THOMAS J. HAYES | Hedge Fund Tips
Many ordinary people view Wall St as a massive blockade of words and jargon with ramparts of complicated financial instruments designed to obfuscate, and confuse small retail investors. Thomas J. Hayes is a Hedge Fund manager who is generous in offering insights via his YouTube and Podcast channels.
We spoke about starting his career with Cornwall Capital, LP (one of the firms featured in “The Big Short” book and movie), managing risk, looking for unloved opportunities and why he focusses on established businesses with a lot of historic data that shows how they've performed through different cycles.
“Guessing which is going to be the next big thing is, in my view, it's a fool's errand. Some will get lucky but the vast majority won't. They write the books about the ones that get lucky. They don't write the books about the ones that blow up their accounts. So, I want to deal with companies that have the resources, can invest and will be beneficiaries of the new trends. Versus betting on the start-up that I don't have any comfort with management experience necessarily. And it's just higher risk. Potentially higher reward, but if you look at the odds over time for new sectors, you really have to be lucky.”
“Managing risk is not just to quantify the risk and the sizing, but make sure that your positions and/or your bets and/or your investments, if they're longer term are uncorrelated. So, you know, if you have 10 energy stocks, you're not really doing much to manage your risk because on balance, they're going to move in a similar direction with some idiosyncratic differences, but you do want to make sure you're in different sectors and/or different asset classes, depending on how you're set up.”
Thomas J. Hayes is the Founder, Chairman and Managing Member of Great Hill Capital, LLC (a long/short equity manager based in New York City). He has been Featured On Fox Business TV, Yahoo! Finance TV, Wall Street Journal, Barron’s, Bloomberg, CNBC, New York Post, Fortune, Cheddar TV, i24News, Financial Times, Reuters, MarketWatch, U.S. News & World Report, Kiplinger, TheStreet, CGTN America, Fidelity and other venues.
Before starting his own firm, he worked with Cornwall Capital, LP (one of the firms featured in “The Big Short” book and movie). Prior to Cornwall, he was Managing Director at Bedford Oak Advisors, LLC (a long/short equity hedge fund), and COO of a public company held through the fund - Wright Investor Service Holdings (which had $1.6B AUM).
Thomas started Hedge Fund Tips® – HedgeFundTips.com – as a platform to share actionable insights, tips and research for Hedge Funds, Institutions and Individual Traders to benefit from – based on what he has learned in his years of experience in the Hedge Fund industry. A free 21- trial membership and description is available here: JOIN | FREE TRIAL
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Hi and welcome back to Shares for Beginners. I'm Phil Muscatello. Many ordinary people view Wall Street as a massive blockade of words and jargon with ramparts of complicated financial instruments designed to obfuscate and confuse small retail investors. My guest today is deeply embedded in this industry, but is generous in offering insights via television, his YouTube channel and podcast channel. Hi Tom.
Hey Phil. Glad to be with you.
Thank you very much for coming. So, Thomas J. Hayes is the founder chairman and managing member of Great Hill Capital, a long/short equity manager based in New York City. He's been featured on an extensive list of financial media channels, which is too long to go into here but I'll detail in the episode blog post. Tom, you used to work for Cornwell Capital and listeners may recall the two young characters who Brad Pitt told to stop dancing in "The Big Short". They were the founders of Cornwell Capital. Were you working there after the GFC and that very successful short?
Thomas (1m 25s):
Yeah, that's correct. I actually came to meet them in summer of 2012. I was at another fund and I was ready to move out on my own. I sent them one of my best ideas that July, which was shorting soybeans, going long puts on soybeans, betting that the price would go down. And they got back to me. They said, "Do you mind if we put this on?" I said, "Of course, no problem." I think at that time they put about 1% of their fund, which would have been about $5 million and they made five X in the next 90 days, so about $25 million. And from then we became very good friends, you can imagine. They were happy with me and they said, "You know, what are you looking to do?" And I said, "Well, I'm going out on my own but I'd be happy to share my best ideas."
