Chapter 7
The Poison Pen
Daniel Loeb
A manager that has become overconfident by using a bad process is like somebody who plays Russian roulette three times in a row without the gun going off, and thinks they’re great at Russian roulette. The fourth time, they blow their brains out.
—Daniel Loeb, October 2011 interview
Call it confidence, call it aggressiveness, or call it a passion for risk. There is a theme running though the life of Daniel Loeb, the founder of the $9 billion hedge fund Third Point. You see it in the boy on the surfboard challenging the waves off Malibu Beach (whose legendary break inspired the name Third Point); in the 12-year-old who fought the bullies at Paul Revere Junior High School in Los Angeles with his allowance, hiring a classmate as his bodyguard for a quarter a day; in the college student who precociously amassed $120,000 in profits from playing the stock market then lost it all on one bad trade; and in the hungry young junk bond salesman at Jefferies & Co., who late in 1992 heard that David Tepper was planning to leave his job as the head trader on the high-yield desk at Goldman in order to launch his own firm. Loeb promptly called Tepper at home. “I want to cover you,” he told Tepper.
“Unfortunately, I don’t have a need for you; I’m unemployed,” Tepper responded. Or anyone else, for that matter; Appaloosa was not yet formed.
“That’s okay,” said Loeb, “If you want to buy 50 bonds or something for your PA (personal account), I just want to cover you. I’m sure you’re going to end up someplace.”
Daniel Loeb smiles at the recollection of his confident younger self. “Note to the salesmen out there—be aggressive,” he says. “I literally cold-called him at home, when [Tepper] had no job. So by the time he started Appaloosa, I had established the relationship with him. He became my biggest client. I was his biggest salesman.”
You can also see this attitude in what has become a signature of Loeb’s investment style and what he is perhaps best known for—the letter to the executive. Dan Loeb’s frank, insightful missives to the officers of the companies in which he is invested have made him feared in underperforming boardrooms and companies, and created a new literary art form. Call it the Blast. Since he started Third Point in 1995, Loeb has periodically shared with the delighted public candid, direct letters he has written to the top brass at companies suffering poor results brought about by management’s missteps. His assertions attract attention and his criticisms run the gamut from accusations of incompetence (“To ensure you a dazzling place in the firmament of bad management,” he writes to one recipient), to laziness (“I saw the crowd seeking autographs from the Olsen twins just below the private box that seemed to be occupied by Mr. Dreimann and others who were enjoying the match and summer sun while hobnobbing, snacking on shrimp cocktails, and sipping chilled Gewürztraminer.”), to lame corporate governance (“I must wonder how in this day and age, the company’s board of directors has not held you . . . responsible for your respective failures and shown you both the door long ago—accompanied by a well-worn boot planted in the backside.”)
Many observers noted that Loeb’s “poison pen” quieted during the past four years and in its absence, the investment world’s focus shifted to how Third Point has spent 95 percent of its time since its founding investing in classic special situations globally in long/short equities, corporate credit, mortgage bonds, and tail risk trades. Loeb’s rigorous investment process, honed over almost 18 years and taught intensively to his analysts, produces bottom-up investment ideas that have generated 21.5 percent net annualized returns for his investors since inception and multiplied a dollar invested on day one 26-fold.
As much as Loeb’s investors love him for his returns, the public loves him for his rabble-rousing. In 2011, Loeb announced that he would no longer author the lively quarterly letters to his investors (which inevitably became public) where so much of what the New Yorker called his “hedge-fund populism” was expressed. Until late 2011, Third Point had shied away from high-profile activism for four years.
Activist or not, Loeb remains a forceful manager who is seldom shy about expressing his convictions, more recently in civic life. Loeb was one of the first on Wall Street to enthusiastically support his former Columbia classmate Barack Obama’s presidential campaign from its launch in 2007, and also one of the first to repudiate him. Loeb’s case against the president’s policies generated front-page stories in the Wall Street Journal and the New York Times Business section for representing a shift in the zeitgeist. Young, politically minded hedge fund managers who had supported Obama’s campaign were beginning to move away from the president based on policies intent on what Loeb characterized as “redistribution rather than growth.” Confoundingly, one of the first things Loeb did after switching his support to Republican candidates was to enthusiastically work with New York’s Democratic Governor Andrew Cuomo to push for the legalization of gay marriage in New York State.
