David Tepper Gets Defensive. Is it Time to Get Out of The Stock Market?

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David Tepper is an American self-made billionaire and hedge fund manager who is famous as the founder and current president of the successful hedge fund management firm, Appaloosa Management. As of May 2015, David Tepper is worth US$10.4 billion and his company manages nearly $20 billion in hedge funds. Appaloosa Management’s achieved 27+% annualized returns in 22 years period.

This is what Jack from Mercenarytrader.com has to share with us about David and his recent interviews about the stock market.

The hedge fund manager David Tepper was on CNBC this week. Tepper has exploited the post-2009 bull run better than any other hedge fund manager these past six years, making billions for himself and his clients in the process. It was five years ago that Tepper observed the Fed would make “everything” go up — and he was pretty much right. For a very long time.

Tepper said some notable things in his wide-ranging CNBC discussion this week. Here are a few nuggets with thoughts to follow.

On being asked, “Would you say you were a bear for next year?”

“Oh I hate that. I’ve never been a bear in my life… it’s a really bad thing… I have been a bear sometimes in the old junk market days.”

“I’m not as bullish as I could be because I have problems with earnings growth, I have problems with multiples…”

Tepper is basically a long-side practitioner (or so he says). And that is generally an okay thing to be, right, because stocks generally go up over time. There are long extended periods where stocks just go up and up, rise higher and higher.

Guys have made billions just waking up in the morning and being bullish. Ackman, Cooperman, others, just waking up in the morning and being bullish. Banking on a reservoir of optimism that someone or something is going to push stocks higher, and then they do in fact get pushed higher, and the bulls make money.

There is a kind of asymmetry in markets:

If you are nothing but bullish, there are long periods of time where you can do well and possibly make large amounts of money.

If you are nothing but bearish, you are probably going to get hurt (or at least frustrated) except for a few tightly defined windows.

The best is a lack of commitment to either side — a true sort of neutral objectivity — with the ability to stick with the right “general conditions” stance for extended periods of time (sometimes years). But of course that is very tough. It takes a lot of seasoning, a lot of trial and error and well-rounded exposure, to cultivate that true objectivity that allows for “deep neutrality” versus a hidden embedded bias one way or the other.

I would argue that, as Pat Miletich once said of gaining composure in the ring as an Ultimate Fighter, it also just takes “a lot of beatings.” As such most guys just go with their natural imprint — DNA bull or DNA bear — and then let come what may.

Side note: One of the really amusing things about markets is that you can make money for the wrong reasons. You can have guys wake up and be bullish for ill-thought reasons, or reasons that don’t make any sense, or no reasons at all other than that their father and grandfather both had sunny dispositions and tended not to think too much, and so they are predisposed to be unthinking optimists when they look at the world as well, and general conditions can sometimes favor those guys for years and years a time.

And then you look at the flaws in the poor rationale of the unthinking optimists, or the reasons why their arguments are goofy, and it would appear to follow that their actions are wrong because their conclusions are based on gobbledygook or irrelevant factors, and then general conditions fool you because the bad reasoning leads to situationally correct results. Mother Nature doesn’t ask for a thesis. She’s like the cafeteria lunch lady, she just delivers outcomes.

Not to say Tepper is an unthinking optimist. He is razor-sharp and probably brilliant, and it may be that he simply deployed a meta-level understanding of macro flows better than anyone else (and then had the cojones to stick to his conviction with huge size).

Because if you understand that the unthinking optimists dominate the general population of Wall Street, and that the Simon and Garfunkel adage “a man hears what he wants to hear and disregards the rest” applies to investors at large with a self-selection overlay (pessimists tend not to be at the table), and further that conditions at all amenable to bullish bias will tend to be portrayed bullishly because that is the instinct Wall Street has in its bones — well then sometimes you can buy with both hands where skeptics hold back because you have a superior understanding of market psychology in a given situational context, like a therapist understanding a patient.

Then too you can develop systematic overlays — approaches informed and guided by price — that keep you out of the tough spots when it comes to fundamental-based decision making, in turn allowing you to reserve fundamental add-ons for decisions of increased size, letting “the system” handle things except when your trader’s instinct and nose for general conditions tells you to crank up the normal dials and go from two or three to ten. (This is a big goal of ours and something we are actively and diligently working toward — hence the “Global Systematic Discretionary Hybrid” descriptor.)

Tepper is no permabull though. He almost tiptoes into endorsing a short stance here:

“Flat is not a bad place to be right now. Flat stocks, in my mind. I’m not a great shorter of stocks and I don’t think the levels are high enough. Listen, if the Fed doesn’t tighten and the market gets excited about that, even though I’m not real comfortable being short stocks — because there’s a bias for stocks to go up over time — maybe I can bring myself to do it. That would be an opportunity to me if the market went higher.”

When a guy who has made billions of dollars being long and vocally says he “hates” being characterized as a bear nevertheless endorses the possibility of going short if markets rise too much post-Fed, that is interesting…

One of the things I have wondered aloud about, regarding Tepper’s amazing performance these past few years, is whether he was the ultimate “man for the times” — with his psychology and emotional make-up perfectly suited for a monster Fed-fueled bull run — or whether he will show true versatility and be able to pivot when the cycle and the environment truly changes.

For a trader to be so bullish in the window it was appropriate that it was like bullishness was infused into his DNA… and then have the ability to shift at the right time and “change his spots” as it were, not holding onto that orientation but philosophically and conceptually morphing away from it as appropriate, again with major size… that would be entering the pantheon of greatness.

There were other interesting comments, but this was my favorite thing Tepper said:

“There’s a time to make money and a time not to lose money.”

Amen to that. In similar fashion there is a time to be directional and a time not to be directional… a time to trade huge size and a time to be very cautious, to trade almost no size at all. There are times when you want to seek out big bets on big and powerful trends, and times you almost don’t want to be involved, except from the perspective of keeping tabs on things, or otherwise want to be insulated from the possibility of getting chopped up in a going-nowhere blender.

The markets are like a high stakes poker game — the biggest, richest, deepest, most multi-faceted and riveting high stakes poker game in the world, with no cap on the size of pots you can get involved with — and sometimes the response to that is to fold patiently for extended periods at a time, or otherwise just focus on protective actions and keeping your powder dry.

focused on making and not losing,

JL (jack@mercenarytrader.com)

Published by www.mercenarytrader.com. A community of ruthless profiteers. Mercenary Trader was created by traders, for traders. The site is wholly owned and run by two professional traders — guys who eat, sleep, and breathe trading. We are in the markets every day, making moves and booking profits. This is what we love and this what we do. To the best of our knowledge, there was no web-based community for aggressive swing traders who routinely combine fundamentals, technicals and sentiment with deep awareness of global macro and the ability to analyze individual equities. We never found anything that fit the bill of what we wanted, so we said hey — why not create it ourselves.

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