Thomas (2m 5s):
And we worked out a consulting agreement for two years where I reported to Brad Pitt, which was Ben and Jamie, of course, which you remember from the movie and just to have a tremendous experience with those guys, tremendously smart group of people.
Phil (2m 18s):
So, we are told not to dance after that a soybean play?
Thomas (2m 24s):
Phil (2m 26s):
So, you went short with long puts. So, I just wanted to just explore quickly because we hear about the term shorting and that's something that beginners might not be aware of and might sound like some sort of strange Wall Street, voodoo. How does that work and how does a long put goes short without going to her too complicated into this?
Thomas (2m 43s):
Sure. I mean, shorting is quite a simple concept. It's really just betting that the price of something will come down. So just like you would potentially buy a stock when you feel that it's undervalued and you think it's going to appreciate over time, you may shore to stock or short a commodity or shorter currency if you believe it's overvalued at a particular level or there's some catalyst that could lead to the stock coming down in price, or in this case, soybeans. In that summer, soybeans were basically at an all-time high, they were pricing in that it would never ever again rain in the Midwest and I was willing to take the other side of that trade. You know, if you looked out on the weather maps for the next 60 days, there was out one drop of precipitation estimated.
Thomas (3m 27s):
And I thought that seemed to be a little bit ridiculous. And the way the positioning was set up, I thought, "Okay, number one, this is going to resolve itself." And there were some seasonal factors that would also play out with regard to that. But what was the safest way where we could quantify our risk? Because if you're short futures contracts and stocks, in theory, they can move an unlimited amount. So, your upside or your profit potential is capped because it can only go to zero, but your downside, which means it moving against you could be unlimited if you were just short the contracts, the futures contracts, or in the case of the stock, shorted stock. So, by buying puts, we knew that the maximum we could lose as the amount of our investments.
Thomas (4m 11s):
So, then you size it and you have embedded leverage in those contracts. You size it according to a risk, in this case it was 1%, so they managed the risk well. And they were able to make a five X in relatively short order. It was a terrific trade. So that's effectively what shorting is, is just rather than betting the price is gonna go up betting the price is going to go down.
Phil (4m 30s):
That's an important lesson for investors as well as to manage risk. And I think that's one of the key points out of what you've just said, is that it's 1% of the total capital, which was at risk in this trade.
Thomas (4m 41s):
Yeah. And the other thing I think when managing risk is not just to quantify the risk and the sizing, but make sure that your positions and/or your bets and/or your investments, if they're longer term are uncorrelated. So, you know, if you have 10 energy stocks, you're not really doing much to manage your risk because, you know, on balance, they're going to move in a similar direction with some idiosyncratic differences, but you do want to make sure you're in different sectors and/or different asset classes, depending on how you're set up.
Phil (5m 11s):
A recent video that I watched of you, you were talking about developing a disciplined approach to portfolio management. How can a new investor start thinking about this and along those terms?
Thomas (5m 21s):
What I recommend to new people in the business and investing generally is a few things. Number one is, the first thing I recommend anyone should do is to read "The Intelligent Investor" by Benjamin Graham. It's Warren Buffet's favorite book and he recommends it the same way. And the lessons in that book, it's either going to click with you or it's not. And it basically talks about in the short run, the market is a voting machine based on emotions and sentiment and reactions, but in the long run, it's a weighing machine based on valuations and fundamentals of the business. And if you're talking about stocks, the earning power of the company. And basically, if you read that book in a couple, 2, 300 pages, something will click and you'll catch the bug and you'll never be the same and you'll do this the rest of your life.
Thomas (6m 10s):
Or you'll read it and nothing really clicks. In which case you can cut your loss in terms of time, pursue another business or entrepreneurial or job situation and outsource your money management to someone else. I think that's a good litmus test of whether it's really your knitting. And it shouldn't be everyone's knitting. Everyone has special skills, special abilities. And I find that many people want to do investing or go into the investment business because they think that that is the ticket to become the wealthiest in the shortest amount of time. And if you go in specifically for that reason, you're almost guaranteed not to get that result because you'll be taking outsize risks, you'll be doing reckless activity and you won't, in effect, get the outcome you're looking for, which is derived from compounding over time, buying good quality assets, having patience, sitting tight, knowing what you own to weather the volatility in the short term so you get the long-term results.