Loeb is confident in his convictions, intellectually honest, eager to take on the system, content to cut his losses, and always unpredictable—in short, a perfect blueprint for a high-returning hedge fund manager.
The Young Whippersnapper Finds His Way
Loeb grew up in Santa Monica, California, one of three children of his father, an attorney, and his mother, an historian. He attended the University of California at Berkeley before transferring to Columbia University, in part because he wanted to be in New York, the better to pursue a career on Wall Street. After graduating, he worked in private equity at Warburg Pincus for several years in the mid-1980s, where he acquired the building blocks of value investing, business analysis, and valuation. By chance, he moved into the music industry, taking a job at Island Records where he became the main financial adviser to Chris Blackwell, the label’s founder, who in his heyday had signed Bob Marley and U2 among others. The company was undergoing corporate realignments during this period, and Loeb helped Blackwell complete a successful restructuring and acquire the Bob Marley estate consisting of rights to the artist’s music. Returning to finance, Loeb spent three critical years at Jefferies & Co. as an analyst and bond salesman focusing on distressed debt and forming relationships with the buyers of this paper—many of which were managing their nascent “hedge funds.” In 1995, he made his biggest leap and launched Third Point with $3.3 million of capital.
It was a move the famously confident Loeb almost passed up, and for the most un-Loeb-like reason. “I almost got stage fright the day before I started the fund,” he says. “I had five or six family members and a few friends and $340,000 of my own money, which was my life savings from ten years working on Wall Street.” Obviously, Loeb went ahead, but taking responsibility for the funds entrusted to him put Loeb under a lot of pressure. He kept expenses low, in part by running the fund from a creaky, used desk in a space that otherwise served as David Tepper’s weight room, for which he paid $1,000 a month. “I kept my own books. I did all the marketing. I did investor relations. I didn’t even have a secretary—I wrote all my letters and I mailed them personally.” Loeb says the biggest challenge was raising money. “That was very hard early on,” he says. “I remember when I got my first check. It came after I did an interview in Barron’s, and a Tennessee-based entrepreneur in the grain trading business wrote me a check for half a million dollars. He sent it regular mail, without any of the subscription documents. So then I had to get the sub docs from him myself. He remains an investor to this day.”
Would Loeb have a harder time or an easier time starting a hedge fund today than he did nearly 20 years ago? Costs were lower, he acknowledges, and there were fewer expectations about compliance and operations. Raising money, he says, was much more difficult. “Today, there are seeding groups handing out money to relatively inexperienced managers,” he says. “It took me five years to get to $100 million, and today people are starting out of the gate with that much. You hear about people all the time that are unproven, untested managers, but because they came out of a big name firm and have fancy credentials, they go off and raise billions of dollars. So I’d say it’s actually much easier now.” Unfortunately, says Loeb, this model has not necessarily led to the formation of really good, high-quality funds. “The problem with the business is that it can force the managers to be overly focused on what their funders think of them and their short-term outcomes,” Loeb says. “The secret to our success is congruence between our investment style and my personal investment style and philosophy, the fundamental elements of which have remained constant over almost 18 years.”
When Loeb started Third Point, he had a strong background in high-yield credit, distressed debt, and risk arbitrage, but necessity pushed him to expand his areas of expertise. “We’ve never defined ourselves as one kind of firm,” he says, “and we’ve never really deviated from that kind of flexible approach. Instead, we’ve deepened our research process, and hired people who brought us expertise in different geographies, different industries, and different asset classes. Our philosophy is to be opportunistic all the way across the capital structure from debt to equity, across industries and different geographies. We invest wherever we see some kind of special situation element, an event that will either help create the investment opportunity or help to realize the opportunity.”
In finding these opportunities, Loeb begins with an investment framework, a financial point of view that helps define patterns of events that have consistently produced outsized returns. “The hedge fund world is full of people who specialize in these so-called event-driven situations,” he says. “There was a time when people didn’t really look at them or understand them. We start with that at the center of what we do, and we’ve done a better job making judgments regarding valuations.” Since 2008, Loeb says, Third Point has added a focus on public policy. “Changes in financial regulations, health care reform, and a variety of industry regulations could have massive impact on the valuations of public companies. We try to anticipate the repercussions. These create opportunities, both long and short.”
