Be Greedy When Others Are Fearful

This is really an insightful interview which i came across on http://www.forbes.com. 

Whitney Tilson has divulged some good investment ideas. 

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Be Greedy When Others Are Fearful
Wallace Forbes, 04.22.10

Whitney Tilson, managing partner of T2 Partners spoke with Wallace Forbes about following in Warren Buffett's steps regarding being greedy when others are fearful and fearful when others are greedy. 

Whitney Tilson: I started our original hedge fund more than 11 years ago, and we now manage both hedge funds and mutual funds. We are value investors, meaning we follow the path laid out by Graham, Dodd, Buffett and Munger and scour the investment universe looking for the proverbial 50 cent dollars. We're stock pickers who invest primarily in the United States, on both the long and short sides.  

Wallace Forbes: Terrific. That I think can be very valuable to individual investors to have both aspects.  

Tilson: Generally speaking, we follow one of the most important mantras in investing. As Buffett says, we try to be greedy when others are fearful and fearful when others are greedy. In the 11-plus years we've been managing money, we've had some extraordinary opportunities to be both fearful and greedy. In fact, two of the biggest stock market busts in history have occurred in just this past decade. And in both cases I'm proud to say that we invested aggressively. We recognized the bargains that were to be had in late 2002 and again in early 2009. 

Forbes: The busts represented opportunity knocking. 

Tilson: Absolutely. But it wasn't easy because it's impossible to time the bottom. For example, we started buying things in late 2008 after Lehman collapsed and we thought things were cheap. It turns out we were right--but the stocks we were buying got much, much cheaper.

It was incredibly painful and difficult to see things we bought at $8 that were at $2 four months later.  

Forbes: That's enough to give you a little indigestion. 

Tilson: Absolutely. Fortunately, the kind of stocks I'm talking about were things like Huntsman, a specialty chemical company. We recognized the dangers of highly leveraged financial institutions, and so we avoided the things that went to zero.

It isn't always true that if you think something is cheap at $8, it is therefore cheaper at $2 if the company doesn't have the balance sheet to survive the downturn and ends up a zero for shareholders. What was critical was to differentiate between the companies that had a balance sheet that could keep them in business until the cycle turned vs. those that didn't.

And so we invested in some hairy situations for sure. Huntsman has quite a bit of debt, but there were no near-term debt maturities, so it survived and the stock has gone from $2 to a peak of more than $14 in the past year. So that's an example of the bottom fishing that we did. 

Now we're out of Huntsman. It hit our price target and we sold. An example of some bottom fishing that we did where we still have a sizable position in is General Growth Properties. General Growth, along with many other highly-leveraged REITs, was one of our favorite shorts in 2008. And sure enough the stock collapsed. We shorted it at $40, it fell to under $1, and we covered our short. But interestingly enough, even in bankruptcy--and the company to this day is still in bankruptcy--we thought that this might be one of those rare bankruptcies in which there would be a recovery for the equity. General Growth went into bankruptcy not because of insolvency but rather because of illiquidity. We think their assets are worth more than their liabilities, meaning there's value there for the equity holders. But the problem is that during the crisis they couldn't roll their debt. 

Forbes: Is General Growth a stock that you're recommending now? 

Tilson: Absolutely. Normally, when we buy something about 50 cents and it rises to over $15 in one year, we've made our money and we're out of there. It has been our single most successful investment ever. Yet today, General Growth remains one of our largest positions. Forget the fact that we've made a lot of money on it--that's irrelevant to our decision today to hold it. 

The reason it's one of our largest positions today is because there's a bidding war for the company. Simon Property Group would very much like to own it, but there's also a competing bid from Brookfield Asset Management, Fairholme Capital Management and Pershing Square Capital Management.  

Forbes: So this is not only something you own and have done well on, but you think it's still a buy today? 

Tilson: It's a very different risk/reward proposition than it was a year ago. It's interesting to see how this investment has changed. A year ago it was very speculative--what I call a mispriced option. At 50 cents or $1 there was a very good chance you would lose all of your money--but also the chance you could make 20 or 30 times your money. Today there's very little chance of losing much money because there's a $15 bid on the table. And the stock is barely above $15. 

One of two things will happen within the very near future: Either someone's going to buy the company, most likely Simon, at a price higher than today's or the company is not going to be acquired and will come out of bankruptcy as an independent company. 

In either case we think the stock price will be north of $20. So here's the risk/reward: If the stock is at $16, we think there's $1 of downside and at least $4 of upside. And we think the probabilities of $4 of upside is significantly higher than $1 of downside. Even if it were a 50/50 proposition, it makes sense--and we think it's better than 50/50.  

So it's changed in a mere one year from an extraordinarily speculative investment to one in which today there's no longer nearly as much upside, but your downside is much more limited as well.  

Forbes: That's very helpful. Now you had mentioned you also take short positions. Are there any stocks you don't like that you think might be overpriced that would be better sold or shorted? 

Tilson: Sure. Generally speaking, many dicey companies have run up a lot over the past year and our short book has hurt us a lot because everything's been running (but we've still done very well because our long book is bigger than our short book). 

It is both a very attractive but also very tough environment for shorting. By that I mean that there are a lot of overpriced stocks out there. However, they've been overpriced for months and they keep going up because there's so much liquidity sloshing around. Also there's a lot of momentum in some of these stocks that's running them up.  

A good example is a company that makes yoga apparel called Lululemon Athletica. They have a nice little niche and they're growing rapidly--their apparel is hot and margins are very high. But it's trading at an extreme valuation and it looks like a fad to me--It's yoga clothing! We think the fad could pass and are quite certain that the valuation is extreme.

The stock is today at right now as I speak at $43.66. It bottomed in March of '09 below $5. So the stock's gone from there to almost $45 and has a $3.1 billion market cap. Its trailing 12 month earnings through January 2010 were 82 cents a share, so it's trading at close to 54 times earnings. And even if you believe analysts' estimates for their year ending January 2011, it's trading at 41 times. 

Forbes: So that's a good sale or a short? 

Tilson: This is one we are short.  

Forbes: Is there anything else you'd like to add? 

Tilson: Yes. Let me just leave you with our general view of the world. A year ago was perhaps a once in a lifetime great opportunity to be aggressive and play offense. And if you had the courage and the cash, it was an all-time great opportunity to make money. But in only a year we've had eight years of normal stock market appreciation. While I don't think we're back into bubble territory, most of the time as an investor you want to play defense, grind it out, and wait for opportunities to be greedy.  

A year ago was one of those opportunities. Today is not, and so we're grinding it out. Things that have $1 of downside, $4 of upside is grinding it out. Things like Berkshire Hathaway and Microsoft are two of our largest positions. They're not screaming cheap, but they're safe. They offer nice upside, limited downside. That's how you grind it out and make decent returns. And then be patient and wait for those opportunities to really get greedy. We're playing defense now. 

Forbes: That's a terrific balanced view. And you've obviously used those views to guide your management of funds successfully in a tough, tough time. Many thanks for sharing your thinking with us today, Whitney.

Source: http://www.forbes.com/2010/04/22/buffett-tilson-reit-intelligent-investing-general-growth_print.html