Thomas (7m 3s):
So that's number one, is to read that book. Number two, I suggest is to read every annual letter that Warren Buffet has ever written. And they're available for free. You just go to berkshirehathaway.com, you can also Google Warren Buffet annual letters. And read one a week for a year, you'll get through 50 years pretty quickly within a year's time. And you'll know more than 90% of the professionals on Wall Street who've never done it. And then the third thing is The Value Line Investment Survey. You can get it online anywhere in the world. In the US they have it sometimes in the public libraries. It's a survey of about 2000 companies that Value Line covers. And in one page, you can learn a little summary about the company, what they do, you can see all their financials over the last 10, 15 years, earnings per share, cash flow per share, book value per share and you can see how they're growing or declining and it gives you a good snapshot.
Thomas (7m 54s):
So, after a year, if you do five a day, you basically have a short introduction to about 2000 companies. And the more you do that, then you'll start to recognize patterns and you'll develop experience on a relatively quick basis. And those are, kind of, the key three things. Now, as for, you know, how do you put money to work as you're a new investor? Buffett has suggested to his family, when he's no longer with us, that they put 90% in an S and P 500 index fund and 10% in cash or treasuries, you know, in the event that they need cash immediately or if some tragedy like a depression happens, they'll still have liquidity in the short term until the market rebounds.
Thomas (8m 35s):
That is a relatively aggressive stance. Certainly, if you have a longer-term time horizon, that's a sensible way to look at it. If you want more volatility dampening, you might want to be a little more diversified with that. And there's some ways that we can discuss if that's of interest.
Phil (8m 49s):
It is interesting that you say that a lot of research needs to be done if you're going to be interested in investing directly in the market. For most people, ETFs are going to be fine because they just don't have that interest. But it's like you say, you've got to light that spark within yourself to be actually interested in reading balance sheets or reading company reports or reading a report about a commodity or tracking the weather to do with soybeans, for example. That's the case, isn't it?
Thomas (9m 15s):
Exactly, exactly. And, you know, we're running a long/short equity fund exclusively now. So, we're basically betting on out of favor, dislocated sectors stocks when the market is dislocated. So, we're buying things when they're undervalued and unloved and we're selling them when everyone wants them or shorting them when there's a bout of euphoria in a particular sector or stock or the market in general. So that's kind of how we do a lot. A bit less soybeans and a bit more high-quality businesses.
Phil (9m 48s):
Let's have a look at some of those themes that you're looking at more high-quality business the moment. Again, in this recent video that I was looking at, you were talking about chips and semiconductors and Intel, Texas Instruments and then stocks like that, in terms of, I think one of the listeners was asking a question about how to gain exposure to a rebound in the car manufacturing sector.
Thomas (10m 9s):
Yeah, it's interesting. So, a lot of the auto stocks here have run up quite a bit, GM, Ford, et cetera. It's not to say they don't have further legs, but it's just not how we're set up to allocate money. We like to allocate money when no one is looking at a sector, when it's seriously out of favor, but the fundamentals are at least steady and/or improving, that's when we go in. I often get questions from viewers for the Hedge Fund Tips with Tom Hayes podcast, video casts of people interested in stocks or sectors after they've already had huge runs. One of the things that we're pretty famous for because we did it publicly, was aggressively buying banks and energy in the middle of the pandemic in fall of 2020 when no one wanted them.
Thomas (10m 54s):
What I'm finding is, during those periods, very few people were asking questions about banks and energy. No one wanted to touch them. What they were asking was about high-flying stocks like Tesla and that type of thing. Now that all of the names, all the banks and energy stocks have doubled and tripled, in some cases even more, quadrupled. Everyone's asking about that. And as far as the viewer that was asking about chips about car auto rebound on the recession, I'm more inclined to look for a derivative play that has not yet priced in what they're discussing. And that's how Intel came up. It's a deep value turned around and play. No one wants it right now because Gelsinger is going to invest a considerable amount of money, 200 billion of cap ex over the next decade.
