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The Federal Reserve Solved!

A Lesson From One of the Money Masters

Many of the readers here at HX Research know a lot about my history and background. 

My career has spanned three decades of professional investing. Across that time, I have had the opportunity to work with and be influenced by some of the greatest investors of all-time.

In the past few days there has been a tremendous amount of focus on the actions of the Federal Reserve Bank.

Many of you know this but “The Fed” (mostly) controls the monetary policy in our country. This means how much money is in the economy and how much it costs to access that money via interest rates.

We could write one hundred issues about the role The Fed plays in the economy and stock market but we think the anecdote we are going to talk about today will take care of it all in ONE issue of HX Daily.

Back in 2001, two partners and myself founded a hedge fund called Stadia Capital. The three of us were very young (I was 29!) and we started with a tiny amount of investor capital. $585,000 to be exact!

That is everything we could put together from our friends, family and ourselves. (For the record – think I was able to put in $5000 – ha ha!)

While we didn’t have very much capital to start, we were blessed with some great relationships. My partners and myself had made quite a few friends in our short time on Wall Street. One group of contacts that were able to foster was within the group of managers that were (or had been) affiliated with famed hedge fund Tiger Fund Management.

At my old firm, we wrote often and fondly about Tiger and its founder Julian Robertson. As we move through the rest of this year, we will share many of those pieces.

The wisdom – and its simplicity – of Julian and his disciples is rare and legendary. It has also produced more wealth out of the investing business than probably any other “family line” out there.

One contact in this network we had built is a man named John Griffin.

Now many (most) of you have likely heard of Julian but far few of you have heard of John. John was (and is) the best of the best!

He was an early alumni of Tiger and launched one of the very first (maybe even THE first) “Tiger Cub”. In the next two decades he put together what is still one of the single best track records of investing out there.

The other incredible thing about John is that he is an absolute gentleman.

My partners had met him through our network and asked if he would give us advice about starting our new venture. He didn’t hesitate for even a single moment!

First words out of his mouth were “Call me anytime guys and will help you as much as I can!”

For a group of rookies with no track record and no capital this was like having Michael Jordan say he would be happy to coach a bunch of eighth-graders at any time.

As I have said many, many times – I have been very blessed in this business.

We are going to write some more about John in the future and try to even get him on the HX Podcast.  Again, he is an absolute legend but also one that is incredibly skilled at distilling his wisdom.

Yesterday, though, we thought of John in the wake of the most recent Fed meeting.

To recap our version of what happened in that meeting…the Fed announced they were doing nothing. Which was expected.

They also announced their views had not really changed. Which was expected.

Finally, the Chairman of the Fed (Jerome Powell) got up and spoke and said basically…nothing new. Which was expected.

Initially, the stock market didn’t do much but as Chairman Powell continued to speak it began to move higher. Strongly.

This was great…until it wasn’t!

For reasons that no one really knows (nor will ever really know), in the last hour of the day the stock market gave up all of the gains. It ended the up basically flat but the last hour loss was violent and fast.

There were quite a few commentators out there that noted that it was very rare to see THAT kind of sell-off so fast. Many felt it must portend something bad for the stock market.

This brings us back to John…

We launched our fund Stadia in March 2001. Although we started with almost no capital, we did good returns in a difficult stock market and grew.

THEN the events of September 11 hit! Those were terrible times but our strategies have always been ones that were built for the worst and most difficult markets.

Our fund did very well.

A few months later, my partners and I had a meeting scheduled with John.

There was no particular agenda. John didn’t spend much time thinking about the “macro” side of investing and was very focused on individual stocks.

We loved going over there and hearing what he and his team were working at the time. They did incredible work. 

Would like to think the same could be said about our team. John and his analysts appreciated our ideas and research. It was a good mutually beneficial relationship.

Our fund was doing ok at the time but we were still in start-up phase and very stressed out. We were young with this small fund and business and we felt every tick of the stock market.

Our meeting was for 2pm on that day. 

Earlier that morning the stock market was quite volatile. It turns out – like this last Wednesday – that this was the day that the Fed was going to make its latest interest rate announcement and give their outlook.

My partners and myself were very nervous about all of it.

We didn’t have a particular view on what the Fed was going to say. Nor did we have any stock positions (or the portfolio overall) that was particularly vulnerable to what was going to happen.

Despite all of this, I put a call into John and politely told him that we would like to move the meeting to another day. Always like to be upfront and said we were nervous about the Fed meeting and thought it would be best to find another.

John – the consummate gentlemen – said “Of course, no problem guys. Am always available.”

Then, however, he said something else. Something so powerful that – as I said in the beginning – can distill a hundred (or a thousand) articles of Fed analysis into one simple view.

He said…

I appreciate that guys. Understand you are nervous and you have this start-up business.  Let me tell you one thing, though, if you portfolio or your strategy is that dependent on what the Fed is going to say today – then maybe you need to be rethinking your portfolio and strategy.”

Mic drop…

Those words hit me like a thousand bricks all at once. I hesitated for a few seconds (which is rare for me) and the in some stumbling manner said to John…”Umm, yes. Ok – we will see you at 2pm.”

Of course, we did the meeting and continued to learn from John for many years.

That 10 second phrase, though, taught me everything I would need to know about the Fed for the two decades!

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