

• Any accounting changes – a smaller reserve for bad debt, revenue recognition, etc.

• Cash flow to interest expense

• Review Howard Schilit's red flags. [He's a pioneer in the field of detecting accounting tricks... Last week, I mentioned his book Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports.]

Sentiment: Are more people bullish or bearish on the stock?

• Do a full media search for articles. Make a list of analyst recommendations.

• Short interest? (Remember, the stock that is already short is potential buying power.) Be careful if there is universal bearishness.

Timing

• What is the expected trigger on the misperception? Make a timeline.

• Who owns the stock – long-term or short-term investors, momentum investors?

• Has the soufflé already risen once? [In other words, has the stock seen a significant move higher?]

• Can the rising stock price be self-fulfilling for a while (financing opportunities, etc.)?

• Where does the company stand regarding the fantasy, transition, reality paradigm?

And when the story starts to unfold – regardless of stock price:

• Watch for earnings warnings, excuses, etc. Where there's smoke, there is often fire.

• Is the company or Wall Street analyst group in denial of the problem?

• Watch the ratios, insider selling, etc.

• Even if the stock is down significantly from its high, if answering all these questions convinces you that it is still a short, do not cover and consider adding to the position (see below).

• Does waiting for the new financials feel like waiting for Christmas? If yes, add to the position.

Again, even if you aren't shorting stocks, it makes sense to consider the points from this Investment Framework and utilize them in your own process. Here at HX Research, I incorporate questions like these into the research process.

Do you utilize shorting? Let us know your strategy in the comments section online or reply to this email.

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].