Thomas (11m 38s):
He's investing in foundries in Arizona. But they're going to be a huge beneficiary of the high-tech specialized chips that are going to go into cars in the future. Right now, they're kind of basic chips that go into cars. So, he's going to get both sides of the market and he's going to be less dependent on Taiwan for the Foundry business. And I think at these levels for a patient investor, and of course this is opinion, not advice, our terms are at hedgefundtips.com, we think that's a stock that can be up 60, 70%. Maybe even more in a period of three, four years, which is going to outperform the general indices. So that's the kind of stocks we would look at for an auto recovery play, or even a chip play. You know, there was a viewer asking about Taiwan Semiconductor.
Thomas (12m 20s):
That's had a monster run, it's a high-quality business, but we're looking for things before they take off, not after they've already run. Kind of old-fashioned point of view.
Phil (12m 28s):
Yeah, that's right. And there's a subtlety to the way that you have to think about the markets as well and what you're looking at. You're not just looking at the story, but there might be a story behind a story that will play out in your own thesis, isn't there?
Thomas (12m 40s):
Yeah. No question about it.
Phil (12m 41s):
I mean, it's like some investors come in and go, "Oh, you know, there's going to be batteries. Batteries are going to need lithium. I'm going to buy a lithium miner." But that's not necessarily the way it's going to work out, isn't it?
Thomas (12m 54s):
Yeah, no. You know, we tend to focus on established businesses with a lot of historic data that we can see how they've performed through different cycles. We're not looking for the high flyers that went public 12 or 24 months. That's a game for someone else. And some people do quite well playing that game and trying to guess what's around the corner and what's coming next. Usually what you find, I mean, there were several thousand auto companies that went public in the '20s, two or three made it, only two haven't gone bankrupt in history, which is Tesla and Ford. Every single other of those thousands that went public in the 1920s have gone bankrupt. So, I think you're going to see a similar situation with electric vehicles and lithium providers and LIDAR and all of that. And guessing which is going to be the next big thing is, in my view, it's a fool's errand.
Thomas (13m 39s):
Some will get lucky but the vast majority won't. They write the books about the ones that get lucky. They don't write the books about the ones that blow up their accounts. So, for me, bigger players are going to participate in that. The companies that have been around, Intel's going to get a piece of the EV business they've got mobilized. So, I want to deal with companies that have the resources, can invest and will be beneficiaries of the new trends. Versus betting on the start-up that I don't have any comfort with management experience necessarily. And it's just higher risk. Potentially higher reward, but if you look at the odds over time for new sectors, you really have to be lucky.
Phil (14m 13s):
What are some of the other themes and sectors that you're looking at at the moment?
Thomas (14m 18s):
So, I was sharing with you, Phil, I love things dramatically out of favor. I think right now, biotech as a sector is tremendously interesting. A lot of the health care has been delayed because of COVID: the in-person visits, the scripts written, the imaging. And what we're going to find with Omicron rolling over is as more people go back to the doctor, the good news is they won't have to worry about COVID, the bad news is they're going to have to worry about everything else: heart disease, cancer, stroke, all the other top killers. And biotechs is going to benefit. If you look since November of last year, the earnings power of the top 30 weights of the S and P 500, when you look at 2022 earnings estimates, cumulatively, that earnings power is fallen four tenths of 1%.
Thomas (15m 5s):
The sector has fallen over 37%. So, when we see that type of divergence, where the fundamentals are basically flat or in some cases improving or slightly deteriorating, but the market has dramatically overshot to the downside. There's been a period of dislocation. Why didn't that dislocation show up? Partially backward looking, people think what's happened in the recent past is going to persist, i.e., less people going to the doctors, less people getting scripts, less people doing imaging and testing. We're betting that things are going to normalize, like you've seen with travel and that type of thing. That's number one. It's become so extreme, there are over a hundred companies, right now, trading at a discount to the cash on their balance sheets.
