The Exchanges

Q Given that view on China, pretty bearish, what positions do you take?

A Well, we think the currency in China is a great short. So it's one of our larger positions. We're short than the CNH. We do have some individual equity shorts there. We've been short China since August last year, but we have tempered it at the moment because there is a chance that Xi doesn't get the second term, which we think is maybe a 15% chance, and also a chance that he does get it, but with a lot of reformers around him. And in that case, I wouldn't be bearish on China. I think it actually could be positive. But if the current situation continues, and we have the same kind of advisors and same kind of standing committee, and the reformers really aren't there, then I think China's in serious, serious trouble.

AI assessment note: “We're short than the CNH. We do have some individual equity shorts there.”

Q So as an investor in hedge funds, what do you think those innate characteristics are that you have that some of these other people that haven't chosen to continue when they're down, that you might be able to anticipate ahead of time?

A Like I said, you have to love what you do. You have to do it for the right reasons. You have to do it because you love doing it, not for the money. All of us are highly competitive, but I really value the track record, the integrity, and the trust that investors have placed with me for so many years. I just think that would be so disappointing to fold up shop during difficult times. The other thing is, I was a big wrestler in junior high and high school, and there's a lot of tough times when you wrestle, and you wrestle some really pretty good wrestlers that are more experienced or a lot stronger, and you always battle back. That experience has been fantastic for me. I came from very humble beginnings. My grandfather was a coal miner outside of Pittsburgh, and He had black lung when I was born, so we had to move in with them, and he couldn't obviously work in the mines anymore, and so they baked Italian bread. My dad helped distribute it to the town and get the clients and that, and we didn't have enough money for a crib, so I slept in a drawer. You come from that, this other stuff is not so difficult. I feel so blessed, so excited for what I do every day. I think that's what you need. You need tenacity. You got to feel really responsible for your investors. You got to feel like it really is on your shoulders, and you really want to do well by them.

AI assessment note: “You need tenacity. You got to feel really responsible for your investors.”

Q Why don't we go back prior to your launching Discovery? I know that was a while ago, but we'd love to hear your investing background, how you first got in the business.

A As a little kid growing up, I wasn't really familiar with investing, very modest roots. But I had a lot of odd jobs and started mowing grass when I was 12 years old for like a buck and a quarter an hour. Saved my money, just put it in the bank, and then, of course, that was in the late seventies then, and all of a sudden, interest rates got double digits, so I put my money into money market funds, and then after a few years, those went to 15, 16% yields, and then yields started to fall, and so I started to take my money and put it into mutual funds. And then I started picking individual stocks, and I'm just doing this on my own, and I really loved it, so I knew I wanted to get in the investment field. I didn't really know anything about it. I did very well in school. I was valedictorian in my high school and my college class. By the time I was a senior in high school, I knew this is what I wanted to do. So I went and got a math and economics degree at Hampton City College and knew I'd get my MBA at some point after that, but went to work for Wall Street for a year at what was then First Boston. It was a very interesting year because there was a crash of 87 happened. We had the Latin American debt crisis. I was doing a lot of stuff on Latin American debt issues for First Boston. So that's how I got into emerging markets. From there, I went to got my MBA at the University of Virg…

AI assessment note: “went to work for Wall Street for a year at what was then First Boston”

Q What were those key lessons in shorting that you learned your time there?

A One is you got to be incredibly careful because there's unlimited loss in shorts. You don't want to ever have any of the shorts too large, but you also want to have shorts that the skew is so much in your favor. Like if you're long, you lose 10 or 15. If you're right, you make 75 or 80. And those were the best shorts. I mean, the best short I ever had at Tiger was the Thai Bot. We shorted a huge amount of Thai Bot before the 97 crisis in Thailand. I can remember they moved the band stronger against us. So at one point we were losing two hundred and twenty-five million dollars on the position. Julian said, you still have conviction in this thing. I said, Julian, I have tremendous conviction. This is just completely unsustainable. Interest rates where they are, the whole banking system will just collapse. They can't keep it there. They have no reserves left. It's going to go and divide about a month later, about 40%. There is where a skew is really in our favor. And even though we took some losses, we had a huge skew in that direction. The other thing is, is shorts are working. It's tough, but you need to keep the position on. Let's say you start with a three percent short. It halves. It's only one and a half percent now. So Julian would always say, well, the best shorts go down 90%. They don't get them 40 or 50%. They go down 90%. If you have that conviction and you have the the…

AI assessment note: “One is you got to be incredibly careful because there's unlimited loss in shorts.”

