Delivering Alpha & Accepting Beta

“You have to bring a total commitment to the business or you don’t belong.  Premium fees demand premium performance.” – Leon Cooperman

In 2009 I listened to a speech given by legendary hedge fund manager Leon Cooperman of Omega Advisors to a crowd of professional investors.

Cooperman told the audience that stocks would likely be substantially higher in five years. He admitted that although he had no idea the path the market would take to get there, he was finding plenty of value in stocks at the time.

It’s hard to believe after the mega-bull market we’ve seen since then, but in ’09 most investors were still reeling from the financial crash and extremely tentative about the market’s prospects. His was not exactly a popular opinion at the time even though every investor is told that you’re supposed to buy when there’s blood in the streets.

Obviously, investors would have been wise to listen to Cooperman’s advice.

Last week CNBC had an excellent profile on Cooperman detailing his extreme work ethic:

The hedge fund manager’s stock-junkie lifestyle starts at 5:15 a.m. on weekdays, when he wakes up in the Short Hills, New Jersey, house he’s lived in for 36 years. He then drives to the Manhattan offices of his $10.7 billion Omega Advisors, getting in by 6:30 a.m. (he took the ferry for 30 years before the firm recently moved from Wall Street to midtown). Cooperman then digs in to investing for 12 hours—including a working lunch in the office—bouncing between grilling corporate executives in person or on the phone, consulting with his 18-person research team and reading company reports. By 6:30 p.m., it’s off to a business dinner with more CEOs or fellow investors like Mario Gabelli of Gamco Investors and Bill Priest of Epoch Investment Partners. Then it’s a quick post-dinner shower and more time in front of a Bloomberg terminal checking international markets before bed at 11 p.m.

So you want to produce alpha, huh? Picking stocks is this guy’s life. His routine shows what you’re up against when trying to compete with professional investors on their terms.

His fund’s extraordinary performance was also detailed in the piece:

Cooperman has also beat most of his hedge fund peers. The average stock-focused hedge fund, as represented by the Absolute Return U.S. Equity Index, gained just 9.34 percent on average from January 1998 through June 2014 (the index doesn’t go further back). Cooperman’s fund has gained 11.9 percent over that period.

For comparison purposes, Cooperman’s 11.9% annual returns in that time are nearly double the S&P 500’s 6.2% performance. That’s an amazing track record over such a long period of time.

While Cooperman’s fund is only available to accredited investors there was an option available to investors both large and small that came close to matching Omega’s performance numbers.

The Vanguard Mid Cap Index Fund was up 10.5% a year over the same period. So individuals could have earned roughly 90% of the returns of one of the best hedge fund track records in the business at a fraction of the costs.

While the two funds are quite different in how they’re structured (fee arrangements, indexing vs. stock-picking, trying to add alpha vs. receiving beta, etc.) there are some similarities in what it would have taken for an investor to receive these double digit returns.

Omega suffered annual losses of 35%, 24% and 13% over the years while the Vanguard Mid Cap Fund was down 42% and 15% in its worst years.  Discipline is the common trait required for both active and passive investing to work.

I’m not trying to trivialize Cooperman’s track record by any means. I have a ton of respect for the guy. I just think it’s unrealistic for individual investors to to try to emulate the stock-picking ability of the greatest investors of all-time.

One of the biggest mistakes I made when I started investing was to assume that by reading everything I could find about the greats I would be able to pick stocks just like them to earn similar performance numbers.  It took me some time, but eventually I came to the realization that I wasn’t learning the right lessons from these investors.

It’s not about picking individual investments when learning from the best; It’s emulating their emotional intelligence and understanding the importance of investor psychology in the markets.

For example, I couldn’t name a single one of the specific stock picks Cooperman gave out during his talk in ’09. But I have a clear recollection of how level-headed he was about the markets when so many other investors were losing their cool during a period of extraordinary volatility and uncertainty.

This is the timeless advice that resonates whether you are trying to pick stocks or passively investing in index funds.

Alpha addict: The amazing career of Leon Cooperman (CNBC)

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A note on performance: The Vanguard Midcap Fund was started in 1999 so I had to use the S&P Midcap Index as a proxy for the 1998 performance. But even if you used the Vanguard 500 Fund returns for 1998 it would have given you similar results. Also, past performance means nothing for future performance for either Cooperman or the Vanguard Midcap Fund and both are used here as examples only.

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  1. Chris Bailey commented on Jul 21

    Great article. I know that sort of time schedule unfortunately – hopefully one day a fraction of Mr Cooperman’s alpha/performance fees will be apparent! Investment is 90% perspiration, 10% inspiration – this article shows it.

  2. Robb Engen commented on Jul 21

    I dislike the analogy that trying to beat the market is like trying to beat Roger Federer one-on-one at tennis. I don’t think it’s the right approach to win over the hearts and minds of stock pickers.

    I’m convinced you can hold a basket of 20-30 blue-chip stocks that pay (and grow) dividends and you’ll equal or even beat a passive portfolio (after fees). The challenge is to find the strategy that you’ll stick with over the long term, including the wild ups and downs of the market. Some find regular dividend payments comforting during the down times. I also worry that new and exotic ETFs will continue to be introduced and add confusion to what should be a simple 2-3 fund solution for passive investors.

    • Ben commented on Jul 21

      There’s definitely a difference between crushing it every year and being consistent over the long haul. Trying harder and increasing activity have never been a sure thing to increae performance and usually detracts. Cooperman would be difficult to emulate while what you describe can be done by most investors.

  3. Mid-week reading - Adam H Grimes commented on Jul 23

    […] You want to make consistent trading profits? Are you prepared to work hard? Of course, but make sure you understand what that means. […]