Thomas (15m 46s):
Meaning if they were liquidated tomorrow, you'd get more than you're paying in the market. Meaning no credit for intellectual property, no credit for sales, in some cases, no credit for patents.
Phil (15m 56s):
So that's known as book value, isn't it?
Thomas (15m 58s):
Well book value, you can have other assets that are included in book value, but I'm talking about the cash. Literally the cash balance is on their balance sheet. Book can include other assets; they could have buildings; they could have a property. That's also included in book value, but no, I'm literally talking at a discount to the cash.
Phil (16m 17s):
Oh okay, so please go on with your thesis.
Thomas (16m 20s):
Yeah. So, if you look at the average multiple since 1986, just for the sector to revert back to its average price to book multiple, it would have to appreciate 24% to get back to its average price. To operate in cashflow multiple, it would have to appreciate 155% and to get back to its average forward PE ratio, the sector would have to appreciate 111%. And what's interesting about that, Phil, is that just as sectors and stocks overshoot to the downside because of that short-term voting machine and the emotions, they always overshoots some downside, they never recover back to their average. They always overshoot to the upside, just like you're going to see with energy and banks.
Thomas (17m 4s):
When no one wanted them, you couldn't give oil away. Now that they're up double and triple and quadruple, everyone wants them. You'll see the same thing with biotech, we believe, over the next 12 to 24 months. And could they go lower first? Sure, we'll add some more. But if you just understand the historic data, you understand the future, you understand the inflection of where we are, we think the risk reward is extremely attractive.
Phil (17m 26s):
So, I believe there's another sector and theme that you'd like to have a look at today as well.
Thomas (17m 31s):
Yeah. Well, if biotech isn't hated enough for you, Phil, the most hated sector in the world right now is China tech. Obviously the Chinese government came down pretty hard on many sectors summer of last year. It's been a nonstop, you know, for lack of a better word, Chinese water torture every day, a new headline comes out, a new regulation, a new thing that's negative. But when you look under the hood at the businesses and one that we particularly have been building quite a sizable position is Alibaba. The business. If you look in the last seven years, earnings and cashflow have grown over 500% since they went public in 2014, revenues have grown 10 X over a thousand percent since 2014.
Thomas (18m 16s):
Oh, and by the way, you can buy the business of 2014 prices today. So those are the type of situations. Obviously, people are worried about the crackdown, is it going to slow down business? Well, they grew revenues about 30% last quarter. Even if you were to cut that in half and revenues were to grow at 10 or 15% moving forward and earnings were to grow at five or 10%, which we believe that this will blow over, this is a crackdown that we see every three to five years in China on tech. Last time in 2018, it was video gamers, this time it was education and Alibaba and Tencent, et cetera. So, when this blows over, which this year happens to be the China National Congress, where they have the transition meeting, it's in Xi's interest to have the economy doing well.
Thomas (19m 0s):
And you've already seen in recent months, they're adding a lot of liquidity, they're adding back a lot of stimulus after tightening last year. We think that Alibaba is going to be a major beneficiary of that. And again, this is opinion, not advice, but based on our internal work and what we've shared publicly, we think the intrinsic value is closer to $300, not closer to $100 on the USADR. And even if it takes three or five years to get there, we think it could happen much sooner once this overhang is lifted. And we think it's a unique opportunity and we're not alone. As a matter of fact, Charlie Munger started buying it first quarter of last year, over $200, which in our view was still a bargain. Then by third quarter, it had fallen quite a bit.
Thomas (19m 42s):
He doubled down on the position in about the 160s. And then last quarter, when it hit the lows at around 110, he doubled down on his double down and actually used margin debt, which he's rarely ever done in his career, and that's his level of conviction in this name. So, we agree as Munger has. We built a much lower basis over time and we think it's going to be a double or triple in coming years. And that's non-consensus. But again, it's knowing what you own, doing the work. And that's why we say after you read that book, if it doesn't click go off and do something else and do it well and you'll be exceptionally successful. And either outsource or put your money into ETFs: a more sensible, easy thing on autopilot. Because if I wasn't working and I don't have to, I would be doing exactly what I do right now.
