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Lessons from Edgar de Picciotto

Edgar de Picciotto of Union Bancaire Privee

Edgar de Picciotto, an early promoter of hedge fund investing, passed away on Sunday 13 March 2016 after a long sickness. On November 12, 1969, de Picciotto opened his own asset-management bank in a city dominated by such well-known private banking names as Pictet Group, Lombard Odier, Darier and Hentsch.

Edgar de Picciotto founded Union Bancaire Privee (UBP) in 1969. UBP is one of the most favorably capitalized private banks in the world, and a leading player in the field of wealth management in Switzerland with $110 billion in assets under management at the end of December 2015. Edgar de Picciotto, who was born of Syrian-Lebanese parentage, moved to Switzerland in the 1950s and worked as a financier before founding UBP’s predecessor in 1969. From the bank’s inconspicuous headquarters on one of Geneva’s chief luxury-shopping drags, he built a customer base of affluent individuals and institutions all over Europe, the U.S., and the Middle East.

De Picciotto was born in Beirut and hailed from a lineage of businesspersons, which lived from the 14th to the 17th century in Portugal, moving in later centuries via Italy and Syria to the Lebanon. He afterward lived with his parents and brothers in Milan, ultimately deciding to study mechanical engineering in France. However, it was financial engineering, which took his perpetual fancy. He earned his spurs and made financial contacts, working in his previous father-in-law’s bank in Geneva. In its 2015 annual report, UBP recalled,

As our 2015 Annual Report was going to print, we learnt with deep sorrow that Edgar de Picciotto, the Chairman and founder of Union Bancaire Privee, had passed away at 86 years of age.

Edgar de Picciotto was a recognized creative visionary and pioneer in a wide variety of fields in the banking industry. He quickly rose to become a leading figure of the Geneva financial hub, and one of the most respected authorities on investments around the world.

In just a few decades, Edgar de Picciotto turned UBP into one of the world’s biggest family-owned banks. Very early on, he also set up a governance structure designed to ensure the Group’s longevity by integrating the second generation of his family into the business.

UBP is his life’s work. UBP is his legacy to us. It now falls to us to grow UBP with the same entrepreneurial spirit that he used to create the Bank, by perpetuating the values that Edgar de Picciotto would wish to see upheld every day and in everything we do.

Edgar de Picciotto’s children and all the members of UBP’s management are determined to carry on the spirit that its founder instilled in it, and they know that they can rely on the professionalism and dedication of all UBP’s staff members to continue to grow the Bank’s business, while also maintaining its independence.

In 2002, news of merger talks between two family-controlled private banks, Union Bancaire Privee (UBP) and Discount Bank & Trust Company (DTBT) over forming one of Geneva’s biggest private banks became newest sign of the altering attitude among the country’s private banks. Withdrawing from UBP’s operational management 20 years ago, de Picciotto set up a governance structure designed to guarantee the bank’s durability. His son Guy de Picciotto has been chief executive officer since 1998, while his daughter, Anne Rotman de Picciotto, and his eldest son, Daniel de Picciotto, are on the board of directors.

Byron Wien, vice chairperson of Blackstone Advisory Partners, had the pleasure of calling Edgar de Picciotto his mentor.

My purpose in reviewing Edgar’s thinking over the past 15 years is to show how he consistently tried to integrate his world view into the investment environment. That was his imperative. He wasn’t always right, but he was always questioning himself and he remained flexible. When he lost money, it tended to cause minimal pain in relation to his overall assets, and when one of his maverick ideas worked, he made what he called “serious money.”

Lessons from Edgar de Picciotto of Union Bancaire Privee

Edgar de Picciotto as a Mentor

Mentors fall into two categories: there are those you work with every day who are incessantly guiding you to enhanced performance. The ability to serve as a great mentor is one of the most undervalued and underappreciated skills in finance. Perhaps better branded as a “role model,” an outstanding mentor can provide not only a wide-ranging knowledge base and technical skills, but also the sagacious financial judgment that implies the high-class investor. Perhaps of even larger importance, a mentor can express a “philosophy of practice,” including the optimal interaction with clients and economists, a procedure for remaining current with advances in the field, and a thorough concept of how the practice of finance fits into a full life. A sympathetic mentor can also provide counselling in selecting the best practice opportunity and can maintain a close relationship for many years.