Loeb says that Third Point also develops top-down theses about sectors, industries, and economic trends. He gives an example: “In the 1990s, we recognized that the growth of the Internet would have a huge impact, but instead of focusing just on new internet companies, we bought a bunch of old-line companies that had internet companies embedded within them and we did quite well without taking the risk attendant in purchasing shares of high-flying overpriced internet companies. More recently, we bought U.S. and European companies that had large emerging market components, such as Swatch, Volkswagen, and Mercedes, and got emerging markets growth with domestic market valuations.”
Loeb also manages exposure by keeping a handle on leverage. Third Point uses a modest amount of leverage, with net equity exposure fluctuating between 30 and 70 percent. “We operate in that range,” says Loeb. “Any incremental leverage we have on top of that is in less volatile credit securities. Overall, our gross long exposure is maybe a little over 110 or 120 long percent less 20, 30, or 40 percent in short exposure, which gets us to an all-in adjusted net exposure of about 70. But gross long plus short is generally under 150 percent.”
The practice Third Point studiously avoids is using leverage on individual positions to tease a good return out of a mediocre investment. “The brilliant investor Howard Marks makes the point by saying something like, ‘Don’t confuse adding leverage to an existing investment with increasing your return,’” says Loeb. “If you take a 10 percent return in security and lever it up four times and after financing costs generate 15 or 20 percent returns, you haven’t increased your returns. You’ve just increased your leverage and significantly increased your risk. But you’ve also got a 20, 25 percent downside threat, so if the trade goes against you, you’ve lost 100 percent of your capital. Look at all the supposedly low volatility leveraged funds that blew up in 2008—due to too much leverage. We don’t leverage anything. We look at everything on an unlevered basis.”
During Third Point’s first seven years in business, the fund returned over 15 percent net every year except one, where it returned 6.6 percent with banner years of 52.1 percent, 44.3 percent, 42.2 percent, and 37.0 percent. These returns got him noticed and the fund grew as investors sought out Third Point for its stellar returns. Along the way, Loeb made a name for himself in single-name short-selling, finding both value plays and specializing in what he calls the “Three Fs: fads, frauds, and failures.” As the tech bubble burst, Loeb was correctly positioned short and made a killing. In 2000, he beat the Standard & Poor’s (S&P) by 26.2 percent. In 2001, he beat the S&P by 26.8 percent. Today, Third Point has a dedicated team of short sellers who consistently generate alpha regardless of market conditions. Unlike many hedge funds that use shorting only as a method of hedging, Loeb instills the discipline of the art of alpha-generating short-selling in each of his team members and this approach has given the firm an important means of profit making throughout the years.
Coming off the high of correctly shorting the tech bubble, in 2002 Loeb saw the chance to return to his roots as a distressed debt investor and “load the boat” with broken credits stemming from the recession of 2001. In 2003, Third Point’s main fund made 51.5 percent for its investors and in 2004 followed with 30.2 percent gains, all on the heels of these savvy investments in distressed paper and the post-reorganization securities stemming from these bankruptcy processes.
One of Third Point’s investments that performed particularly well was Dade Behring, a company that manufactures testing machinery and supplies for the medical diagnostics industry. Third Point became involved in a “high-profile distressed deal” in which the company bought Dade Behring’s bonds and bank loans. “The more we learned about the company, the more we liked it,” says Loeb. “We visited the company, which was run by a man named Jim Reid Anderson, who was extraordinarily astute. And it wasn’t just him, but his entire team was of superior quality. When the stock emerged from bankruptcy, it traded down, and Third Point bought more stock. Over the next four years, the management proceeded to grow the business, grow margins, take market share from competitors, and innovate new products.“
“We don’t usually hold onto companies for so long,” says Loeb, “but this was such a good company, that kept having catalyst after catalyst emerge. We thought that inevitably it would be an attractive acquisition target, which it turned out to be.” In 2007, Dade Behring was purchased by Siemens. Third Point earned a 600 percent profit from what it paid four years earlier. “It was one of the best investments we ever made,” says Loeb.
Like most investors, Loeb suffered during the financial crisis and the turbulence that immediately preceded it. In July 2007, amid great optimism, Loeb launched a public vehicle, Third Point Offshore Investors Limited, which was the first permanent capital vehicle for a U.S.-domiciled fund in Europe, and also the first float of an event-driven fund anywhere. Although staked at inception with investments from several large funds of hedge funds and high-net-worth investors, and with long holdings that included the New York Stock Exchange, DaimlerChrysler, and Phillips Electronics, it sailed into the first fears of market meltdown and struggled to meet its capital target. The initial public offering (IPO) managed to raise $525 million from listing a fund in London after a 24-hour delay, below its $690 million target but not a bad outcome given the uncertainty facing the markets at that time.