Thomas (20m 27s):
And you probably get that feeling in talking to me. I'm on a treasure hunt every day and I love it.
Phil (20m 31s):
You love it. And just for listeners who don't know, Alibaba is like the eBay of China, isn't it?
Thomas (20m 39s):
Yeah. A closer comparison would be the Amazon because they have the front-facing consumer retail, but also their Ali cloud business. The cloud business is the equivalent of Amazon web service. Only it's growing much faster for Alibaba than it is for Amazon. And we think that's going to be a cash machine in the coming years and a strong part of our thesis moving forward.
Phil (20m 57s):
So, let's go into the section of the interview where I just wanted to go over a couple of stock market terms for beginners so that they get some idea from, especially from an insider like yourself. You hear this term "secular" a lot; there's a secular movement or there's a secular theme. What does that mean? What does that trigger in your head?
Thomas (21m 17s):
Yeah. So, the difference between secular or cyclical. So cyclical stocks, they tend to move with macroeconomic conditions such as consumer spending or economic growth. So, growth has normal cycles from expansion to recession and stocks that are impacted by that like energy, like banks, like materials, et cetera, they tend to do well when GDP is growing fast. Versus secular plays tend to do well, irrespective of the economic up and down. So, think a Colgate toothpaste think a Kimberly-Clark toilet paper, think Johnson and Johnson, think about how many band-aids am I going to buy? Because we're in a recession. If you've got to cut, you're going to get the band aid.
Thomas (21m 59s):
So, things like that, more secular growers versus cyclical. Semiconductors have historically been a cyclical business. Now everyone's saying this time is different. I'm not fully convinced, which is why I'd be less inclined to be buying the high flyers and more inclined to gain exposure through some of the deeper value plays that can weather any slowdown in the interim as they build their recovery play.
Phil (22m 20s):
And in this video that I was watching, and I'll put a link into the episode notes and the blog post, your trip lightly over a whole bunch of figures, but one of them was free cashflow that you seem to feel was a pretty important figure. What is free cashflow?
Thomas (22m 34s):
Free cashflow is the most important metric in our view. It's the cash that a company generates after taking into consideration cash outflows that support its operations, maintain its capital assets, et cetera. So, the reason free cashflow is so important to investors is because that's the money they use to return capital to shareholders through buy-backs and through dividends and also available capital if they potentially want to do a creative acquisitions that make sense. But predominantly what's left to return to shareholders, whether they return it to shareholders or buybacks is a function of free cashflow. And it's much harder to fudge a cashflow than it is to fudge and adjust earnings. So that's a number we pay close attention to.
Phil (23m 14s):
And where do you find that number? I think you were just going through Yahoo Finance to find that number, is that correct?
Thomas (23m 21s):
Yeah. You can probably find it on different platforms like Yahoo. You know, it's effectively sales revenue minus operating cost plus cashflow minus required investments in operating capital. So, any good screeners should have a row that delineates the cashflow
Phil (23m 37s):
And how can you recognize what's a good free cash flow? What's the kind of number that you're looking for?
Thomas (23m 43s):
Well, it's yield. And it really depends on the business. So based on different sectors, cashflow is going to be more or less important. So, you know, free cashflow yield of 10%, that's very, very attractive. Question is why does it have such a high free cash flow yield? And then you have to look at the businesses: there's some impairment in the business, is the business declining? A lot of things can be cured with free cashflow because you can just buy in the float, you can buy in shares to increase earnings when you have the cash generative ability. So, it's the health of the business. And the other thing that's so important about free cashflow, and this is one of the reasons behind our comfort with Alibaba when no one's wanted it and no one wants it until they do, and the key thing with this business, as I said earlier on, in the short term, the market's a voting machine in the long-term it's a weighing machine.
