Episode #170: Bill Martin, “On The Short Side, Position Sizing Is The Biggest Driver Of Success”

Episode #170: Bill Martin, “On The Short Side, Position Sizing Is The Biggest Driver Of Success”

 

 

 

 

 

 

 

Guest: Bill Martin is the Chairman and CIO of Raging Capital Management, a long/short equity hedge fund founded in 2006. His entrepreneurial experience includes founding finance website, Raging Bull, where he served as the original CEO, and InsiderScore, an institutional analytics business Bill co-founded, focused on money flow-related data that is utilized by more than 250 top tier hedge and mutual fund client firms.

Date Recorded: 7/22/19

Run-Time: 59:54

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Summary: In episode 170, we welcome our guest, Bill Martin. Bill and Meb start the conversation by diving into Bill’s early entrepreneurial experience running Ragingbull.com. He discusses the business, raising capital, and ultimately selling the business. After Ragingbull.com, he started a research business and InsiderScores before ultimately launching Raging Capital in 2006.

Meb asks Bill to get into Raging Capital. Bill offers that the long side is fairly concentrated, focused on the long-term and thinking strategically about the businesses. The short side is where he and his team focus on a diverse basket of businesses they consider overvalued with fundamentally challenged business models. Bill describes the nuances involved in position sizing on the short-side, and even illustrates with an example of Insys Therapeutics.

Next, Bill covers where he’s seeing opportunity in the world. He talks about a theme with MLPs, companies with exposure to Puerto Rico, and building products.

Meb then chats with Bill about his thoughts on China. Bill walks through his thinking on China broadly, and that the network he’s building in China is beneficial to investments he’s making in the portfolio.

As the conversation winds down, Bill walks through mechanics of short selling, and some names and themes he and his team are working on, including a number of firms in the public storage space, and some auto-related companies.

All this and more in episode 170, including Bill’s most memorable investment.

Links from the Episode:

  • 0:50 – Welcome to our guest, Bill Martin
  • 1:34 – Ragingbull.com, and Bill’s entrepreneurial start
  • 5:11 – Selling Raging Bull during the dot com bubble
  • 6:29 – Moving back to New Jersey and launching InsiderScore
  • 9:00 – Shifting from entrepreneur to fund manager
  • 12:20 – Investing framework
  • 17:33 – Experiences shorting stocks and the pain involved
  • 21:15 – Opportunities on the long side
  • 27:18 – Strategies around exiting positions
  • 28:14 – Interest in building products
  • 29:36 – Being on the board of small and mid-cap emerging growth firms
  • 33:45 – The Golden Bathtub
  • 37:08 – How Raging Capital thinks about public vs private investing and changes in the private space
  • 39:38 – Mechanics of short selling
  • 43:24 – Current themes Bill and his team is exploring today
  • 52:07 – Challenges of running a hedge fund
  • 55:10 – Capacity in terms of the overall portfolio size
  • 56:14 – Advice for young people thinking about entering asset management
  • 57:28 – Most memorable investment
  • 59:00 – How to connect with Bill: RagingCapital.com

 

Transcript of Episode 170:

Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber Show is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: Hey, podcast listeners. Welcome, we have an awesome show for you today in the middle of your summertime listening. Our guest is the founder/CIO of Raging Capital Management, a long-short hedge fund founded in 2006. That’s almost 14 years in business. He’s also got a pretty diverse background first as an entrepreneur when he was in college. At fellow Virginia, he founded ragingbull.com and followed that with an independent research business before launching his own fund, almost at $1 billion today. Welcome to the show, wahoowa, Bill Martin.

Bill: Thank you, go ‘Hoos. Great to be here.

Meb: It is great to be here. Thanks for joining us today, Bill, from New Jersey. It’s a beautiful day here in Los Angeles. We got to get started back your time at Virginia. I didn’t know you, you were a couple of years older than me. But we share some commonalities. What did you study at Virginia when you started? Were you a comms school guy?

Bill: I was doing some finance and doing history but took a little bit of an entrepreneurial detour, I didn’t actually end up finishing. So I started a company before I finished.

Meb: You weren’t there for long. So for the younger listeners, they’re probably not gonna remember this. But for the older crowd, this is gonna be a big blast from the past. But talk to me a little bit about this because this was…take us back to the mid, late ’90s. What was the origin story for this idea? This is gonna bring back a lot of memories for people that were investing during this time.

Bill: Time passes but there was this thing, the.com boom, so I lived it and breathed it. Started a company called ragingbull.com, which was a leading online finance site in the late ’90s. And it really was just born out of my passion and love for the markets. And immediately when I got online, I saw the potential for the technology and ended up starting a company around it.

Meb: Walk us through it. So you’re sitting there probably in the old dorms or somewhere and trading stocks during Finance 101, maybe Ed Burton’s economics class, I don’t know. So, what was the origin for the idea? How did you develop it? Give us a little history lesson in that company.

Bill: Sure. I mean, I was one of those guys who got the stock market bug early. I bought my first stock when I was 10 years old. And so when I went to college at UVA, I very much wanted to go to Wall Street. I had been online for a few years at this point, this is kind of mid, late ’90s. I didn’t realize it was quite as early as it was I ended up interning at Goldman Sachs one summer. And that’s when it struck me that people didn’t know the internet. They didn’t know the technology and that there was a business opportunity. So we literally started the business in our dorm. Real-time stock quotes, charts, data, and like financial Twitter today, a lot of community. And the community piece was really key, particularly in the late ’90s.

Meb: And this was like what could have been seen as one of the first social, sort of, investment communities, if not the first. So you came up with the idea. Were you the tech guy, or were you building it out yourself? Did you work with some people? And how did you eventually get the excitement to drum up all the users?

Bill: Well, I found as an entrepreneur, you need to be a little naive about the challenges and difficulties and we were young and naive, and that very much work to our benefit. I was never a programmer but I knew the technology and was fortunate to have some friends who were really good coders and really good on the technology side. And I ended up partnering with a good friend of mine who grew up with me in New Jersey, and another good friend of mine who went to school at UVA also and started the business, and that young and naive kind of work for us.

Meb: So I would have been an engineer in the engineering school. I imagine I was probably on your website during class. I mean, I remember, we used to have professors that were literally, I don’t know if they were trading stocks during class, but they were definitely checking quotes. I actually remember my first computer connected to the internet was when I went to Virginia as, oh man, it was the crappiest Compaq you’ve ever seen in the world. And I remember getting on the internet and just like, what do I even do here? What do I search? I remember search. I was like, “Search Denver Broncos.”

Anyway, late ’90s, this booming bubble, it’s a lot of fun. You started the company, get some traction, and then you decide to go full time, right? You said, “Enough of this Charlottesville. I’m gonna crank on this company.” Is that kind of how it went?