Loeb didn’t let the challenges of the London-listed fund’s raise distract him from a profitable 2007. As clouds darkened the horizon that September, Loeb saw compelling spreads in an assortment of big private equity–led public deals presenting a huge upside opportunity in risk arbitrage transactions if the funding markets stayed open. In short order, Loeb made the call that several large deals would close and in a time of escalated fear put $1.5 billion or about 28 percent of the firm’s capital into a set of risk arbitrage plays that earned the firm $125 million of profit in six weeks. In addition to those trades, successful bets on large companies in Europe and India and an insightful—and ultimately very meaningful—short position in the ABX Subprime index, Third Point finished the year up 16.6 percent.
The financial crisis brought on the worst year in Third Point’s history. In September, just before Lehman Brothers collapsed, Third Point had about $5 billion under management with earnings up 4 percent for the year; it ended the year with about $2 billion under management, and down 30 percent. “Many of our investors needed to raise cash and had to withdraw their money,” explains Loeb. “We weren’t going to prevent that, and so we liquidated every dollar back,” he says.
Third Point needed stable capital just like every other fund; it just wasn’t going to keep investors’ money hostage—an industry practice referred to as “gating”—during the worst financial crisis since the Great Depression. “There are a few funds out that weren’t able to comply because they couldn’t liquidate their positions fast enough, but they’re in a small minority,” Loeb continues. “Many funds that chose to ‘gate’ put the interests of their management company and its fee-generating ability above their most precious asset—their investors’ partnership. They put their own interests above those of their investors. And I think many of those funds are languishing now regardless of their performance because they violated their partners’ trust.”
Catching the Big Wave in the Storm
In March 2009, Warren Buffett was quoted famously on the cover of the New York Post saying, “I’ve never seen anything like it, the economy has fallen off a cliff.” At that point, Loeb was “super bearish.” The day after the Post’s Buffett cover, Loeb wrote a letter to his investors that he later explained said, “‘Brace for impact,’ and went on and on about how Armageddon was coming and how we needed to protect our assets.” By that point, Loeb had taken Third Point out of most equities, and net and gross exposures of the funds were at all-time lows. By early April, Third Point’s assets had fallen to about $1.6 billion.
During this rocky period, in February 2009, the Treasury Department announced that it would be applying “stress tests” to 19 of the United States’ largest bank holding companies. Banks that failed the tests would be eligible for the “Capital Assistance Program,” recapitalizing the banks using government monies. At the same time, Citibank, one of the weakest banks, announced an offer to exchange preferred shares for common equity, a confusing and much talked about trade whose net effect was to strengthen Tier 1 capital at the bank.
In mid-March, a trickle of “green shoots” data suggesting modest improvement in the U.S. economy and the government initiative to stanch the bleeding at U.S. financial institutions caused the market to snap 20 percent, “a big move off a low,” before the results of the stress tests were even announced. “I had to think really hard and reassess my bearish position,” Loeb says. “If the market was coming back, that’s one thing. If this was a dead cat bounce, that’s something else. A key rule in investing is that you don’t necessarily need to understand a lot of different things at any given time, but you need to understand the one thing that really matters. And at that point in time, what I had to understand was the wellbeing of the financial system. Were we going to have more Lehmans and AIGs and Bear Stearns? Or was the ‘stress test’ sleight of hand going to calm the markets?”
In order to answer that question, Loeb decided that he personally needed to have a deep and thorough understanding of the stress tests that the government was administering. He took the train to Washington and met with consultants, lobbyists, and others who explained their understandings of basic principles of the “stress tests.” They also shared their beliefs that Treasury planned to allow banks to respond to the results of the tests by converting existing securities to Tier 1 capital.
During his day in D.C., a light bulb came in Loeb’s head. He realized that financial institutions, in earning their way out of the mess they were in, would have to look forward to the future cash-generating ability of the institutions—thus cleaning up their balance sheets by getting rid of toxic assets and drastically slashing the size of risky businesses, like proprietary trading arms, essentially internal “hedge funds,” and credit restructuring divisions. A lifetime of recognizing patterns also paid off as Loeb realized that the much-discussed Citi trade at the end of February represented a kind of “blueprint” for the banks to solve their capital inadequacies with implicit Treasury permission.