Thomas (24m 30s):
Opinion, always follows trend. So, no one wants it now. When it's up double, everyone will want it and that's when we'll start to lay off some of our stock. When it's up triple, everyone will want it. We already have, in our mind, our predetermined expectation of what fair value will be in the future. The facts change, we'll change our mind. But on balance at those levels is when we'll be peeling out of the stock. But as it relates to Alibaba, that was the name of the game, is while you're going through all these regulatory hurdles, the cashflow continues to grow. So just because the stock is off from 319 down to 115, the fundamental health of the business is still growing. And it's those type of situations where if you're patient and you put that money to work, it doesn't happen in a linear way one-to-one, it happens all at once.
Thomas (25m 15s):
And when it goes, it goes in a way that often doesn't let people in. 'Cause everyone looks back. Their recent performance that they extrapolate will continue, which is the recent performance has been bad, and then they wait for a pullback that never comes. And then by the time it's 200, they have to chase it up and they wait for a pullback and next thing you know, it's two 50 and we're laying out a stock. And that's what happened to us with Wells Fargo in 2020, it's what happened to us with Exxon Mobile in 2020. Now everyone wants those stocks and we're lightening up.
Phil (25m 45s):
So how important is the business story? I mean, it's like when uncle Fred's telling you about a particular company at a barbecue and their eyes light up and it's a very exciting story and it can get people quite interested in it. And businesses are often stories, but that can be a pitfall as well. What's your kind of built-in detector for making sure that the story is not just that: a story?
Thomas (26m 6s):
Well, this is a great question because I think you could ask anyone who bought Peloton last year and what do they think about the story. Story stocks, Teladoc, DocuSign, the story was, you know, everyone's at home, trees grow to the sky. There's a very popular fund in the US that buys a lot of these innovative story stocks that you're betting on the future of growth. And I was looking at this ETF objectively, I was just looking technically. And I said, "Wow, this looks like it's really oversold and it looks like it's due for a bounce." So, then I went and I did the work on the top 30, 40 names.
Thomas (26m 47s):
I found one company in there that had $74 million of revenue that was over $5 billion market cap. So, I said, "That's probably not due for a bounce." And many, many of these stocks were trading at 15, 20 times, even after the fund was down some 57% in the last 12 months or 60% in the last 12 months. And this was a very popular name. I don't want to single it out, but what I want to say is to do your homework because every single story in this ETF is compelling. It is the future. It is just like those 2000 automobile companies from 1920 to 1930, that went public and only two have made it without bankruptcy. Certainly, Ford was the first and then the second is Tesla, that's the only other automobile company that hasn't gone bankrupt at one point in its career and 2000 did.
Thomas (27m 36s):
So, the story is one thing, the fundamentals is the other. You want cash generative businesses. If you want to gamble on couple of these things, and maybe you'll get lucky. But, you know, the time to buy Amazon was not when it went public in 1994, it was when it was down 90% in 2001 in 2002. But if you looked under the hood, the earnings per share, the cash flow per share, the revenues per share were still growing even though the stock was down 90%. And it's a very similar situation to what's happening with Alibaba. All that had happened was the multiple contracted just as it had overshot in the tech bubble in 1999 and 2000, it undershot in the tech wreck in 2001 in 2002.
Thomas (28m 18s):
And if you could have bought it at eight or nine bucks and whatever it's trading at, made many hundreds of times your money, those are the type of opportunities. So, it's okay to listen to the story because then you just have to do step two, which is, do your work. Are these reasonable multiples? Are these reasonable expectations about the future? Is there any track record that I can bank on? Is it in favor? Is it out of favor? What's the sentiment around this? And then when you come to your own conclusion, then you can feel more comfortable putting capital to work when you've done your diligence.
Phil (28m 48s):
This "story" story about ETFs is really important as well because people tend to think that ETFs are quite safe, but often they are marketed as stories like this particular ETF, which I think we all know what you're talking about, but will remain nameless. But stories are part of ETF marketing as well.