Q How do you go about balancing your own independent views with the views and positions of other people that you respect when you're doing that cross-referencing? And I'm particularly thinking about crowding, for example, on equities in the hedge fund side.

A I think that was a bigger issue when we were larger and needed really big ideas. Now, when I look at my portfolio, our ideas are so different than other people's ideas. I've went through my top 10 longs. Very few hedge funds would have any of the names I have in the top 10. The same thing on the short side. So I don't really think it's an issue anymore. Maybe in 2013, 1415, that period of time is a bigger issue, but today we're doing so many independent things, so many interesting things, because we do a lot in EM and other places, a lot of the managers that I speak to don't do much there, or if they do it, if I talk to a currency guy, he may have one or two currencies that I have on. It's a very eclectic portfolio in a way, and an eclectic group of people that I speak with, so that crowding issue is not anything that I see as an issue anymore.

AI assessment note: “So I don't really think it's an issue anymore.”

Q So with this twenty-four-seven trading around the world in markets that are open all the time for 2030 years, how have you gone about sustaining your energy to do this on such a difficult schedule?

A I have some diversions outside of the business that I love. I'm a huge sports fan. I'm a big fan of Pittsburgh teams. I'm a Pittsburgh Steelers fan. That's a great outlet for me. I also enjoy my kids and my family. Playing golf. Make sure I go out and do that on the weekends. I think that's important. I try to stay very healthy, stay fit. I eat better now than I used to eat. I get my blood tested every quarter and have different supplements and things like that, that I take to make sure that everything's in balance. And so I actually feel better with more energy than I've ever felt. So using medical technology to be better and to be more fit and healthy.

AI assessment note: “I have some diversions outside of the business that I love.”

Q Who are your favorite people to talk to on the outside cross-referencing?

A I like to speak to a lot of the senior people in some of these leadership roles, whether it be economic Ministers in certain countries or central bankers, very, very thoughtful. Central banks talk a lot to each other. I never really understood how much they do speak to each other, especially now through the BIS, they meet quite frequently and they do share ideas and thoughts. That's always very helpful to me. I have a lot of outside consultants, people I think over the years that have been very thoughtful on different countries or regions or topics. I got half from the Fidelity days, some I have from the Tiger days, and some we've developed a discovery. A lot of them are paid consultants. Some of them are friends. And then I like to talk to other managers. A lot of my ex-Tiger guys that I worked with, people I worked with at Fidelity, and people I've met along the way. I like to talk to people who are actually in the markets and looking at different things, and some of them do individual stocks, some of them are macro people, some of them are currency, but people that I have respect for that I think do a good job and have been in the business for a long time.

AI assessment note: “I like to speak to a lot of the senior people in some of these leadership”

Q What was that six month interview process with Julian like back in the day? It was fairly legendary for his test and all of these things he did in the interview process.

A We had intelligence tests to take, personality tests. We had to talk to Dr. Stern, a psychologist, and it was fascinating. I love the investment part of it because Julian and I used to talk about different investment ideas and a lot of things that he was interested in. He was always interested in Brazil because we had a lot of investors from Brazil at Tiger. He was interested in what was happening around the world. Back then in the nineties, the big trade that Tiger had and where Julian made tons of money was a macro trade. He did it through individual stocks, but we were short Japan and long the US. And that was a massive macro trade. It was one of the most brilliant macro trades ever. And it was for a decade. In the late eighties, everybody thought Japan was taking over the world. The Nikkei was over 40,000. It went down to like 9000. It was one way train down while the US market In the nineties was just a fantastic upward movement. So that was the key. I give Julian credit because we used to always mark down every quarter, we'd lose 10% in Japanese equities because they would always ramp the equities into the end of the quarter at their fiscal year into March. But he stuck with it. I think we got a little smarter towards the end where he would lighten up in the first quarter on the short side and then put it back on towards the end of the month. But man, he stuck with that t…

AI assessment note: “We had intelligence tests to take, personality tests. We had to talk to Dr. Stern”

Q When you think back to the time from 95 to roughly 2000 when Julian folded up, the talent inside of the old tiger became fairly legendary in the hedge fund business. All these people spun out. What was that internal culture like?