Bill: Well, definitely Charlottesville is a great place to go to school. But we had a venture offer. There was a high flying company called CMGI back in the late ’90s. They offered us venture money when I was 19 years old. We ended up raising over $20 million in a couple of years and did the dot-com thing on both the ups and the downs of the cycle. So we received quite an education in just a few short years.

Meb: And what was kind of the…I mean, I know you can probably look back on it with some lessons and fondness at this point. But what was the eventual runway, how did the site play out, what was the eventual transition away from that into kind of the next things you were doing?

Bill: Sure. We ended up…our instincts, even though we were drinking the Kool-Aid as much as the next guy, our instincts were correct that it was time to sell the business. Even with my rudimentary finance education at Virginia, I could see that the valuations didn’t connect to the bottom line results. Even though we had a business with real revenues and was growing very quickly.

So we ended up selling the business. Unfortunately, we took a lot of stock in the deal, kind of the only option at the time. So we handed a lot back when the market crashed in early 2000. But it was a great way to start a young career. I met a lot of great folks, built a good brand, a lot of relationships and a lot of experience. So I was hungry to dive into the next project from there.

Meb: I think I still have some capital loss carryforward from CGI. I definitely was a shareholder as an undergrad at one point for 100% sure. I think you also were a student in Professor Griffin’s class. I was the token engineering kid. I remember to this day, my stock recommendation was Human Genome Sciences in 2000, which was a high flyer both up and down. Okay, so Raging Bull kind of sunsets. You turned your eyes to the horizon, what comes next? You decided not to go back to Charlottesville, right?

Bill: Yeah. We were up in Boston. After we sold the company, I moved back to Princeton, which I grew up nearby here. And I knew I wanted to get closer to the markets but also leverage the entrepreneurial background I had. So, I ended up starting an investment research business, which gave me an opportunity to write about the market each day and pick stocks. But also, out of that grew InsiderScore, which is a fairly well-known successful platform that exists still today. It’s an institutional analytics platform that primarily hedge funds and mutual funds subscribe to.

Meb: Yeah. Let’s spend a few minutes on that because being a quant and working in the data part of the world, what was the sort of idea behind that? What caused you to start it and then what was the actual concept for the platform for those who aren’t as familiar?

Bill: Well, for me, again, as a market junkie, I just love data and information. I love the markets. And so, as the technology world was blossoming, I saw opportunities to leverage the technology to be a better investor. And so InsiderScore was really born out of post-Reg FD form 13 data, taking that data and put it in a clean, structured, tagged, organized way so you can run analytics and rap research, and do screening around it. And then over the years layering on other data sets, and what have you. But really was all about finding a needle in the haystack from a data perspective.

Meb: And talk to us about a few of those needles. The general concept was, “Hey, there’s investors that probably have some value-add in the timing of the purchases and sales securities.” Any general insights you can kind of pass along from that, origins that aren’t too proprietary?

Bill: Sure. There’s a lot of academic research around insider trading. Obviously, someone writes a check, they’re generally doing it for one reason, to make money. Well, I’ve actually found though, in leveraging the data and the analytics, that there’s some really interesting behaviours on the selling side that we certainly apply in what we do at the hedge fund in terms of looking for short selling opportunities.

So, maybe you have an executive who has 10-year options, yet they’re choosing to exercise and sell them for a nominal gain well before they expire. You see other situations with 10B51 plans where insiders continue to sell with seemingly no limit on the downside. So there’s a number of different profiles you can pull out of that that I find are actually really, really valuable and a great source of ideas on the short side.

Meb: So you kind of started this site, and I know it’s done very well. There’s certainly a name in the industry that still exists. So at what point do you said, “All right, I got the itch, I’m gonna move away from these entrepreneur operating companies,” and get the idea of actually going to start other people’s money?” What was the process? Did you sell the company? Did you just kind of say, “I’m gonna go moonlight as a fund manager?” What was the process?

Bill: Well, again, my love and passion was the market. So I always wanted to get back closer to the market. After running the research business for a few years, passed that off to a partner, and he ran with InsiderScore and he’s done a fantastic job, he was a Virginia guy as well. And launched the fund in 2006. And so I knew this was what I wanted to do. Knew it was something I want to do for a long time to come. And I was fortunate that had some success that I could kind of build off of that and take a little bit of a longer-term mindset in building the business on the hedge fund side.

Meb: All right, so you and I both kind of came to the conclusion at the same time. I think we started managing money in the beginning of ’07. The nice timing of about a year runway before the major financial crisis. Talk to me a little bit the origin story of the firm. And we’ll get into…you’re an old school hedge fund manager at this point, been in business almost 15 years. Let’s talk a little bit about the general starting of the fund. I assume it’s kind of friends and family in the beginning, or if it was seeded by somebody, and then we’ll get into the framework for how you guys think about the world.

Bill: Sure. Yeah. I mean, the capital was my own, it was family capital. And it was primarily entrepreneurs that I had been fortunate to have networked my way into. So really, really good base to start from. And even today, about half of our capital is entrepreneurial capital. So from a kind of idea sourcing and idea diligence point of view, I think it’s a really unique asset that gives us a really strong edge.

But in terms of the fund and Raging Capital, on the long side, one part was definitely trying to be entrepreneurial in the public markets. So looking for those emerging growth businesses before they’re known and obvious, and trying to be creative and find interesting entrepreneurs and interesting technologies. At the same time, a strong value bed. My original mentor on growing up with actually Michael Price at Mutual Series, where my grandfather had invested my college money. So even though I grew up in technology I always had a strong value then.

And then you had mentioned John Griffin earlier, tremendous influence on me and so many folks in my generation who came out of Virginia and Columbia Business School. But he ran Blue Ridge Capital and prior to that was a tiger, and really opened my eyes to the short side and the benefit to the short side, the inefficiency in the short side, and the benefit of hedge model where you could not only compound wealth but protect wealth over the cycle.

Meb: By the way, good for your grandfather. I mean, it’s always nice to pick one of the better performing fund managers in history. Wasn’t he originally Seth Carmen’s mentor, I’m trying to remember.

Bill: He did work for I think was Matt Stein originally. A lot of great investors came out of there. And Michael was always a very creative value investor. He would get activists at times. He would do distressed stuff. And in the contract of a mutual fund was a pretty unique and differentiated investor. And so, for me, it was literally one of the first investing sources I ever read. So it was a great eye-opening introduction to the market.

Meb: So, you guys have done a pretty phenomenal job over the years. I mean, I think something like doubling the return of the S&P 500 since 2006, compounding it, I think, like 15% a year or something just crazy. Let’s talk about the framework. So, you started the firm ’06, you mentioned there’s kind of two pillars, or maybe three, emerging growth companies value with the catalyst and a short book. How is this just you in a cubicle, in a corner somewhere? Did you start out with some analysts? And how did you start? Did you start sourcing ideas? What’s the process? Give us the playbook?