Thomas (29m 6s):
Yeah, there's no question. And look, it may very well prove to be right. It's very interesting, the last decade from 2010 to 2020 was the only ten-year period in the history of public markets where you could buy a basket of stocks trading at 10 times sales and make money. Historically, that was a guaranteed way to lose your shirt. What changed was from 2010 to 2020, you are in a period of very historically low interest rates, declining interest rates and that leads to a different respect for money. When capital has no cost, the natural effect is malinvestment.
Thomas (29m 49s):
We saw it in the housing bubble from 2003 to 2007. We saw it in the tech wreck from '95 to 2000 and this was the latest. So, it may be the story stocks, it may be bonds, we'll see what it is. But I think that regime is changing. I don't think rates are going to go up dramatically, but I do think the direction is different than it's been in the last 10 years. When capital is free, you can put it anywhere. When capital has a cost, you demand a return on that capital because it's costing you to hold the money. So that return comes in the form of dividends, it comes in the form of buybacks, it comes in the form of generating free cashflow, generating earnings, not just a promise to grow the top line, keep losing money and a promise that at some point in the future, the top line will be much higher and then they can have earnings.
Thomas (30m 39s):
That doesn't work once capital has a cost. And in the last 10 years, it's been a unique environment in history where that game did work and people made really good money playing that game. But I think the music may have stopped.
Phil (30m 51s):
So, Tom, tell us about your YouTube and podcast channels. And do you have a TikTok dance on your channel?
Thomas (31m 0s):
Well, thank you. The YouTube channel is Hedge Fund Tips. So, I think it's youtube.com/hedgefundtips. Our website is hedgefundtips.com. You can find all of our podcasts and video casts there, or you can just Google hedge fund tips with Tom Hayes or say it to Alexa or say, hey, Google play hedge fund tips with Tom Hayes, latest podcasts, and it will come up that way. That started, gosh, it must be about two and a half years ago with 120 episodes. And it was just something that I was doing. It's become the number two podcast, according to feed spot, in the hedge fund category. It's very popular with institutional investors, with high-net-worth investors. A lot of journalists listening, that have come to know me over the years, and brand-new investors also listening.
Thomas (31m 45s):
So, there's something for everyone. We have an ask me anything segment where people send in their questions. They find that very helpful. We have a lot of fun, its opinion, not advice. And then the blog, we do a weekly article that goes into details about what's happening in the market, what we think about it, et cetera. And people find it very valuable, I love doing it, I enjoy it, it helps clarify my thought process for the money that we allocate with clients and personally and I think people enjoy it. As for TikTok, TikTok is @officialhedgefundtips, Twitter is @hedgefundtips and I'm on LinkedIn as well so I hope to connect with several of you as you show further interest.
Phil (32m 24s):
That's great. And we'll put all those links, of course, into the blog post in the episode notes. But I think it's just great work, what you're doing, Tom. It's just great that you will share your knowledge and your expertise so willingly and so broadly for so many people because, like I said at the start, it seems like this wall of jargon that new investors are presented with when they're looking at the markets.
Thomas (32m 45s):
I'm happy to do it and you meet a lot of great people. You know, it's not common. Most hedge fund managers don't do it. But I find what you keep to yourself diminishes and what you share grows bigger and bigger and bigger. And I've been able to bring on a great junior analyst because of it and I don't really have to train him because he's listened to my podcast for the last year or two years, he knows the thought process. And I've attracted someone with a similar thought process versus just hiring someone who wants to become an analyst but they're wired to invest in a different way. Maybe they're growth investors or something like that, maybe their story stock investors. But I just find I'm attracting the perfect clients, I'm attracting the perfect employees and analysts and even admin.
Thomas (33m 27s):
I mean, it's just been a very positive thing all around. And it's very fulfilling because I do each week get great questions and great thank you notes and all that stuff. So, I do know it's making a difference for a lot of people.
Phil (33m 37s):
Fantastic. Tom Hayes, thank you very much for joining me today.
Thomas (33m 41s):
Thanks for having me, Phil.
Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation