David Tepper: The King of Bouncing Back
“For better or worse we’re a herd leader. We’re at the front of the pack. We're one of the first movers. First movers are interesting; you get to the good grass first, or sometimes the lion eats you."
This is the first part of two on David Tepper. You can find the second part here.
In late 2008, David Tepper experienced the third sharp drawdown of his career. His Appaloosa fund was down 27 percent as the financial crisis battered markets. He had survived previous crises - the Russian default in 1998 and the implosion of the dotcom and telecom bubbles in 2002. In each case, he had roared back. “We’re consistently inconsistent,” Tepper explained. “It’s one of the cornerstones of our success.”
"Investing with David is like flying, with hours of boredom followed by bouts of sheer terror," a long-time client commented. "He's the quintessential opportunist, investing in any asset class, but you have to have a cast-iron stomach."
After successfully buying distressed debt in 2002, Alan Fournier gave Tepper a pair of brass testicles, “cartoonishly huge and grotesquely veiny” as New York Magazine described them. The balls came with a plaque inscribed with the words ‘The Most Valuable Set of All Time.’
“We’re not afraid to lose money. Hence the plaque,” Tepper said. “It should say, we’re not afraid to make money.”
While working on a big trade, Tepper reportedly called Fournier, who had departed to found Pennant Capital, screaming into the phone: “I’m rubbing your balls for good luck!”
It’s Tepper’s high conviction “ballsy” style and his humor that make him one of the most fun and fascinating investors to study. He once called himself “the Mother Teresa of the markets” because he was always there “to make sure [securities] don't go down more.”
Tepper came to Wall Street without an Ivy League degree but with a chip on his shoulder. After he was passed over for partner at Goldman Sachs, he seemed to revel in his role as the outsider and regularly took pot shots at his industry.
"The media says that hedge funds are the new masters of the universe," he chuckled. "We're just a bunch of schmucks."
Perhaps. But from Appaloosa’s inception in 1993 until its conversion to a family office in 2019, Tepper compounded its capital at more than 25 percent net of fees. Which at the very least made him and his investors quite wealthy schmucks.
But at the end of 2008, in the depths of the financial crisis, the ballsiest investor on Wall Street was pondering his next move. How was he going to bounce back this time?
Growing up in Pittsburgh
“I used to think buildings were black because that was just the color they made them. But they were black because of the soot.”
Tepper was born in 1957, the son of an accountant and a teacher. The middle child of three, he grew up in Pittsburgh’s lower middle-class Stanton Heights neighborhood. He described himself as a “big kid,” “a joker,” and “well-liked.” “We played touch football in the street and tackle football in a nearby cemetery,” he recalled “We tried to not hit the gravestones.” Tepper was kicked out of one class and told to “roam the halls and act like the animal you are” by a teacher. Local football games were canceled for two seasons because there were too many fights.
But Tepper also developed an excellent memory and a knack for math (“I could barely even talk at the time but I could do math.”). “He was analytical,” remembered his brother, Scott. “We had a railing on our porch, and he would be like, ‘If I put my head in there, would I get stuck?’”
Tepper once told students at Carnegie Mellon that “there's nobody on earth you owe more to than your parents. In life, you should recognize your parents.” But the relationship with his own father was difficult. Tepper’s father was “not a warm and cozy guy” and “worked all the time.” Tepper also once shared that his father was “physically abusive,” a cycle that Tepper was proud to break. And yet, he learned important lessons from him: to “always think about charity and those less fortunate,” and to follow the Golden Rule: to treat everyone the same and with respect (both the “president and the garbage man” as Tepper said).
Tepper caught the bug for stocks early on and started tracking his father’s portfolio. When he had to pay his way through college, he figured out his first trading strategy:
“I had some scheme going where I was taking advantage of small moves in the market by buying options. It was like clockwork. I would put in orders at a sixteenth of a point and sell at an eighth and pay a dollar or two for commission and come out way ahead. It was just a little anomaly in the market at the time, and it was a really steady income.”