If this was the low point for many of the financials, it should only go up from here, thought Loeb. But the conclusion was far from consensus. “Economists like Nouriel Roubini were looking at this the wrong way,” he said. “They were thinking the financial system is insolvent—which it may have been technically if an immediate liquidation of any of the major banks was ordered. Roubini predicted the S&P would hit 600, and possibly even 500! He and others were wrong, and the main reason why they were wrong was that they didn’t understand the framework of the stress test. They were focusing on the balance sheet when the Treasury was focusing on both the balance sheet and the income statement over a period of time.”
At that critical inflection point in early April 2009, a more bullish Loeb went to work. Over the next four weeks, Third Point deployed hundreds of millions of dollars of capital by scooping up preferred shares in insurance companies like the Hartford Group and Lincoln National. He also purchased preferred shares of Bank of America and Citigroup in addition to the debt of many of the undervalued, bottom quartile banks.
Returning to its roots, Third Point also put money to work in distressed debt. The fund started building significant positions in companies that were going through bankruptcies and reorganizing on the heels of the 2008 crash. So it bought big chunks of debt of distressed firms like Ford, Chrysler, CIT, and Delphi. Loeb also began buying high-quality mortgage backed securities trading at fire sale prices, reversing their successful 2007 bet against the mortgage market. These chunky distressed positions and a large portfolio of individual mortgage bonds formed the core of a home run in credit investment performance over the next two years.
Loeb calls this one of Third Point’s defining moments. “I was able to say, ‘Hey guys, they’ve rung the bell. We may be two or three weeks late, but this is not another dead cat bounce or a bear market rally; this is the real thing, and we need to get invested.” Eight months later, at the end of 2009, Third Point was up 45 percent, which put the fund up by 39 percent for the calendar year. They followed up with a 35 percent gain in 2010. There was little surprise that Third Point was named AR magazine’s event-driven fund of the year in 2010 and 2011.
The crisis taught Loeb how to get better at sidestepping volatility. “I think one of my big improvements since 2008 is how to manage a portfolio for high returns, while avoiding the kinds of draw-downs that we’ve had in the past. Over the years, we’ve had multiple 10 percent monthly drawdowns. You can’t outperform the market the way we have been and not expect some sharp drawdowns. But we’re getting much better at generating very good numbers with relatively light exposure.”
Going forward, Loeb is placing increasing emphasis on emerging markets. “They are obviously essential,” he says. “While the U.S. markets are still the biggest, most important, and most profitable, and while the United States still has the best capital markets and companies, the rate of change is much greater in places like India, China, Brazil.” Such countries are an increasing factor both in producing companies that service the local markets, as well as businesses that compete internationally. “You simply can’t ignore what’s going on there,” he says. “Even if all you do is focus on U.S. companies, a lot of the suppliers of American companies coming out of the emerging markets. I believe our success over the next decade or two will be dependent on our ability to apply our investment framework around event-driven investing to these markets. You can’t understand the global copper markets if you don’t understand China. And you won’t understand markets in general unless you know where China is going. It’s essential.”
Lately, Loeb has returned to his literary ways, but much like in other areas of his life, his tone, although tough as ever, has been refined. As of February 2012, Third Point’s funds collectively hold 5.6 percent of Yahoo!, making it the second-largest shareholder of the perennially undervalued company. Loeb took on the board of directors in sharp, hard-hitting letters, assailing Chairman Roy Bostock for presiding over four CEOs in four years and for an overall absence of leadership and strategic vision. Yahoo! has lost ground to other Internet companies in recent years, but it remains, in Loeb’s words, “a huge, huge value proposition.”
In September 2011, Loeb wrote this missive to Yahoo! founder and then board member Jerry Yang (Roy Bostock was chairman of the board):
Dear Mr. Yang:
Thank you for taking the time to speak with us by telephone on Monday. We are only sorry that we were not able to finish our conversation as a result of Mr. Bostock’s abrupt unilateral termination of the call.
Mr. Bostock’s failure on the call to acknowledge his pivotal role in, and accept responsibility for, the decline of Yahoo! makes clear that he does not intend to voluntarily follow his recently terminated hand-picked executive, Ms. Bartz, out the door. It is our strongly held belief that not only has Mr. Bostock been a destroyer of value, but also so long as he serves as Chairman of the Board, the Company will not be able to attract the talent it needs and deserves, particularly at the CEO level. This opinion is based not only on our prematurely truncated conversation, but on numerous discussions with Silicon Valley cognoscenti and other people familiar with both Mr. Bostock and the Company.