Bill: Well, the first one based in Princeton, New Jersey since we launched. And my first hire was a forensic accountant, Alan Young. He’s one of my managing partners, he’s still with me. Today the firm has 14 folks, 6 of them on the investment side. And so, I think for us, given the entrepreneurial background and the operating background I have, we’re very much bottoms-up focused in terms of networking ideas, and trying to connect dots to source ideas, and trying to build a bottoms-up portfolio.

Meb: So what’s the process? I’m a quant, it seems like you have a little bit of quant underpinnings with some of the data sites that you’ve been involved with. But talk to me about the general process. I know you travel a lot. I know this kind of value-added sort of concept of research is really digging in. You’ve got forensic accountants, everything else. Talk to us about two things. One, what’s the book look like as far as how do you position it? Do you have 10 names? Do you have 200 names? How do you think about building it as terms of gross, net, all that good stuff?

Bill: Sure. So for us, our long book, we strive to be fairly concentrated. We tend to be long-term investors. Over 70% of our gains have been for long-term capital gains on the long side. We strive to have around 35 names or fewer. I think the big thing for us there is, I mean, there are areas we like to hunt. We are looking for those entrepreneurial companies. We are looking for those beaten down out-of-favour companies.

But for us, it’s not about chasing a quarter or chasing a short-term data point, we really strive to think strategically about these businesses. So put yourself in the shoes of the CEO or the chairman and imagine how you’re gonna run this business if you owned it. What’s the competitive set look like? How do you allocate capital? How do you build and grow the business?

And really try to think three to five years out and have an entrepreneurial mindset. And you’d be surprised at just taking a step backwards like that, creating that framework, the benefits that create, particularly in the volatile market when the market’s testing you with ups and downs. And it’s interesting how predictive just that thought experiment often can be. That’s our long book, happy to dive in the short side as well if you’d like.

Meb: Just talking about the general framework. And then I think what we’ll do is we’ll talk about some themes and names. And that’ll probably illustrate a lot of your thinking as well. What’s the general thesis on the short book? Is that the opposite of the long book or is it something else?

Bill: So the short side is a little different in that we really strive to have the most diverse basket of fraudulent, overvalued, fundamentally challenged, crappy businesses that we can, so a lot of names. Oftentimes we’ll have 50-plus names on the short side. I believe that on the short side, position sizing is the biggest driver of success. And so we like to say that we have a good idea how the movie is going to end. We’ve seen the Teslas before, we’ve seen the Carvanas before, and what have you. But anything happened in the interim, stocks are volatile, and you have short squeezes and everything else that can happen in the markets.

And so, we really try to size positions that in order to have consistency and durability to manage through that volatility, to have room to add of those positions, except they go against you or favourable developments start to play out. But also at the same time having a discipline to cover positions when they get too big and you can’t sleep well at night.

Meb: Expand on that idea, position-sizing, because the short side despite the fact even if you had a short stock that you just know is going out of business, I think you just said you know how the story ends. There’s almost like unquestionable…in the mean, anything can happen. So do you say, “Look, we’re gonna do these 40, 50 positions, they’re all going to be half-percentage?” Or what’s the thinking about how to actually position size because that is what a lot of people get into trouble with for sure.

Bill: Sure. For us, a really big position on the short side is around 5%. I’d say middle of the fairway for us is in that 150 to 250 basis point range. But there’s a lot of names in the book that are 50, 75 dips where we’re just we’re getting started, we get a feel for how they trade, and we will…just like the long side, we really take a strategic viewpoint with these names. And we know how the movie is gonna end, or we’d like to think we know how the movie’s gonna end, and we’ll often be around them for multiple years. And so we like to get a feel for how they trade, really understand the company, and when the right developments play out, be willing to press them.

So we made a lot of money a few years back on Valiant, and that was a situation where we hung around that thought for a couple of years. And when it started to work, we made it larger numerous times on the way down. And so I think that’s really key, having that flexibility and that longer-term mindset on the short side.

Meb: I was listening to an old interview with Chanos recently where they always mentioned the concept of like, “Well, you can never make more than 100% on your shorts, whereas longs are uncapped. Therefore, you should never be a short seller.” But he goes like, “Well, actually, you can continue to increase your position size as it goes down, in which case you can make more,” which was an interesting takeaway.

But there’s certainly upside challenges too, as some of these can move against you. Have you had any short experiences that have gotten particularly painful as we look back on it? Not to get into the painful stuff early but as we think about shorting, it’s just…I feel like it’s so hard and so hard to do well. And you guys have been…I was looking through the numbers on your short book and how it’s done over the years, and it’s pretty impressive. I know a lot of funds claim to be good at shorting or that that’s a value add, but you guys seem to have kind of actually done it. What are some of the biggest challenges when these move against you? How do you kind of deal with those situations?

Bill: Like, you asked if I’ve ever had pain on the short side. I’m over here laughing. So like last week, or today? It is part of the game. And again, that’s why we really take a diverse approach and we have a lot of names. And I just find if you’re spending too much time fixating on an individual position and you’re waking up each day worried about how that stock’s gonna act and trade, it’s just too big.

And so if you had a lot of promotes frauds, high flying names that make no sense, but they’re small enough, it allows you to have that emotional neutrality, which I think is so key. One recent example which we’re very proud of, and it’s probably the worst actor we’ve ever seen on the short side but we were short for almost five years, a company called INSYS Therapeutics. This was a company that was effectively bribing doctors to prescribe fentanyl, which is a very, very powerful opioid that is primarily used for cancer breakout pain. In the case of this company, 90% of their prescriptions were for non-cancer patients. So bad guys that led to a lot of bad addiction and deaths ultimately.

And recently, earlier this year, DOJ took them to trial. They were successful on getting RICO convictions, and the company declared bankruptcy. And so when you look back over the last 4 or 5 years being shorted from 40 to literally zero or close to zero here, it looked like an ICG trade. The reality is when we actually went back and looked over that 4-and-a-half year timeframe, the stock rallied 40% or more on 16 different occasions.

And so, you can see the trend but a lot of pain. And for us, it was about managing that position size. We knew how the movie was gonna end, but just making sure we size it in a way where, “Okay, it’s gonna have another 40% run, then we’re comfortable with that. And we can manage through it because we know how this is gonna end.”

Meb: How did you guys originally source that idea? Was it where one of the PMs or analysts was just having conversations and doing research? Was it that some of the management was consistent, just bad people? If you can rewind back, do you recall the original idea generation?

Bill: Well, you’ll find this interesting because I know you have a background in biotech. But the last four or five years, we’ve actually been short a basket of biotech and kind of smaller cap healthcare names. And it’s interesting because obviously, there’s been tremendous technological advances and a lot of great things happening in biotech. At the same time, there’s also been hundreds and hundreds of IPOs, many of which have come from firms like FBR, or Roth, or H.C. Wainwright or what have you. And so when you have bull market that’s lasted as long as you’ve had with this biotech bull market, a lot of low-quality companies make it public.