A I think that we were all hard workers. We were all dedicated to what we were doing. We all wanted to succeed, but I think Julian did a great job of Putting people together who worked together as a team. We really supported each other. We helped each other. We had these Friday lunches where we had to come in with an idea that we wanted to present, and also an idea we wanted to take out of the portfolio. So we had to be prepared, and we had to go up against one of our colleagues in a different area. But it was done in a very cordial manner, but in a way that people did their homework. No doubt, I think the hiring process, because it was so meticulous, I think they hired the best people. And I think that's why it was so successful, and that's why I think a lot of people who've gone on from Tiger have become great investors. But we also learned a lot from Julian. You know, I thought you could say two greater institutions was working with Tiger, but I also managed a lot of money for the Soros family for over 20 years. And I used to speak to George very frequently the first five years or so, almost every day. And I ran what he called part of the back book for Soros was whatever I could convince him to put in the portfolio he'd put in. And these were huge compared to the size of the fund back then. But man, what a master trader. George was. He just had a feel for the market. He knew w…

AI assessment note: “We had these Friday lunches where we had to come in with an idea”

Q Any parallels with all the different crises you've seen over time in emerging markets?

A The one big difference for the U.S. is that we're the reserve currency of the world. Even during times of crisis, we have strengthening in our currency. As a result, our interest rates don't have to go as high as they otherwise would, or inflation doesn't get as high. I actually think inflation is rolling over. It's just going to take longer to come down to the acceptable levels, but it's rolling over. It's peaked in our view. The real risk on the headline is energy prices and maybe food prices. I mean, maybe headline can go a little bit higher, but core has definitely peaked. It's already three months in a row, year over year, it's come down and even month over month come down. So we think core inflation's peaked. We think it's going to come down, but unfortunately it's just not going to come down fast enough where the Fed can stop. The U.S., we have a huge advantage. In the EM, a lot of these currency crisis then would lead to debt crisis because the currency would devalue so much they then couldn't pay their debt that was denominated in another currency. We have all our debt in our own currency, so we can actually print the money, which we've done in the past, and we're actually inflating our debt away right now. So debt is not a big problem in the U.S. at the moment. Inflation is the big issue.

AI assessment note: “The one big difference for the U.S. is that we're the reserve currency”

Q If your views on China play out over the next period of time, what does that mean for the rest of the world markets?

A I really think that we're in a process of moving to a massive cold war of the West against China and Russia. I think that's terrible for returns and asset prices, and it's really bad, obviously, for Chinese assets. Obviously, Russian assets already decimated. That's not going to change. But the interesting thing is if something were to change in Russia, if there would be a regime change or a big shift in what they're doing, there's an opportunity investment of a lifetime in Russian assets. These things are so depressed, and I saw it happen in 98. A lot of the oligarchs that are around today and a lot of wealth generated happened after the 98 crisis, they bought their companies for a song. They're even cheaper today. And I saw some stocks trading right before they froze them in London and the US, some of these ADRs and GDRs trading at valuations that you don't want to support that regime, but these things were trading at one 99th of where they traded six months ago. They're dominant companies in their country, and some of them are dominant companies in the world in terms of energy. Just a small amount of investment in those stocks, and some people can retire on it because you're going to make 50 times your money on any regime change in a very quick period of time, so. There's some tremendous opportunities going to come out of this, but it really is a problem for the world and a …

AI assessment note: “I think this is going to be lower growth, higher inflation”

Q saying things as they're going down, you want to keep the position on if you have conviction. And I imagine if something's going to go down, 90%, it goes down 80, and then it gets cut in half. But when these things get small, they can also rip against you. So how do you balance that desire to monitor your risk with the conviction that you need to press shorts?

A I think the best shorts are ones where there's either a fundamental flaw in the business model or is ultimately going to go bankrupt. Those are really the best shorts. If you could find all those shorts, it'd be fantastic. A lot of shorts you can't find, there can be catalysts that can correct them at 30 or 40%, and those, you just have to know the difference between the two. That's why the conviction level is so high. So normally as a stock goes down, conviction level might go down in terms of, you said at the lower price, it may not be as attractive to be short, and that's true, and you just have to know which ones could have financial distress and which ones might not. It's really an art. It's a lost art these days. You don't see as many people shorting individual stocks, but I think now is the time to be shorting individual stocks. It has been for the last few months, and I think that's going to continue for a while.

AI assessment note: “you just have to know the difference between the two”