Mentors are significant to all of us, as they teach us what can’t be learned from books or in the classroom. They set aside a concrete example of “how to get it done,” and, sometimes more importantly, what to be done, when to do it, and whom to engage in the effort. Their inspiration often carries us through when nothing else does.

  • Understand the consequence of understanding the macro environment. “Many people describe themselves as stock pickers … but you have to consider the economic, social, and political context in which the stocks are being picked.” De Picciotto indubitably showed he had a good nose for trends.
  • Meet as many people of authority as you can. “For him, networking never stopped.” De Picciotto took great pleasure from knowing smart people and exchanging ideas with them.
  • “Nobody owns the truth.” De Picciotto would test his ideas on those he cherished and, and if he ran into a convincing conflicting opinion, he would contemplate on it seriously and sometimes change his position. While he never lacked principle about his ideas, he was unprejudiced and malleable.
  • Value the trust and the delight of friendship and the vainness of resentment. De Picciotto was gratified of his own success but also an enthusiast of the success of others who were his friends.
  • Never talk about overlooked opportunities except when you are disapproving yourself. Be your own harshest critic. Even if you are an intellectual risk taker, you will make many mistakes. Diagnose them early, but never stop taking risks, because that is where the tangible opportunities are and your life will be more invigorating as a result.
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Few Professional Investors, Hedge Funds, and Mutual Funds Routinely Beat the Market

Wall Street, New York

Vanguard founder John Bogle, Warren Buffett, Charlie Munger, and many wise people have, with plenty of persuasive evidence, adviced that most people shouldn’t even try to beat the market or attempt to manage their investments actively. Instead, they should just pick low-cost index funds and assemble a balanced and portfolio based on their specific risk profiles and financial goals.

Few professional investors have actually managed to outperform the rising market consistently over those years. A study quoted in the New York Times indicates that perhaps only two mutual fund managers have beat the broad stock market indices: the Hodges Small Cap Fund and the AMG SouthernSun Small Cap Fund.

In other words, if all of the managers of the 2,862 funds hadn’t bothered to try to pick stocks at all—if they had merely flipped coins—they would, as a group, probably have produced better numbers. Instead of two funds at the end of five years, basic probability theory tells us there should have been three. (If you’re curious, I explained how the math works in a subsequent column, “Heads or Tails? Either Way, You Might Beat a Stock Picker.”

Warren Buffet’s The Million-Dollar Bet

In 2008, Warren Buffett bet that over a 10-year period the S&P 500 would outperform a sampling of hedge funds. Buffett’s The Million-Dollar Bet with was New York money manager Protege Partners pits the S&P 500, as represented by the Vanguard 500 Index Fund Admiral Shares, against five funds of hedge funds chosen by Protege Partners, the names of which have never been disclosed. A charity of the winner’s choice will receive $1 million or more at the end of the wager.

Fortune’s Carol Loomis mentions that, during the seven years through the end of 2014, the Vanguard 500 Fund is up 63.5% compared 19.6% for the Protege hedge funds of funds. Not all of the five funds had their final figures for 2014, when the Fortune article was published.

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Insights from Tobias Carlisle’s Book ‘Deep Value’

'Deep Value' by Tobias E. Carlisle (ISBN 1118747968) Failing businesses, poor management, and unpredictability often provide the most promising investment opportunities. Tobias Carlisle’s Deep Value offers insight into finding the best risk-to-reward ratio for investors willing to go against intuition and what is normally accepted by the investment crowd.

Tobias Carlisle is the popular blogger on value investing, contrarian thinking, and activist investing. He blogs at Greenbackd (Deep value, contrarian, and Grahamite investment)

“Deep value is investment triumph disguised as business disaster. It is a simple, but counterintuitive idea: Under the right conditions, losing stocks – those in crisis, with apparently failing businesses, and uncertain futures – offer unusually favorable investment prospects,” explains Carlisle. “This book is an investigation of the evidence, and the conditions under which losing stocks become asymmetric opportunities, with limited downside and enormous upside.”

Deep Value provides plenty of research that the ‘cheapest’ shares based upon simple value formulae consistently outperform.