But there’s real binary risk to biotech. So for us, we’ll often be short 15 to 20 individual names, and we size them much smaller. Our average sizing is probably closer to 40 to 50 basis points. And we’ve had a really high hit rate there. We’ve generated a really nice alpha. [inaudible 00:20:47] actually came out of that originally, which was part of that basket. It had some characteristics that we thought were questionable and kind of sketchy. And as we got to know the name better, we realized that this was actually one of the worst actors we’ve ever seen. And we did the extra work to get comfortable in sizing up and being willing to tolerate the volatility.

Meb: It seems like if you have a biotech company that’s located or listed from Salt Lake City or Vancouver, that’s usually good due diligence, you’ve got to look, you’ve got to dig in more. All right, Bill, you travel a lot around the world. I know your team has done research trips to Puerto Rico, to China, etc. Let’s get into some ideas or themes that you’re starting to see opportunity on the long side. One of my favourite things to do when looking at 13Fs of our favourite managers, we already mentioned Seth Klarman but others, my favourite ones are the ones you look at their names, and either I don’t recognize them or have just, like, never heard them, or they’re just pleasantly weird.

The ones I like the least are just like the hedge fund hotel names, where just everyone owns the same stuff. But sifting through your top 10, I don’t think I know any of these companies. But where do you see an opportunity in the world? Is it a land of just milk and honey right now and everything’s cheap? Or are you finding certain places of opportunity? What’s the world look like?

Bill: I think on the long side, it’s a very dispersed market in the sense that if it’s a liquid stock that’s in an index that’s of an appropriate size and predictability of its business, there’s almost no valuation too high for that company. I would anecdotally observe that those companies that are in the index, that have the right profile index, trade at probably 30% to 40% premium to the company that’s equivalent that’s not in the index.

And so you have a group of growth and highly predictable businesses where there’s no valuation too high and then there’s the whole rest of the market. And a lot of cases owned by value or active type managers that see redemptions every single day. And so, there’s actually for market that overall, I think it’s very expensive and very right on the short side. As value-oriented investors, there’s definitely things to do and a lot of pockets of value out there.

Meb: Let’s start to hear some where there’s some names or themes that look particularly interesting to you.

Bill: I’ll talk about a theme first and then talk about got a couple of individual more entrepreneurial ideas because I think that really exemplifies what we do. But thematically, one area we’ve been very constructive on is actually MLPs, Master Limited Partnerships. So these are generally pipeline operators that support energy companies. There’s been a great talent in recent years from the increasing growth of oil and natural gas production in the U.S., even though the commodity prices have been volatile, the volumes have grown. And that’s in a lot of cases, what drives these businesses that are largely toll takers.

But they’re also pass-through and so they don’t qualify for the S&P 500, a lot of them. And a lot of institutional investors are challenged on them because of the tax implications. And a lot of the retail left after the energy markets crashed in 2015. So you have a bit of an orphaned asset class. And ironically, even though historically, this is a sector that had really aggressive balance sheet leverage, really poor governance, really, really poor earnings quality, today, these businesses, the leverage has come down a lot. The earnings quality is dramatically improved. They’re self-funding in a lot of cases, and yet they’re trading at a big discount to the equivalent C-Corp peers.

So, a company like Kendra Morgan, which is actually a C-Corp, it’s in the S&P 500, trades a material premium to a company like Energy Transfer that’s a pure-play NLP, even though we think energy transfer, it’s a far better business, has much better financial metrics, and we think that blue-chip asset base. So we own some energy transfer, which is a larger name for us, but we think it’s really, really cheap. Pays out about an 8.5% dividend that’s 200% covered. We also some Crestwood, which is NLP that we’ve known for the last several years over a constructive on. That’s one theme that I also think highlights just the valuation discrepancies in some parts of the market.

Meb: So it’s definitely an out-of-favour theme. I mean, I remember being on the RA public fund circuit, conference circuit, you know, you see these themes every few years that everyone’s clamouring for. And since 2000, this decrease in yield, certainly NLPs in the mid-2000s were a darling asset class that you saw a lot of herding into. And you’ve just kind of seen the opposite over the past four years, which I’m assuming is creating a lot of that opportunity. And you mentioned, interesting point too, which is almost like a structural arbitrage where for whether it’s taxable reasons, no one wants to own it, which I think is pretty interesting. But you don’t hear much about 8% evidence in 2019 anymore. I hear you been going down to Puerto Rico. Is that just because of the surfing or what’s going on down there? Are you seeing some opportunity down there?

Bill: We’ve got close to 20% of our portfolio in three companies that have a lot of Puerto Rico exposure. We own Ambac, which is actually our largest position in the book. We also own Assured Guarantee. And then we have a nice size position in Banco Popular. We had some smaller positions in Puerto Rico Prior to the hurricane there. There are company-specific reasons for owning those names. When the hurricane hit, we travelled down there soon thereafter, and all these stocks had cratered, they were very out of favour. And the knee jerk reaction to anything Puerto Rico was very, very negative.

And on the ground there, we actually found that the economy was poised to boom, that there was substantial amount of money coming in from federal stimulus and hurricane rebuilding funds from the insurance companies. And that it would be the equivalent, I guess to make an analogue, to the U.S. spending $15 trillion in infrastructure rebuilding. Just an enormous amount of money on a very small economy. And so that economy is very strong down there. I think there’s still misperceptions around how strong it is. And that’s enabling them to finally resolve some of the debt restructuring issues they’ve had their historically. And so, we think these names are cheap and there’s good company-specific reasons to own each of them.

Meb: It’s interesting because you have all of this just terrible news flow that continues to come out, I think, with some of the leadership in Puerto Rico is consistently in the news. But as a multi-scarred investor in a lot of global countries in Europe in emerging markets, it seems like once some of that news flow goes from just being absolutely atrocious to just slightly less terrible, you see a lot of the monster gains in some areas because it creates the opportunity where no one wants to own a lot of these companies or stocks or regions. That’s a pretty cool thesis. How do you think about exiting a lot of these positions? You mentioned you have multiyear holding periods. Is it price targets? Is it kind of, once the business changes? What would cause you to potentially move out of these Puerto Rican, sort of, thematic ideas?

Bill: We are very focused on having a variant view. So to the extent that view is being priced into the market, we would be more open to exiting at that point. In general, though, if I look at my long book, we tend to hold things over a long period of time but we’re not at crowd stark type investor that we’re buying and holding stuff for decades. We are very much focused on the catalyst and taking advantage of the dislocation. And so I really like to go through my long book and ideally, if I’m going to own it, how am I gonna make 50% potential in this name over the next 18 months? Obviously, that’s not always gonna play out that way. But having a thesis around here’s how that could happen I think is important and is the types of opportunities we’re looking for.

Meb: So another big theme for you guys you’ve been in for a while, building products. Is that something you still think is kind of interesting and involved in?