“It was funny, in high school I never had an “A,” but in college I almost never didn’t have an A.”
In 1978, Tepper earned a degree in economics at the University of Pittsburgh and worked as a credit and securities analyst in the trust department of Equibank in Pittsburgh. He left to get his MBA at Carnegie Mellon (to which he contributed $55 million in 2004 and which now has the David A. Tepper School of Business) and joined the treasury department of Republic Steel. “About three months after I got to Republic Steel,” he remembered, “they gave a 7 percent across-the-board pay cut.” His friends called him up with the words "Great choice, Tep!”
Republic was on the edge of bankruptcy which meant that it did “more finance deals than it had in its previous 100-year history,” as Tepper recalled. “And I learned from each one of them.”
Tepper used this experience to join a junk bond fund at Keystone Mutual. A year later, he joined Goldman Sachs’s new high yield department.
“There's a lesson here. In life, get all the experience you can. While you're young, go for the experience versus a paycheck.”
The Goldman Setback
In 1985, a 27-year-old Tepper arrived at Goldman Sachs where high yield was still a backwater. After six months, he moved from research to the trading desk which was run by someone who “wasn’t good at understanding companies and was more familiar with how interest rates moved so he wasn’t really right for the job.” Another six months later, Tepper headed the desk.
“When I got to Goldman, I changed the way junk bonds were traded. It was pretty radical, moving the whole market to trades on sectors. It used to be traded by maturities, which helped perpetuate the monopoly held by Michael Milken at Drexel Burnham.”
While his work was in bonds, Tepper always remained close to the stock market. He recounted 1987: “Going into the crash I had set up my entire portfolio as just short—I had no long positions. I made a fortune during and after the crash,” he said with a chuckle. “It was very cool.”
During the early 1990s savings and loan crisis, Tepper bought holding company paper of distressed financial institutions like Republic Bank. He understood the government couldn’t break into the holding companies to take any cash or assets, even if the bank subsidiary failed. This experience with distressed financials would become invaluable later.
However, even though Tepper “kept making the firm so much money,” he was being passed over for partner several times. Brash and confident, he excelled at navigating markets but not in office politics.
“When I was at Goldman, I’d say things to people like, ‘Do you know what a schmuck is? Go look in the mirror.’”
Importantly, he irritated the head of his division, Jon Corzine, due to his continued friendship with Bob Rubin.
“When I was taking positions, I should have gone to see Jon Corzine. Jon Corzine was a treasury trader and knew nothing about corporates, so I would never talk to Jon Corzine – I was still a young guy. I wanted to get the answers fast because I just wanted to get my job done and I went to the guy that had the information. For a year, I continued to go to Bob Rubin. Bob Rubin should have said, ‘Hey, idiot, go and talk to Jon Corzine, he’s the new head of ﬁxed income.’ But I think Bob Rubin liked to have the conversation.”
“People say that I basically kept going to Rubin instead of Corzine but it wasn’t for political reasons. It was just because Rubin knew what was going on with equities and Corzine was a Treasury guy that didn’t know corporates. I wasn’t disloyal to him, but I wasn’t one of his boys. I was stupid because I was just working hard and wanted answers and to be as efficient as possible. I wasn’t trying to screw or not screw anybody.”
“That was probably a mistake. I wasn’t trying to skip over [Jon Corzine], I was just naïve.”
In another instance, Tepper was asked by a partner to make trades that he thought were inappropriate. He refused and notified the legal department.
“The partner had started a new fund to invest in bankrupt companies, and I was supposed to make the trades for him. He was also the partner who controlled our restricted lists. He asked me to buy a company that he had just removed from the restricted list that day. It didn't seem right. In fact, I went to our legal department and told them what was going on. They said it would be okay after a lot of back and forth, but it still didn't feel right to me. So, I refused again. I didn't get fired, but when I came up for partner, I got shot down. And I was incredibly upset.”
