Leon Cooperman, CEO of the Omega Advisors hedge fund, recently regaled an audience at Roger Williams University, in Providence, R.I., on his experiences as an investor and a leader of the investment management industry for 45 years. Cooperman has attracted some attention for his criticisms of President Barack Obama from a Democratic perspective for going too far in bashing Wall Street and not far enough in addressing the fiscal issues studied by the Simpson-Bowles Commission; however, he did not discuss these issues during the speech.
Cooperman grew up poor in the South Bronx, graduated from Hunter College and Columbia Business School and worked as a senior executive at Goldman Sachs for 25 years before he decided to strike out on his own as a hedge fund manager. He explained that a mutual fund manager will earn 1 percent or less in management fees, whereas the hedge fund model offers the opportunity to earn 2 percent + 20 percent of the gains.
Cooperman described himself as a value investor in the tradition of Benjamin Graham, whose most famous protégé is Warren Buffett, and he has practiced his trade well enough to average 500 basis points above the average for the industry. Value investors study the fundamentals of companies, investigate the managements and shift allocations of their funds in an effort to buy undervalued securities in the United States, the United Kingdom, Europe and Canada, and sell them when they become overvalued (buy low/sell high).
Ideally, as stated by Buffett, an investor should look for a company whose fundamentals are so good that it can be run by an idiot, because some day it might be. His principal standards consist of high free cash flow and honest management.
Cooperman said he “obsessed” with his work, and he advised the students in the audience that if they did not enjoy working with a lot of numbers and a lot of people, this would not be the right occupation for them.
The last portion of Cooperman’s talk was devoted to a generally optimistic presentation of his investment outlook. He predicted that the U.S. economy would continue to grow at a pace of 2 percent to 2.5 percent over the next year and would not slip back into a recession. Charts depicted the coordinated actions of central banks to supply liquidity to the global economy. He predicted that the largest banks would be able to earn their way to a healthier condition with the help of a positively sloped yield curve.
The eurozone will not break up, according to Cooperman, because it would result in a strong mark that would hurt the ability of Germany to export to the rest of the European Union. At the same time, he warned that interest rates are bound to rise. Cooperman chuckled at being quoted as saying he would not be caught dead owning U.S. government bonds, but proceeded to explain that the real, after-tax returns that are likely to be available will be confiscatory, and this will also make it difficult for pension funds to earn the returns of 7 percent to 8 percent their models assume.
Two questions arise that could be asked of any leading investor or policymaker. The first is whether the 2008 crisis episode has damaged the U.S. economy so badly that it will suffer a chronic inability to grow enough to employ workers as they enter the labor force. The other is whether the stock market has, in fact, fallen under government sponsorship, along with the Too Big To Fail banks and the auto industry, and, if so, how this new reality affects an investment strategy.
Cooperman expressed the view that the risks of owning or not owning stocks are fairly balanced, but that compared with other investments, they’re the best house in a neighborhood that might be good or bad.
His philosophy holds that even if markets move sideways for an extended period of time, there will still be opportunities to buy undervalued stocks and hold them until the market recognizes their value.
Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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