What distinguishes a first-class business from an ordinary business?

Tobias Carlisle - Author of Deep Value on Value Investing In a cruel irony, most good businesses earning high returns on invested capital can’t absorb much incremental capital without reducing those high returns, while most bad businesses earning low returns on invested capital require all earnings be reinvested simply to keep up with inflation. Bad businesses that can only earn sub-par returns destroy capital until they are liquidated. The sooner the business is liquidated, the more value that can be salvaged. The longer the good business can maintain a high return on invested capital, the more valuable the business. What then distinguishes the first-class business from the ordinary business? The differentiator is not simply high returns on capital, which, as Graham pointed out, even an ordinary business will earn at some point in the business cycle, but sustainable high returns on capital throughout successive business cycles. The sustainability of high returns depends on the business possessing good economics protected by an enduring competitive advantage, or what Buffett describes as “economic castles protected by unbreachable ‘moats.'”

On Ben Graham and activism

Graham was a forceful and eloquent advocate for the use of shareholder activism to foment change in deeply undervalued companies. The very first edition of his magnum opus, Security Analysis, published in 1934, devoted an entire chapter to the relationship between shareholders and management, which Graham described as “one of the strangest phenomena of American finance.” “Why is it,” he wondered, “that no matter how poor a corporation’s prospects may seem, its owners permit it to remain in business until its resources are exhausted?” In answering his question, Graham wrote that it was a “notorious fact … that the typical American stockholder is the most docile and apathetic animal in captivity:”

“He does what the board of directors tell him to do and rarely thinks of asserting his individual rights as owner of the business and employer of its paid officers. The result is that the effective control of many, perhaps most, large American corporations is exercised not by those who together own a majority of the stock but by a small group known as ‘the management.'”

He saw deep undervaluation as a prod impelling shareholders to “raise the question whether it is in their interest to continue the business,” and “management to take all proper steps to correct the obvious disparity between market quotation and intrinsic value, including a reconsideration of its own policies and a frank justification to the stockholders of its decision to continue the business.”

Characterizing Price and A Wonderful Company

We know that a wonderful company will earn an average return if the market price reflects its fair value. To outperform, the price must be discounted—the wider the discount, or margin of safety, the better the return—or the business must be more wonderful than the market believes. Wonderful company investors must therefore determine both whether a superior business can sustain its unusual profitability, and the extent to which the stock price already anticipates its ability to do so. This is a difficult undertaking because, as we’ll see, it is the rare company that does so.

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How Carl Icahn Transformed into an Activist Investor and Mature Corporate Raider

Carl Icahn, Activist Investor and Corporate Raider

Icahn’s progression from arbitrageur and liquidator of closed-end funds to full-blown corporate raider started in 1976 with a distillation of his strategy into an investment memorandum distributed to prospective investors.

It is our opinion that the elements in today’s economic environment have combined in a unique way to create large profit-making opportunities with relatively little risk. [T]he real or liquidating value of many American companies has increased markedly in the last few years; however, interestingly, this has not at all been reflected in the market value of their common stocks. Thus, we are faced with a unique set of circumstances that, if dealt with correctly can lead to large profits, as follows: [T]he management of these asset-rich target companies generally own very little stock themselves and, therefore, usually have no interest in being acquired. They jealously guard their prerogatives by building ‘Chinese walls’ around their enterprises that hopefully will repel the invasion of domestic and foreign dollars. Although these ‘walls’ are penetrable, most domestic companies and almost all foreign companies are loath to launch an ‘unfriendly’ takeover attempt against a target company. However, whenever a fight for control is initiated, it generally leads to windfall profits for shareholders. Often the target company, if seriously threatened, will seek another, more friendly enterprise, generally known as a ‘white knight’ to make a higher bid, thereby starting a bidding war. Another gambit occasionally used by the target company is to attempt to purchase the acquirers’ stock or, if all else fails, the target may offer to liquidate.

It is our contention that sizeable profits can be earned by taking large positions in ‘undervalued’ stocks and then attempting to control the destinies of the companies in question by:

  1. trying to convince management to liquidate or sell the company to a ‘white knight';
  2. waging a proxy contest;
  3. making a tender offer and/or;
  4. selling back our position to the company.