“I just didn’t give a shit. What was I going to do? Trade for them when I think they’re doing something that’s wrong? And then not see my kids again because I’ll get blamed for the trades? So I didn’t do the trades, but I didn’t get made partner either.”
The Horse Leaves the Barn
“Life takes funny turns. That’s really important. You’ve got a long life. Don’t get upset by setbacks. Setbacks are another way to say opportunity.”
Tepper left Goldman and set up his own fund in 1993. He started out with a borrowed desk at the office of a former client, mutual fund legend Michael Price. Tepper wanted to name his fund after a horse but Pegasus had already been taken. He settled on Appaloosa. This proved useful because brokerage firms sent information by fax and “if you were at the beginning of the alphabet, you got it 15 minutes faster.”
A young high yield salesman at Jefferies named Dan Loeb immediately called Tepper. “I want to cover you,” Loeb told him. “Unfortunately, I don’t have a need for you. I’m unemployed,” Tepper responded.
“That’s okay, if you want to buy 50 bonds or something for your personal account, I just want to cover you. I’m sure you’re going to end up someplace,” Loeb said. “By the time he started Appaloosa, I had established the relationship with him. He became my biggest client. I was his biggest salesman.” Loeb later rented a used desk in Tepper’s weight room for $1,000 a month when he started his own fund (as recounted in the book Alpha Masters).
Tepper lacked connections and started Appaloosa with a modest $57 million in AUM, including $7 million of his own. In the beginning he reportedly also had a partner, Jack Walton, a former senior portfolio manager at Goldman Sachs Asset Management, who later left the firm.
“I had no family connections, someone like me leaving and starting up a fund was Goldman’s worst nightmare.”
“Leaving Goldman was a scary proposition. They didn’t give me my record. I didn’t raise $50 million because I had connections. I was from the inner city of Pittsburgh. I didn’t have any social contacts. The only thing I had was me.”
Emerging Market Adventures
Tepper had sat next to Goldman’s emerging markets desk and soon added the asset class to his expanding domain. He regarded it as just a different kind of credit analysis.
“You’re basically doing country analysis, which wasn’t really that hard for us to pick up. And then, it’s just like everything else — analyzing all kinds of investments. You’re trying to figure out that inflection point.”
His first wins came from debt crises in Latin America. In 1995, Appaloosa had big gains on positions in Argentina, Brazil, and Venezuela. In Argentina, the inflection point could be found in bank deposit flows.
“As soon as money started coming back in the country, that market took off. So we were able to figure out the right variable, to look at the right thing to focus on. And when it changed, we were fairly early and we were able to make a lot of money.”
During the Asian financial crisis, Tepper sent a team to Korea and discovered that “the country was an export machine—a real industrial country. They were sacrificing their gold for the good of the country. We were frankly surprised by the level of sacrifice.”
Tepper scored another win in Korea before getting tripped up by an unexpected Russian government default in 1998. Markets froze up quickly and Appaloosa, which had grown to $1.7 billion AUM, lost 29 percent overall and $80 million on its Russian position alone.
“1998 was hard because that was the first one we really went through. We took our book down, raised cash, and did different things than we had ever done.”
“It was the definitely the biggest screw-up of my career. We had huge emerging market and junk positions that we sold down to avoid disaster, so we were able to act fast. Our biggest mistake was not realizing how illiquid markets could get so quickly. Many firms went out of business at the time, and at one point, I wondered if we would be able to survive. That was kind of an interesting lesson for a lot of people.”
But Tepper didn’t panic. Instead, he scooped up more Russian bonds during the depths of the sell-off. The fund recovered with a 61 percent gain in 1999.
“After we lost a lot of money on Russian bonds in 1998, we bought Russian bonds again and Eurobonds. No bank wanted them on their balance sheet. We paid 16 cents on the dollar for Russian bonds of ’28, with a 12¾ percent coupon. We sold them for around 40 cents on the dollar.”