Bill: Obviously, building is a cyclical industry. And so, there’s always fits and starts associated with that we’ve had a material presence in our book for really about five years now. On the long side, we’ve owned different manufacturers, as well as building product distributor companies.

Today we on Builders FirstSource, which is a building distributor. We owned BMC, which is a building distributor. We have some JELD-WEN, which is a window and door maker. In general, I think the demographics remain extremely favourable for the building sector in the U.S. And we had an extended period of time where we materially underbuilt housing in the U.S., at the same time that the demographics…and if you take a step back, there’s more 28 and 29-year-olds as an age cohort in the U.S. than any other age group.

And even the millennials having children and eventually moving out of their parents’ home. And so when you have a structurally undersupplied market with the demographics, which look at millennials, this group is 30% to 50% larger than kind of the baby boomer group equivalent, we think there’s a really nice tailwind to be in these names. But you do have to be comfortable with the volatility. And so, we trade around these a little bit more than some of our other positions.

Meb: So there’s about two more long ideas I wanna touch on before we move to the dark side. You’re interesting in your book because you kind of have both sides of the brain. A lot of managers you talk to are very kind of narrow exposure to one particular methodology. And yours is kind of both this concept of value and catalysts, as well as some pretty interesting, different sector thematic ideas, but also emerging growth with some of the founders. And in some cases, you’re even the largest shareholder in a company, which is the position that when you’re waiting in some of these smaller-cap worlds that you are is an interesting one, probably influenced a little bit, and I imagine informed by the fact you’ve been on a fair amount of boards. Maybe talk to us about any ideas you have on this emerging growth space and any influence that experience of being on Bank Rate and on these other boards is kind of influenced that at all.

Bill: Thanks for asking that question. I mean, that’s an area I’m very passionate about. I’ve had the experience as an entrepreneur, but I’ve also been on boards and Bank Rate, I joined that board when I was young and I spent almost a decade on that board in the 2000s. And that actually was, to me, very eye-opening from a governance point of view in that that board had a lot of very prominent material shareholders on it with real skin in the game. And so, the conversations with management, I would just describe as kind of healthy tension at all times. Capital allocation, compensation, strategic decisions, it was just a very healthy back and forth.

In contrast to a lot of other public companies where particularly in small mid-cap land, you get situations where the CEO ends up putting a couple of his friends on the board, and they’re all kind of rubbing each other’s shoulders, or scratching each other’s shoulders rather. And the governance can be poor. And there’s a lot of inertia around those businesses without a lot of skin in the game.

So one name we’ve been very involved that it’s one of my favourite ideas right now. It’s a smaller-cap name, but it’s a company called Immersion. It’s about a $250 million market cap. They’ve got well north of $100 million of cash. And they’ve got a leading IP portfolio around haptics, which is the touch technology that enables the touch on your mobile phone, the touch on the tennis game as you’re playing a Nintendo Switch game, the touch that you feel the vibrations you feel in auto, maybe on a steering wheel, or on a keyboard.

And so have a great base of IP there. But had a situation with governance was very poor. The board had very little skin in the game. Management of spending money left and right. They were litigating its major customers. It was a really problematic situation. And so we and some other shareholders were involved with basically bringing an entirely new management team, replacing most of the board, settling out a lot of the key litigation and setting the company up today in a situation where we’ve got a great balance sheet, we’ve got great customers, we attracted a management team that came at Dolby, which was a very successful, we think, analogue, what they’ve done in the sound and audio licensing space. And so we think the business, there’s still work to do on the cost side and transforming the business model but super excited. And we worked very hands-on to help catalyse that.

Meb: And when you become a large shareholder, how does the portfolio management position sizing change? Most of our investors probably won’t ever have that problem but how does that become a challenge or a benefit to the actual management of the portfolio in general?

Bill: There’s definitely been some lessons going away. Something we’re careful about to the extent you own more of the company. Oftentimes, you are trading liquidity. And so you have to have the return profile and to justify it, you have to have done the work. And ultimately, we like to say you have to be able to control your destiny. So, you need to be willing to go on that board to shake things up and to be the owner that you are in those select instances. So, it’s not something we do frequently, but it’s something we occasionally can do. And we’ve set up our lock-up structure broadly in the fund. We’ve got a lot of three-year capital, which allows us to take some of those more concentrated and longer-term, more patient positions.

Meb: It’s smart, as we saw with the financial crisis, certainly liquidity mismatches can be really tough from the portfolio managed standpoint. That’s a thoughtful way to go about it. Can we talk about the golden bathtub before we move on to the shorts?

Bill: The golden bathtub.

Meb: We’ve had a lot of different viewpoints on China on the podcast in the past on, it seems like no one has just a middle of the road viewpoint. Everyone’s either a huge bull or a huge bear. What’s your thoughts on that part of the world?

Bill: Four of us on my team and I visited China last year, literally right when Xi was named president for life. So we were there at a pretty interesting time. Everything was…[inaudible 00:34:14] was going down. And spent over 2 weeks there, 50-plus meetings, just really a great immersive activity. And we don’t really invest in China but we found, particularly in recent years, that more and more China is the tail that wags the dog. And so it’s impacting all of our other investments in other ways. And so just having a better understanding of what’s going on there and their approach, I think, has been really valuable.

I think a couple of key takeaways. One, it’s a really big scaled market, which obviously is super attractive. And I think from a U.S. point of view, we need to be counterbalancing that with more alliances and more free trading with our partners. Number two, I think there are a lot of challenges for China as they moved from a, really, today with a top-down very infrastructure-driven economy to one that’s much more organic and entrepreneurial. It’s very different for a bureaucrat to say, “Hey, build 100 new railroads this year.” You know how many points of GDP that’s gonna buy you.

Far different to have a consumer company get started or an AI company get started and see the growth. So I think that’s interesting. I think we also spend a lot of time looking at real estate, and this ties into kind of the golden bathtub idea that I came up with. But from the outside, real estate’s very expensive in China, for sure. But there’s a lack of asset alternatives. There’s a lot of equity in those properties.

There’s a system where you’ve got kind of a one-child system where there’s a lot of family members kind of supporting a lot of that purchase activity. And at the core, the money is stuck in China, it’s stuck in the bathtub. And so there’s tremendous stimulus, top-down spending, what’s effectively quantitative easing and government infrastructure spending. And it’s all pouring into that bathtub.

And because of the capital controls and information control, they can’t usually leave. So it creates a boom but to the extent that money tries to get out into Vancouver real estate, or Bordeaux wine, or properties in Manhattan, you could see that ultimately if the capital controls didn’t exist, asset prices in China would revalue quite materially.

Meb: And did you guys come out of that with any security ideas or you said, “You know, hey, we want to get educated on this for the future and also how it plays out in our current portfolio?”