Read more: the insight that enabled Carl Icahn to become a corporate raider

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Doug Kass of Seabreeze Partners is Short Caterpillar

Caterpillar's brand and product portfolio

Doug Kass of Seabreeze Partners Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy. He is a well-known hedge-fund manager and media personality, frequently found on financial television. He became famous for being be Warren Buffett’s handpicked ‘credentialed bear’ and grill Warren Buffett and Charlie Munger at the 2013 Annual Meeting of Berkshire Hathaway.

Caterpillar’s principal end markets are mining, construction, and energy. Consequently, it is exposed to the major themes and events in each of these end markets. Doug Kass is short on Caterpillar and writes,

Caterpillar is one of the finest examples of a company that “over promises and under delivers.” It is also a vivid example of (thoughtless) cheerleading by analysts and in the business media.

Wall Street rejoiced, and CAT’s shares traded near $110 after the third-quarter report last November. There was little meaningful forward-looking analysis or questioning of the results at that time by most analysts or by the business media, which seems to worship the company’s management (an “honor” that’s little deserved).

Caterpillar is another example of a company that buys high (its share price) and sells low (or doesn’t buy stock at low prices). Its capital-allocation policy is among the worst in corporate history.

Remember CAT as a possible template in the future when the media and others rejoice in financial engineering in the face of weak top-line growth.

Caterpillar is the largest construction and mining equipment manufacturer in the world. The company’s brand and product portfolio have been delicately assembled over the last century.

Caterpillar was born in the late 19th century as a steam tractor manufacturer. Still, the brand indeed began to take shape in the 1940s, when Caterpillar’s robust off-road tractors, motor graders, and generators were used to reconstruct Europe following World War II. During this era, Caterpillar’s name became synonymous with bulldozers. Caterpillar now offers wide-ranging product lines and operates in many categories where the company has the biggest or second-biggest market share position.

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Julian Robertson’s 3 Things To Look For in a Stock

Julian Robertson of Tiger Management is a now-retired hedge fund legend

Julian Robertson is a now-retired hedge fund legend. He stopped managing money for his clients more than 10 years ago, but he is still widely followed in the media and his comments attract a lot of attention. His stellar track record is to credit. Julian Robertson returned 31.7% per year after fees between 1980 and 1998, beating S&P 500’s 12.7% annual return by a huge margin. He performed terribly in 1999 and 2000 and his overall return went down to 26%.

Tiger Management’s Julian Robertson made a rare yearly media appearance recently on Bloomberg’s ‘Bloomberg Surveillance’ program. There, he talked about what the most important things are that he looks for in a stock:

  1. Good management: This was the first thing he mentioned and is something you’ll see strongly emphasized at most of the Tiger Cub hedge funds these days.
  2. Good product line: This one is kind of obvious as you need to sell a product/service that people/companies need or desire.
  3. Shareholder orientation: This kind of ties back-in with #1, but he wants a company that’s very stockholder friendly (presumably returning capital to shareholders, etc).
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Activist Investors Forcing Real Change

Activist Investors Forcing Real Change

Shareholder activism is an ever more complex and multi-faceted phenomenon. If the ambition of shareholder activism is to cause change through disruption—or at least confront the status quo—then activist investors are increasingly hitting the target. Companies such as Target, Apple, Canadian Pacific Railways, Dell, Herbalife, Procter and Gamble, eBay, Yahoo, Amgen, and J. C. Penney have already been transformed to some degree owing to encounters with activist shareholders. Theoretically, this sounds like a good thing—more accountability to investors.

The activist shareholders have achieved success in those cases because of a emergent refinement in their modus operandi. Ten years ago they were seen as troublesome mavericks. Having typically acquired 5% to 10% of a company’s stock, they tended to hone in on a single corporate governance issue, such as poison pills, staggered board structures, or, most notably, management incompetence. By contrast, today’s activists constitute a trustworthy, objective asset class, taking a stance on a wide variety of strategic issues in their target companies.

Activist investors have recurrently played a crucial role in interactions between corporations and markets. In the wake of the 2008 financial crisis, activists are playing a growing role in countering corporate inertia and chubbiness, in driving M&A activity, and most crucially in unlocking value-for themselves, for the companies in which they have invested, and for the economy. As hedge funds and activist shareholders gained greater power and credibility, some companies have even become more receptive to dissident shareholder proposals. Activist shareholders are deploying multifaceted campaigns, focusing on core concerns like operations and governance. Companies have found that an activist campaign can be costly for management, both in direct expenses and in the significant time and attention diverted from running the business.