“It was like minting money. It was almost worth all of the hell we had to go through.”
Tepper shorted the bubbly Nasdaq in 2000 but covered the position because of investor pressure – five weeks before the market crashed. In the book Alpha Masters he called it “one of the worst trades of his career.” He pledged to never let his investors interfere with his decisions again:
“It’s the manager’s decision to make the right calls for the portfolio not the investors.”
In 2002, the high yield market toppled over when the internet capex boom collapsed. Appaloosa lost 25 percent. Tepper made big bets on the distressed debt of three of the then-largest bankruptcies: Enron, WorldCom, and insurance giant Conseco. Again, he emerged victorious from a bloodbath, up 149 percent in 2003.
“In 2002, 2003 after Enron collapsed, we bought bonds of [energy companies] Williams and El Paso for 20 cents on the dollar. We also bought the bonds of Marconi [a troubled U.K. telecommunications equipment maker] and [insurer] Conseco.”
The Delphi Distraction
In the mid 2000s, Tepper successfully bet on commodity sectors like steel and coal which benefited from the surge in Chinese economic growth. But he also got tangled up in a messy restructuring.
In 2005, Tepper invested in Delphi, an automotive supplier that had been spun out of General Motors and became the largest automotive bankruptcy to date. The company was buckling under high labor and pension costs and Tepper believed that cost cuts and a release from liabilities to GM could create a significantly more valuable company. He immediately bought up nearly 10 percent of the stock, and later added debt, and went to work.
"I saw a 10 percent chance of losing everything and a 90 percent chance of making money. So, I had to roll the dice."
"These employees are facing an economic reality," Tepper told his wife when she watched the news of job losses and wondered whether her husband was "a good guy or a bad guy” in this situation. "You can't manufacture profitably in the United States with these salaries. One way or another, these people will be displaced."
Tepper first partnered with Cerberus for a $3.4 billion capital injection but the deal fell through. In 2007, he agreed with the company on a new $2.5 billion recapitalization to take the company out of bankruptcy. Tepper held his large stake alongside Michael Price who commented: “Delphi is an important example of the kind of thing David Tepper does. He makes a contrarian investment away from easy money and fights to unlock profits.”
But this time, Tepper walked away from the fight.
By early 2008, the economy was weakening and much of the automotive sector was careening towards failure. "Like a lot of people, we did not see how awful the economy would get,” Tepper said. “The world got worse." Tepper had put in place covenants that allowed him pull out of the deal if credit markets experienced distress – which he did. "We had tests to protect ourselves. They questioned our protections."
“Delphi was a big investment commitment that we thought had significant upside potential at the time. But the situation soon became very aggravating. We thought we did everything right.”
“It wasn’t worth the time at that point. We’re known as people that will fight till the end but I’m not going to fight something just to fight something. I’ll fight if I have to, but I’m actually a lover and not a fighter at heart.”
The company sued Appaloosa alleging that Tepper “pushed, with the grace and diplomacy of a battering ram, to play a central role in the reorganization” only to pull out. Appaloosa reportedly lost almost $200 million on the investment and a settlement with the company.
“I’m no longer mad,” said former Delphi CEO Steve Miller. “Tepper certainly has got a touch of arrogance, but he’s really entitled to it. He’s the kind of guy who moves ahead while you are trying to figure out what to do with your pawn. His ability to do math, really complicated balance-sheet math in his head, was awesome. But he’s impatient with us lesser mortals.”
Not only was Delphi a loss, it also distracted Tepper from another important trade. He later reminisced about some of his peers who had made fortunes shorting subprime bonds:
“It wasn’t that we didn’t have the trade on ourselves. But that we didn’t have the extra time it took to figure out the best way to play it. If we weren’t torn away with some of the Delphi crap, we definitely could have hit the subprime trade better.”
The Crisis Hits
In early 2008, Tepper reduced risk in his portfolio when Société Générale announced a $7 billion loss from its trading desk. Tepper expected markets to sell off, but he was early and got whipsawed. Having extracted himself from the Delphi situation, he could focus fully on the unfolding financial crisis.