Bill: For me, it’s about building a network. Been going to Silicon Valley for 20-plus years and have really good contacts there on the ground. I don’t have the equivalent in China. And what you read in the paper is very hard to trust. A good example of that is, we came back from our trip when Huawei CFO was arrested around Thanksgiving last year, you know, called up a friend that I’ve met in Shanghai and said, “Hey, what do you think about this?” And his comment was, “Interestingly, until yesterday, the whole trade war news wasn’t on the front page of the paper.”

And so, really working hard to build those kinds of granular connections. And that’s gonna take a decade last to really do right. But I think it’s super-valuable because it is the tail that wags the dog in so many different industries and companies today, globally.

Meb: I know I said we were going to have to the short side but I had one more question because I think it’s interesting and slightly different from most traditional funds. You guys do a little bit on the private side too. Could you maybe talk a little bit about how you guys think about public versus private, any differences you’ve seen over the past 15 years on there’s certainly a lot in the news about companies staying private longer, or opportunities that come across your desk? How do you think about it and how does that play a role in the portfolio?

Bill: Given my entrepreneurial background and a network that we have around that, I always said that I’d like to have some private allocation. That’s part of the reason we have a lock-up structure that we do so we can have the luxury of having a small part of our book in those types of opportunities. So we’re not a venture firm. We’re not out there proactively looking for things. But things do come through our networks or there’ll be themes or technologies we’re interested in, we’ll go out and proactively hunt down companies. We’ve been fortunate over the years, we own Facebook privately, we own LinkedIn privately. We were the first institutional capital into a company called Toast, which is a restaurant point-of-sale company, it’s doing really well.

So it’s been really good for us. It also provides a tremendous number of really valuable data points and anecdotes as it relates to public market companies. There is no Reg FD for private companies. So I think that’s super valuable. To your point, the private markets have really developed in recent years. There’s a lot more capital, and public markets certainly becoming much more of an exit for a lot of companies and a lot of different industries. And while appreciation and value is being built privately. I think some of that’s an outgrowth of cheap and easy money in a long bull market, which will self-correct to some extent. But I do think there are some structural real changes there that with the JOBS Act in 2012, and what have you, that are permanently changing the structures of market and capital raising.

Meb: It’s fascinating to me, because if you follow the sort of geopolitical just normal news flow, and this is part of the reason I’m a quant because I’m the most susceptible to this is of anyone, you follow the normal geopolitical, whatever, TV, CNBC news flow, and I feel like all you wanna do is go out and buy puts on the stock market all day long. And then you follow just a lot of these private companies and what they’re up to and seeing the deal flow there, and all you wanna do is invest all your money into these incredible companies. And so it’s kind of a nice barbell of optimism and pessimism. I encourage our listeners to maybe log on to Angel List or any other places and just kind of keep in touch with what a lot of these cool companies are doing because it’s a good counterbalance to what your traditional news flow is.

All right. It’s time to move to the dark side. We’ve had some short sellers on the podcast. They always have a screw loose. If you like to be a good short-seller, you have to think a little differently than most. And it’s certainly one of the hardest areas, I think, to really do well. Can you talk to us briefly about the mechanics of short selling first, and then let’s get into some themes. And the kind of intro I have on that as you look around and a lot of people don’t really understand the short lending and borrow world. So maybe explain that very briefly. I mean, I was looking today, or sorry, last week, someone was tweeting out that the cost to borrow Beyond Meat’s stock, which I think is hitting 200 bucks a share now, is something like 120 percentage points. So I’d love to hear you talk about short selling in general, how you kind of got interested in, and that part of the world. And then we’ll dive into some ideas.

Bill: Sure. So, hopefully, I can be the short seller that lives to tell about it going on your program here. So it’s perverse, I suppose, but I really enjoy the short side. I think it’s actually one of the more inefficient areas in the market where a lot of investors aren’t focused. And if you think about, to your point, there’s a lot of really exciting companies out there, disruptive companies. Like, for every Facebook, there’s a long, long tail of companies that aren’t Facebook. We think that creates a really interesting opportunity set for creating a really diverse portfolio of these crappy, overvalued, fundamentally challenged companies.

It is an area that structurally not only do you have to have, I think, an emotionally neutral mindset, you have to have that right position sizing and growth. I think a lot of investors think about it like long’s where they…if we’re gonna spend all this time on this, we need to size this like we would a long. So it might be 5% or 10% position and I just think it’s really hard emotionally to manage the short side that way. And there are some intricate mechanics as well. I mean, we work with multiple primes, actually close to five different primes through direct prime relationships, or through [inaudible 00:41:37] on the swap side to get access to borrow.

So the shorter stock, you need to be able to borrow it. There’s a whole market of borrowing and lending stocks where rates change every day. For the most part, most of our positions, we’re actually in the current environment getting paid to be short because when we’re shorting that stock we get cash for shorting it and we can put it in hedge funds minus a small spread from the broker. But, to your point, there are stocks like Beyond Meat that new IPO, very, very tight flow, very, very hard to find the shares, and the rates can be very, very high. And so that definitely gets added into the decision-making process and the position sizing process of shorting.

Meb: Yeah. How often does that kick out a short name that you’re interested in where you say, “No, it’s just too expensive and we have to apply sort of the mathematics of how poorly this company or stock will do versus the actual cost to do it?” Is that 1 out of 10, 1 out of 100, never happens, always happens?

Bill: It’s like the old 80-20 rule. The bulk of our costs on the short side generally are a small number of companies. I’d say 80% of our companies today are GC borrows, meaning our general collateral and easy to borrow. So we’re actually getting paid to be short those. So you know, there’s a handful that we pay up for. It’s a case-by-case scenario. Sometimes stocks are [inaudible 00:42:50] on the short side and they’re very expensive to borrow. And you’re better off saying, “Hey, let someone else worry about that. Let’s go find something that’s off the beaten path.” And a lot of cases, that’s the right decision.

There’s other situations I mentioned earlier INSYS Therapeutics, the company, we were short from $40 to close to zero. That probably averaged a 10% to 12% per annual borrow cost over the 4 or 5 years we were shorted. And it was worth every single penny to pay to be shorted and pay the hold on to that borrow because we knew where the movie was gonna go.

Meb: All right, so it’s 2019. Let’s talk about the box office. What are some of the dastardly movies playing out today? Any names, any themes you can talk about? I know the short side is a little harder to talk about. Many PMs won’t talk about the names at all because they’re worried the companies are gonna start sending them hate mail letters to their house and barring them from conference calls, etc. Anything in today that’s looking particularly ripe?

Bill: Always have names I can talk about and a few different areas that jumped in mind. I’ll start with the more boring I guess. But we’re actually short number of public storage routes, including Public Storage and Extra Space Storage. So on the surface companies, these are the guys that have the boxes were if you need extra space, you rent a garage. They’re all over Route 1 in New Jersey. So, a lot of assets in this market, valuations that didn’t bid up because of a lack of yields and because of cheap borrowing costs. And so these things traded very expensive multiples. They pay very small dividends.

