market folly

Jason Karp, founder of hedge fund Tourbillon Capital recently appeared on Patrick O'Shaughnessy's podcast, Invest Like The Best, and he talked about a range of investing topics.  We posted extensive notes from the conversation with the full audio below.


On The Differences Between Public and Private Investing These Days

Years ago, 40-50% of stock market volume came from fundamental allocators.  Today it's less than 10%, so 90% of trading activity is coming from passive, quant, CTAs, risk premium captures, etc.  The vast majority of trading then is not coming from people who are concerned with 'what does this company do?' etc.  This leads to multi-day or even multiyear dislocations.

"The time for convergence between cashflows and the fundamentals of a business and stock price is usually 3-5 years at worst."

He said private companies tapping venture capital can now gain massive scale (i.e. Uber) without even going public.  Over the past 5 years there's been an 'explosion' of capital via VC's etc. 

"I believe the trends of why people allocating so aggressively privates is because the public markets have gotten harder. And people don't want to deal with daily, monthly mark-to-market."

He thinks there's a lot of edge left in private equity and a "more linear relationship between effort and outcome."  While that's applicable to public market investing, your time horizon has to be around 5 years.  But if you or your investors have a shorter horizon, it's less so.


On His Investment Style

"If I can find deep value, where the cashflows are growing, which is extremely rare, then that's the best case scenario.  My primary first variable is: 'are the cashflows growing?' Because growth solves a lot of sins."  If cashflows are growing, you can be wrong on the valuation.

They'll take the price today and instead of doing a DCF, he'll do it in reverse and try to figure out what's priced in today's stock and what would have to happen for it to be worth x.

He says that with deep value stocks, most have problems.  "All the cheap stocks have things that are very, very wrong with them.  So you're inherently in an adverse selection pool to try and find the frog that you can kiss that turns into a prince, when most of them are frogs and you're going to get warts on your face.  I just think there's an easier game to play."

On general investment advice he's learned over the years: "It's very important for you to keep your consumer hat on at all times, and remember that your gut instinct about how you feel about the product and experience... is so important."  He compared it a bit to a Peter Lynch-esque approach.  It helps you spot trends much earlier.


Talking Stocks

He thinks Facebook (FB) and Alphabet (GOOG) are surprisingly cheap given how entrenched they are in your everyday life.  He says FB's Instagram specifically is going to grow like crazy with businesses.  There's highly cyclical companies that are trading at around the same valuations, which is kind of crazy.

3 types of edge in market:  information edge, which is largely gone.  Analytical edge still exists and it's based on how you process information versus others.  Structural edge is where he sees the most opportunity: being able to stomach volatility via long-term holding etc. 

"There's more opportunity than I've ever seen in my career for duration... ever."  He says there's so many stocks that screen poorly and others that screen extremely well and are getting very crowded.

He thinks quality, safe, low volatility stocks are very overextended and then there's others that are more value and a little hairier... the disconnect between fundamental value and where the price is, is the largest he's seen in his career.


Industries To Watch For The Future

Karp feels health and wellness is one of the most interesting places to be doing research both in public and private markets right now.  The megatrend here is people focusing on less processed foods, not caring about brand, mainly just wanting quality products.  He thinks the trend is here to stay because once people find out about all the chemicals in their food and how it affects test animals or humans, there's no turning back.  And a lot of it will be demographics since millennials are so young and already focused on this.

He also feels cannabis is going to be one of the biggest industries in this country in the next 5-10 years.  He says it's much more valuable to be learning about this than crypto.  Many of these stocks will go to zero but many will also go up ten-fold.  As the tipping point has hit with legalization starting to happen, he thinks there will be alpha there.


On Hiring

He says that knowledge and passion are the two most important factors in hiring people.  The first is easy to find, the second's not.  And it's the more important of the two.  You want the people working for you to actually enjoy what they do. 

The third variable is emotional intelligence and it's the hardest to find.  He thinks it's more important than IQ.  It's about the ability to control yourself, have empathy, see other points of view, and rapidly change your opinion.  In the investment industry, these are crucial. 

He hires a lot of athletes due to the competitive nature (something we've heard from Julian Robertson before), and people from military backgrounds due to training.  He's also found mothers to be spectacular due to their perspective on managing people and conflicts.  Instead of looking at a resume, look at what a person has been through or actually done.


Embedded below is the podcast interview with Tourbillon's Jason Karp:



And if you haven't already, be sure to check out Patrick O'Shaughnessy's podcast: Invest Like The Best.