As a Founder and major shareholder of the Company, the abysmal record of the current leadership must be heart-rending to you personally, as well as damaging to your net worth. We urge you to do the right thing for all Yahoo shareholders and push for desperately needed leadership change. We are prepared to support you and present you with suggestions on candidates who could help bring Yahoo back to its rightful place among the world’s top digital media and technology companies. . . .
Loeb maintained the pressure behind the scenes throughout the fall of 2011, though he never spoke on the record to journalists. It was clear that Silicon Valley players had heard Loeb rattling his saber. Large private equity firms, long interested in purchasing Yahoo! began to circle. Industry insiders who had followed the company for years posited that Loeb’s shareholder activism might finally push the company in the right direction. Loeb, however, remained mostly mum. When rumors surfaced of a potential sweetheart deal between Yahoo! and interested private equity firms that would have entrenched management and the board at the expense of shareholders, Loeb spoke up. He voiced concerns about one of Yahoo!’s largest shareholders, powerful founder and former CEO Jerry Yang. In December, he wrote:
Dear Directors:
Third Point LLC, as the beneficial owner of 5.2% of Yahoo! Inc.’s (“Yahoo”) outstanding shares, remains extremely troubled by news reports regarding the dysfunction and inequity being exhibited in the process of maximizing stockholder value that the Board is allegedly “managing”. We are disturbed but not surprised by this mismanagement given the history of strategic bungling by Yahoo Board Chairman Roy Bostock and Founder Jerry Yang, which has been chronicled in our previous letters and in numerous critical media and analyst reports. As significant shareholders with our own fiduciary duties to investors to uphold, we cannot stand by silently if such reports are accurate and Yahoo, a company in no need of cash, plans to engage in a sweetheart PIPE deal which will serve only to entrench Mr. Yang and the current board while massively disenfranchising public shareholders and permanently robbing us of the opportunity to obtain a control premium.
We are not alone in our concerns. Shareholders, analysts, and the media are questioning the integrity of the process currently underway. As stewards of our assets you are charged with a duty to place stockholder interests above personal gain or other motives. In order to allay the concerns and uncertainty permeating the marketplace and provide much needed transparency on the supposed “process” that Yahoo is undertaking, we ask that you immediately make public the letter(s) in which Yahoo invited third parties to make proposals for the Company (the “Process Letters”). We assume that Yahoo’s Process Letters did not place any artificial restrictions on the proposals that the Yahoo board was willing to consider in its search for strategic alternatives, such as discouraging, or even prohibiting, bids to purchase Yahoo in its entirety.
The private equity deals were scuttled and in the New Year the changes Loeb demanded began taking place. First, Yang resigned from the board. A week later, Bostock and three other long-standing directors announced that they would not seek reelection to the board; at the same time, two new members were chosen. “The shake-up appears aimed in part to blunt a possible challenge by Yahoo!’s biggest shareholder, the hedge fund manager Daniel S. Loeb,” reported the New York Times. “An acid-tongued activist investor, Mr. Loeb has been preparing for a possible board fight if the company does not make progress in generating better returns for investors.” The company also appointed a new CEO, Scott Thompson, who pledged to work to increase value for shareholders.
In February 2012, Loeb notified the company of his intention to nominate his own candidates to the board during the upcoming proxy season. Urging balance on the tech-dominated Board during a critical period at Yahoo!, Loeb recommended experienced media luminaries Jeffrey Zucker, the former CEO of NBC Universal, and Michael Wolf, the former president of MTV Networks and head of the McKinsey and Booz Allen Media practices. He also put forward Harry Wilson, a financial restructuring expert who led the U.S. Auto Task Force’s work to successfully turn around General Motors. Loeb also announced his plans to join the board as an advocate for the company’s beleaguered shareholders, many of whom contacted Loeb, commented on blogs, or tweeted their support for his endeavors.
In taking on a $20 billion Internet legend, Loeb has seized on an extraordinary opportunity that bears the hallmarks of his successful past investments using his evolved techniques. Pursuing better corporate governance on behalf of shareholders, unlocking value with consistent catalysts, and seeing a major value proposition that others had given up on requires a unique combination of contrarian thinking, keen financial valuation skills, understanding catalyst-driven investing, and an ability to stand up and fight. The Yahoo! campaign represents the essential Dan Loeb.