What’s interesting though, and I think this is, if we take a step back and just think about, what does an extended period of easy money due to corporate profit margins and corporate returns? In time, extended period of easy money is going to drive those things down. And we think that’s really the inflexion opportunity here with these names in that there has been a huge amount of new supply coming into these markets. Post-’08, there was very little new development. But really since 2014-2015, we’ve had almost every single year record amounts of new supply coming into the public storage markets.

Not enough where comps turned negative but comps are only very modestly positive. At the same time, the costs are very real with these guys. Property taxes are growing up. There’s wage inflation, there’s real marketing inflation. And it just seems like there’s an endless supply of new supply. I’ve heard tons of anecdotes of regular Joe’s literally doing development projects in public storage. And so we think there’s a good chance you see a tipping point where new supply drives comps negative and drives down utilization. And given the operating leverage in these businesses that would be really, really negative for the stocks, particularly at the valuations they’re at. I think the analogue here is what’s happened in the senior housing over the last few years, where again, the golden goose got killed by easy money and too much new supply.

Meb: Well, there’s a big haymaker to that sector that I feel like is an even bigger risk, which is, we’ve seen a fair amount of companies trying to tackle this on the private side, but peer-to-peer storage, where you have the ability that people that have whether it’s houses, or I guess it could even be corporate space to lend out, that would probably be a lot cheaper because it’s just sitting empty anyway, versus having to actually have the real estate and maintain it. That seems like that’s a kind of infinite supply issue as well.

So the problem is I love to short people hoarding, but I see how half my family’s hoarders anyways, it stresses me out. I would love to just be able to short hoarding but it’s a trend. I don’t know. I feel like it’s only going one direction. That’s an interesting one. I haven’t heard that one before. What else as you look around? By the way, are you finding it easy to find shorts today? Is it hard? And what else looks good?

Bill: We have a very long list. I mean, I’ve been a little bit of a broken record on the short side over the last couple of years in that I think we’ve had such an extended period of easy money that you’ve got very frothy valuations, a lot of retail participation in the market, a lot of momentum participation in the market. Easy money creates a buy and it creates competition. And so unless you’re the very, very best of businesses, there’s a lot of technological disruption and a lot of competitive disruption for a lot of companies out there. So, I think the long tail is really, really attractive on the short side. And it’s been hard to actually translate that into returns in this market. But we just think it’s a really, really ripe, attractive opportunity set.

Meb: All right. So let’s talk about maybe one or two more ideas or themes on that side to the extent you can and then…

Bill: One theme that covers a couple of different names, and then we could talk one individual name, but we are short a number of auto-related companies as well. Like the public storage, been significant beneficiaries of cheap capital. In the U.S. what that means is that large size vehicles now account for almost 75% of all auto sales in the U.S. and the AFPs on those vehicles just significantly outpaced inflation.

And so we basically we think there’s a bubble in large size, expensive vehicles in the market. That is really been the primary source of profits for certainly the big three in the U.S. At the same time, Europe is a terrible market to be in. Between the unions and the regulations and very, very aggressive remissions rules, tough market to be in. And China, which was kind of a great market, that market changed as well with a lot more new competition and broader economic weakness.

So we short Ford, which we think is a company that is very, very dependent on that U.S. kind of truck profit stream, which we think is at risk. At the same time, they’ve got real burdens in Europe and China. Outside of that, I think to be a hedge fund, you have to be short Tesla. We avoided it for a long time but we interestingly were short Solar City back in the day, and we’re fairly convinced that that was a zero and it was gonna hit the wall. So when Musk crossed the Rubicon and bailed out his family members to buy that company, we kind of followed along and we’ve been short Tesla since.

Which is actually we have a pretty good feeling how that movie is gonna end. It’s been obviously volatile, but it’s been a pretty good short. And we continue to think there’s real problems there with the executive turnover is pretty unparalleled and unprecedented. And there’s a real negative margin shift going on into business from the higher end S&X model down to the three, and you’re seeing real competition for the first time.

And finally, you know, we’re short the High Flyer, a very popular name. This is probably controversial but we’re shorts in Carvana, which is an online car seller. In the current market where everyone loves digital-first businesses, they automatically assume that digital-first businesses are superior to traditional brick and mortar. We don’t think that’s the case here. We actually think it’s a lot like Lending Club, which was a really successful short for us a couple of years ago, where people said, “Oh, this is a…” just like a bank, except you don’t have the cost of a bank, the brick and mortar cost of the bank.

Well, Carvana is digital-first. They don’t have the brick and mortar costs of a traditional dealership but that also means they lack the really high margin services and financing pieces of the business, in particular, the services and trade-in pieces that a traditional dealership has. And it’s really expensive to acquire customers. At the end of the day, it’s a very competitive, low-margin, heavy lifting business. And we think it’s been very tough for them to become meaningfully profitable in time.

Meb: You have somewhat of a natural built-in hedge by being both short Ford and Tesla because I tell you, Bill, I haven’t seen it yet but I would almost be a totally blind buyer of the Tesla pickup truck. And so if the Tesla pickup truck takes over the industry then Ford goes to zero, and that’s fine and you can short Ford forever. If it doesn’t, you still have the thesis that Tesla goes to zero. So it’s kind of a nice pair trade being short both those. But the one that looks kind of beautiful, I have to wait until 2020, I feel like all these are coming out late 2020, is the other electronic maker, Rivian. And they have a beautiful looking SUV and pickup truck, although somehow it’s like 100 grand.

And I’m holding out, holding out for the old school gas remake of the Ford Bronco. A nervous after Toyota kind of massacred the FJ Cruiser, and it looked like a giant inflated loaf of bread. It was such a bummer. So, hopefully, we’ll see if it comes out or not. So, we’ll see. It’ll be fun to see that play out. The car space is, you see so much…I mean, Tesla is almost like China, you see people line up on one side of the other almost never in-between. Tying back to the earlier part of our conversation, I got into it a little bit in a friendly way with Musk on Twitter talking about short lending. And of course, I was coming from the standpoint that it’s great for end investors. And he was coming from the standpoint that it’s very nefarious, and somehow companies are doing it to manipulate stocks. But anyway.

Bill: With all due respect, I mean, Elon Musk has been the biggest manipulator. To talk about shorts, not only his private offer. But if you go back…we like to track insider filings. If you go back and look at some of the filings where he was buying Tesla stock last year, we think actually a lot of those transactions happened in the pre-market. And he was running the price up in the pre-market, not economic buying in a traditional sense. He was certainly trying to manipulate. So he’s the last guy who should talk, in my opinion, but…

Meb: It seems like, as a board, you would want to say, “Hey, look, here’s the deal. You’re just not allowed on Twitter and you’re not allowed to be trading these securities, just focus on running the company.” I don’t know. What do I know? All right, so we’ve talked about a lot of names. I wanna kind of start to wind down with a few other topics I think are interesting. You’ve built a very successful hedge fund in a world where that’s been hard to do. It’s been a headwind, it’s been almost a graveyard for your style of fun in the past decade.

