$2.5bn return for investor who bought bank shares when everyone else was selling
Published 22/12/2009 | 06:11
Away from the pride and bluster of Wall Street, in a modest office in suburban New Jersey, David Tepper is closing out one of the most profitable years any hedge fund has ever had.
His fund is up $7bn (£4.4bn), and he'll be taking a reported $2.5bn of that home personally.
The strategy: keeping your head when all about you are losing theirs.
The 52-year-old has managed to become one of the most successful investors in the world without becoming a household name, without attracting public opprobrium and without even having to skip dinner with his family.
In contrast to George Soros, known as the man who "broke the Bank of England" when he bet against the pound in 1992, or more recently John Paulson, whose bets against the US housing market turned him into a multi-billionaire when the crash came, Mr Tepper is an optimist, a buyer rather than a seller, a speculator who looks like he is building things up instead of tearing them down.
He buys things at the bottom, when no one else will. In the credit markets, they call these people distressed debt investors, folks who will buy the bonds of companies that everyone else thinks are going to disappear.
This year, he invested in Citigroup and Bank of America when many other people thought the two biggest US banks might be nationalised in the spring panic, and he has bought into Royal Bank of Scotland, too, as the British Government worked to repair that fallen titan. He's been doing his bit for what he calls "Mother England".
When the league tables of 2009 are finally compiled, it seems likely that Mr Tepper's Appaloosa Management will be at the top, a remarkable achievement for a man from a modest area of Pittsburgh.
He who eschews the glitz of Manhattan or the gargantuan houses of Connecticut in favour of nights at home in New Jersey with his wife Marlene and their three children, and for coaching his kids' baseball, soccer and softball. (His preference is soccer, because of the strategic thinking required.) The family still lives in the two-storey home that he purchased in the early Nineties.
"Money should be a secondary goal," Tepper told the business school magazine at Carnegie Mellon university in 2004, after he had donated $55m to his alma mater, which is now named after him. MBAs can be impatient when it comes to job hunting. Students facing graduation should work hard at finding an experience that will lead them to things that they like. I loved the markets, and that was my focus."
His love of numbers can be traced back to following baseball as a child, and memorising the myriad statistics from individual and team performances. His accountant father funded his first portfolio of stocks as a teenager.
A first job as a credit analyst in Pittsburgh eventually took him to Goldman Sachs in the 1980s heyday of junk bond trading, but when he was repeatedly passed over for partnership at the elite investment bank there he walked out to set up on his own.
Appaloosa's place at the top of the league table this year is no fluke. Twice before Tepper has made 100 per cent-plus returns: when he foresaw confidence returning to emerging markets in the middle of 1990s and again in 2003, when the effects of the last US recession abated. In the 17 years since he set up on his own, he has returned an average of more than 30 per cent a year.
And of course this is all happily self-reinforcing. With increasing billions to play with, each successful bet can earn bigger and bigger payouts. Unlike many hedge fund managers, Tepper rarely these days uses borrowed money to increase the size of his bets.
Nonetheless, his style of investing requires some mettle, perhaps why he keeps a sculpture of a pair of testicles in his office, to rub for luck and for laughs when clients come calling. In 2009, his ballsy bets paid off.
"I felt like I was alone," he told The Wall Street Journal yesterday, but he also was certain that everyone else was "nuts, nuts, nuts". He said: "Why would the government break its word? They're not going to let these banks go under, people aren't being logical!"