The Third Point Tao and Team Approach
Now 50 years old, the trim, 5′10″ Loeb leads an active physical lifestyle that would put many men half his age to shame. A lifelong surfer, Loeb also competes in triathlons, lifts weights, runs, swims, bikes, and skis, in addition to practicing yoga. “I think yoga and meditation are good for your brain and body. They help you think more clearly, improve your memory, and help you become a more balanced, self-aware person. And I think those are all really important things that make a good investor.” He shares his interest in yoga with his wife, Margaret Munzer Loeb, to whom he has been married since 2004. The couple has three children.
Right now, Loeb is concentrating on continuing the path of excellence he has established. “I love what I do,” he says. “I love the investing process—the problems and the puzzle-solving and testing my wits. But I have also really enjoyed building an organization. That realization came to me later in life, but as fine as building a great portfolio is, building a great organization with great people is even better.”
When Loeb looks to hire people, he tends to value training and experience over formal education. “Before you can get into all the nuances of investing and understanding how to do a due diligence process and question a management team,” he says, “you’ve got to have the nuts and bolts of finance down. Almost everyone who’s worked at Third Point has at least gone through a two-year training program in an investment bank, plus done a couple years at a private equity firm, doing modeling and valuation work.” For Loeb, having an MBA isn’t as critical as having the training. New hires need about two or three years of experience in a field other than the public investment world, like mergers and acquisitions. “I don’t like the word ‘instinct,’” says Loeb, “because it just sounds like a gut thing. I think what we call instinct is really a type of pattern recognition, which comes from experience looking at the companies and industries and situations that work.”
Loeb looks for another quality as well: success at something other than work and school. “We’ve had a lot of excellent musicians and athletes here,” he says. “I don’t want to dismiss the importance of academic credentials, but we want bright people who are really diligent and hardworking, but also have real tenacity and grit who enjoy what they do and have an incredible passion for investing.”
In evaluating his team, Loeb says that he emphasizes process over outcomes. “Ultimately, of course, you want people with good processes and good outcomes, but I’d rather have somebody working for me who had a good process and a bad outcome in a given year that somebody with a bad process and a good outcome.” Most dangerous of all, according to Loeb, is a manager with a bad process who has become overconfident because of undue success. “It’s like somebody who plays Russian roulette three times in a row without the gun going off, and thinks they’re great at Russian roulette,” he says. “The fourth time, they blow their brains out.”
For anyone contemplating a career as a hedge fund manager, Loeb offers three points of advice. “First, make sure you’re passionate about investing,” Loeb says. “I have seen too many people go into this because they’ve done the math on the business model, and have concluded that it’s a very lucrative business to be in. But I’ve never seen anyone with that approach really make it as an investor. The great hedge fund managers, guys like Bill Ackman, David Einhorn, David Tepper, Kyle Bass, and Alan Fournier, are super-passionate. If you aren’t going to match them, don’t bother.”
Second, while you’re being passionate about investing, don’t forget about running your business. “Make sure you spend enough time, maybe 20 percent of your time, thinking about your business process in your organization,” advised Loeb. “Ask yourself, what kind of culture do you want? What are you going to look for in hiring people? How do you want to organize yourself? How are you going to pay your team? How are you going to measure and reward performance? You will have to answer all of these questions eventually. Better to answer them in an intelligent considered way than as an afterthought.”
Finally, of course, make sure you have confidence. Loeb feels that managers who lack confidence go out of their way to try to anticipate what their investors want them to do. “Look, this is a business that requires willingness to take risks and to generate returns. You can’t do that unless you have a healthy appetite for risk. Too many of my colleagues have sacrificed a performance culture for one of low volatility and risk management. It’s sapped the industry of creativity and diligence, because people are basically fear based, and they think that if they have that bad month or quarter or year, that they’re just going to go away.”
On the precipice of his eighteenth year running Third Point, Loeb has demonstrated that his essence remains even while he honors his own evolution in portfolio and team management. The new Loeb is savvy about managing downside portfolio risk, always willing to take a hard look at how Third Point can improve, and committed to creating a lasting organization that lives and breathes the Third Point investment framework and process. The essential Loeb—a direct line traced from young surfer to aggressive salesman to forthright activist investor—is confident, contrarian, aggressive, willing to take big risks and to be a rabble-rouser for what he thinks is right. “The hedge fund industry is littered with eunuchs trying to run hedge funds,” says Loeb, “and it’s not a business for eunuchs.”