And so we always say on this podcast that the biggest compliment you can give, not just anyone in the asset management business, but also just in general in life and business is surviving. Talk to me a little bit about the challenges of running a fund. You guys have had just periods where you’re just destroying it. I mean, I think looking at the founding your business, you had five or six years in a row where you beat the S&P. But also there’s times as any asset manager style, strategy, whatever underperforms as well. And how you guys kind of wade through those periods, I know, what was it, 2017 maybe was more challenging versus having a bounce-back here in 2018, when the market was done poorly. How do you kind of wade through those periods as a fund manager? And any advice for the younger crowd or people trying to do it on their own looking at their monthly, quarterly statements?

Bill: I think there’s kind of a compliment in there. So thank you.

Meb: Yeah, it is. I mean, look, if you build an almost billion-dollar business in a time when a lot of your brethren have gone the way of the dodo.

Bill: Yeah. Well, thank you. For me, it’s the passion and love. And like any pursuit in life, you need to have that passion. And this is what I love to do. I wake up in the morning and the markets, even on the toughest of days, they fire me up. And if you’re intellectually curious, this is just a fantastic business. So you’ve got to have that, and I think that’s super, super important.

For us, I think being in Princeton is a nice advantage. If for nothing else, a tough day, sometimes just turn off the screen and go for a walk. Just take a step back, take a deep breath. Remember that you actually own businesses, and the market will price those businesses what they want in the short term but if you do the work and have the right vision, then it does work out.

So I think more broadly, it is a really interesting time in that there’s obviously a lot of secular changes with technology, which is creating pressures on fees, and what have you. And I think those are real, powerful secular changes that aren’t going away. At the same time, I do think there’s a cyclical element here in that in the late ’80s, early ’90s, the mutual funds are the dominant investor class, hedge funds rose out of that, the late ’90s, early 2000s to kind of feed on their inefficiencies. And too much money went in the hedge funds. And the last decade combined with the interest rate environment, and the overall backdrop, but the cheaper passes have kind of eaten at the hedge fund industry, which just had too much capital.

And so we’re going through that period today where it’s a real shakeout, and that problem of too much capital is going away. And I think it’s a tremendous opportunity if you can be one of the guys still standing. What that moment is where it turns, I’m not exactly sure. But capitalism has a way of kind of fixing things and working everything out.

Meb: So as you look to the horizon, you know, in the future of your business, I know there’s been times you’ve actually closed a new capital as you start to bump up against a billion dollars. How do you think about capacity? I know you traditionally have kind of waded in smaller mid-cap area. How do you think about that going forward?

Bill: Sure. I mean, our total assets under management today are a little over $700 million, which I think is a really good size in that it gives us the resources to have a team and to get the calls and have the right infrastructure for this business. But it also allows us to be nimble and entrepreneurial in the public markets and do some of the stuff like an immersion, which I mentioned earlier, that really gets them fired up and passionate.

So, I’m not in this business to gather assets, I’m in this business because I love the entrepreneurial pursuit and I’m really competitive, and I want to win. So I think one of the smart things we have done over time is pursue that longer lock-up and regularly close the funded new investors, which has allowed us to make sure that we don’t get too big and get too big too quick also, and allow us to stay true to what Raging Capital is.

Meb: As maybe some of the younger people listening to this, let’s say he or she says, “I would really wanna get a job at Raging Capital.” The response to this or the advice I’d love to hear is, and not specific to your firm, but just in general, how should a young person think about pursuing a career in asset management? Is there any general advice, suggestions, resources, thoughts you have? Because I get this question, if not every day, at least once a week. Any general feedback?

Bill: Yeah. I mean, obviously, I’ve taken a little bit of a non-traditional path. That’s been very rewarding for me. I can’t speak to how to get a job at Goldman Sachs, or BlackRock, or what have you. But I think for the more nimble folks out there, it is about having that underlying passion, that underlying intellectual curiosity. Most of the jobs aren’t posted out there. It’s networking and finding the right people, sharing your ideas and anecdotes to them and sharing your passion with them, and leveraging that network, reaching out to them.

And I also think, particularly today, as you’ve done really well, Meb, there’s just build a brand. I mean, there’s a lot of ways to create your own research firm online with literally a shoestring where you can start publishing your ideas and sharing your ideas, and that often leads to opportunities. So, you open your own doors, I guess, is the way to think about it.

Meb: I think that’s great advice. As you look back, you’ve been doing this pro 15 years, you’ve been doing it on your own before that. I think you said your first stock purchase was Hershey’s. Did I read that correctly?

Bill: Yeah, way back in the day, yeah.

Meb: Yeah. What’s been your most memorable investment? Anything come to mind? Good, bad, in between?

Bill: In my office, I only have pictures of two people on the wall. One is Paul Volcker. So, give you a little sense of I guess my politics or kind of macro-politics.

Meb: Is a life-size one because he’s 6’8′ or something ridiculous, right?

Bill: It’s the one where he’s on the cover of “Time” smoking a cigar.

Meb: Awesome.

Bill: So definitely Austrian School [inaudible 00:58:11]. So he’s on the wall. And the other guy on the wall is Mark Zuckerberg. Mark has been very good to me. We made a lot of money privately on Facebook. And then in 2013, we made our year in Facebook publicly when the business funnel kind of broke out and inflected. We actually owned some Facebook again when it sold off late last year. And we were back at Facebook for the first time in many years. So that’s been a great stock for us.

But also, I think just a good example where we really took the time years ago, and I was able to leverage my background a bit here. But take a step back, think strategically about the business. And we had a viewpoint early on that this wasn’t another kind of social fad that he actually was building an operating system for personal communications. And that if that was true, then the network effect stickiness and value of that was much greater than the market was appreciating and much more persistent and sticky. So that’s been great stock and he’s on my wall.

Meb: I love it. Well, looking forward to you having a few more additions there over the years as well. Bill, it’s been so much fun. Where can people keep up with what you’re up to? What you’re doing? Follow you, your writings, your goings-on, any place in particular?

Bill: Well, we have a website, ragingcapital.com. Feel free to shoot me an email. Happy to send along some of our letters and talk ideas for anyone who shares a similar interest as I do.

Meb: You ask for it, you’re gonna get it in fluid. Behave, listeners, take that opportunity seriously. Thanks so much. I really appreciate you sitting down with us today.

Bill: Thank you. It’s an honour and good luck to you. I really appreciate it.

Meb: Listeners, we’ll add show notes, all sorts of goodies at mebfaber.com/podcast. You can subscribe to the show on RadioPublic, Breaker, iTunes, anyplace good podcasts are sold. You want to shoot us an email, we love to hear comments, criticisms, feedback@themebfebershow.com. Thanks for listening, friends, and good investing.