Activist Shareholders Bill Ackman, Dan Loeb, Carl Icahn, Stephen Schwarzman

The new activists have dramatically upped the pressure on corporate executives and boards. They buy stocks they view as undervalued and pressure management to do things they believe will raise the value, such as giving more cash back to shareholders or shedding divisions that they think are driving down the stock price. With increasing frequency they get deeply involved in governance— demanding board seats, replacing CEOs, and advocating specific business strategies.

Shareholder activism once the province of a handful of high profile names has been expanded by hedge funds with a dedicated focus on activism. Activists have become more disciplined, informed, and balanced in their style. Increasingly they are waging discreet, private campaigns to force boards to acknowledge their ability to bring fresh ideas and stimulate performance. Other, more passive shareholders tend to welcome a powerful and rational new voice speaking on their behalf. It is, after all, every board’s duty to represent all its shareholders.

'The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success' by William N. Thorndike (ISBN 1422162672) Activists do have good ideas. They are extremely analytical, they’re very sharp, very rational people. And often, they have a pretty positive story to be told that should be at least paid attention to. Activists often have valid reasons for pressing companies for change and urges executives to react more collaboratively when confronted.

Activists are having a profound effect across American boardrooms. Today’s activists are ushering in a more open style of corporate culture. Where real power used to dwell solely with the chairman and CEO (two distinct roles still too often filled by just one person), it is now becoming more devolved. New checks and balances are providing stronger advocacy for a broad set of stakeholders. Also, as investment capital is reallocated, executives will focus more closely on performance, even long after activists have sold their stake.

Prominent Shareholder Activist Investors

Recommended reading: ‘The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success’ by William N. Thorndike has created a buzz among the activist community for laying out in plain language what the activists are often arguing for.

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Books on Science Recommended by Investor Mohnish Pabrai (Pabrai Funds)

Mohnish Pabrai, Pabrai Funds and Dakshana Foundation

Mohnish Pabrai is an investor, hedge-fund manager and philanthropist. Mohnish manages Pabrai Funds and leads the Dakshana Foundation, a tutoring service in India for less-privileged members of the society to enable them to attend the elite institutions of higher learning in India.

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Charlie Munger on Three Considerations that Average Investors can Use for Better Returns

Charlie Munger, Berkshire Hathaway's Vice-Chairman and partner of Warren Buffett

In a lunch that investor Mohnish Pabrai of Pabrai Funds had with Charlie Munger, Berkshire Hathaway’s Vice-Chairman and partner of Warren Buffett, Charlie explained that an investment operation that focuses on three attributes would do exceedingly well.

  1. Carefully look at what the other great investors have done. Charlie endorses mirroring the investments of the most successful investors by learning from the 13Fs they might file. Look at what other great minds are doing.
  2. Look at the cannibals. Look thoroughly at the businesses that are buying back huge amounts of their stock. These businesses are eating themselves away, so Charlie describes them as the cannibals.
  3. Carefully study spinoffs. Joel Greenblatt of Gotham Capital has a whole book on spinoffs: “You Can Be a Stock Market Genius Too.” Overall the book discusses investment opportunities presented by circumstances that are usually not considered by the average investor: spin-offs, mergers, risk arbitrage, restructurings, rights offerings, bankruptcies, liquidations, and asset sales.

Charlie Munger believes that if an investor did just three things, the end results would be vastly better than the returns of an average investor.

Read this Motley Fool article on more of what Mohnish Pabrai learned from Warren Buffett and Charlie Munger.

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Books on Genetics and Evolution Recommended by Investor Mohnish Pabrai (Pabrai Funds)

Mohnish Pabrai, Pabrai Funds and Dakshana Foundation

Mohnish Pabrai is an investor, hedge-fund manager and philanthropist. Mohnish manages Pabrai Funds and leads the Dakshana Foundation, a tutoring service in India for less-privileged members of the society to enable them to attend the elite institutions of higher learning in India.

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