He scaled back leverage, raised hefty cash balances, and raised a new fund, called Thoroughbred, which remained largely undeployed.
"You don't make money if you don't take risks, but you must take the right risks and have the right risk management."
"When the banks went down in September, we had already set up our analysis. Ah, analysis. What a funny thing."
The entire market was starting to revolve around the health of the financial sector. And Tepper was looking for the inflection point.
“We were very liquid when September 2008 hit. It was a financial sector event. We had been sitting there waiting for it to tell you the truth. I mean, like everybody else, we were a little taken aback by the size of the declines in the marketplace, but the nine months leading up to it were kind of frustrating. Spreads were very tight in the debt markets and we had just raised money for Thoroughbred, so we had a pretty big liquidity cushion. We just did our due diligence and made sure to read all the indentures and credit agreements we could get our hands on.”
“We typically hold anywhere from 10 to 20 positions at a time that are really meaningful. And during 2008 and 2009, there was no trade more meaningful than financials.”
“So there was a skewed upside versus downside. Everything in the markets, whether investors knew it or not, was a bet on financials at the time. It was the same bet regardless of what you bought.”
His first trades were reminiscent of the savings and loan crisis. In the fourth quarter of 2008, Tepper bought battered holding company debt of bankrupt banks like Washington Mutual and Wachovia. Tepper knew that even when banks failed “the government is not allowed to take the holding company. You can have value in the holding company. We knew the structure."
“We had been following WaMu very closely. We knew there was still about $4 billion in cash from TPG sitting at the holding company—and it wasn’t going down to the bank. We also knew there would be a potential tax refund. We knew we would be rewarded if we’d just be patient.”
It’s important to note that Tepper at this point was supported by a team of traders and analysts. Distressed debt investing especially is a team sport. Tepper worked closely with people who complemented his skills such as Jim Bolin, a former senior debt analyst at Goldman and senior partner at Appaloosa. Tepper once described Bolin as “the best pure analyst on Wall Street.”
"Investors overreacted. Fortunately, Bolin and I were alive in 1990. It's a bitch to be old, but sometimes it is not so bad. How many people are around who went through that in the 1990s?"
“We also made a lot of money on AIG. About one week before everyone thought they were going bankrupt, we bought $100 million of their commercial paper for 30 cents on the dollar. When they didn’t go bankrupt, the paper was worth par. But we figured even if AIG did go bankrupt, it was not a bad price to pay.”
Despite his caution, Appaloosa dropped nearly 27 percent in 2008 as markets sold off across the board and credit markets froze. After returning 20 percent of capital for investor redemptions, Tepper entered 2009 with 30 percent cash in his main fund and 50 percent in Thoroughbred.
In February 2009, the Treasury introduced the Financial Stability Plan and its Capital Assistance Program which outlined terms for capital injections into large banks. The government would purchase preferred stock priced at a modest discount to the respective February 9th stock prices. Tepper quickly connected the dots.
Investors had been burned by bank capital raises throughout the crisis and there were rumors that the government would ultimately nationalize banks like Citigroup and Bank of America. But now the government had signaled its backstop. “The government told me in writing what it would do and at what prices,” he said. There would be no nationalizations. Instead, markets would start to thaw.
“This is ridiculous, it's nuts, nuts, nuts!” he told one of his partners. “Why would the government break its word? They're not going to let these banks go under, people aren't being logical!” It was time to buy.
“When the white paper came out, the government tipped its hand. If the government was going to raise equity for the banks, it meant it was establishing a floor under the equity indicating at what price that floor was. Essentially the government was telling us that it wasn’t going to let the banks fail.”
“We were looking at the banks on the downside. We already had positions on the short side. We knew the banks pretty well. We knew the laws, the different layers of the bank structure. When the Treasury came out with their white paper, we knew it would be a securities law violation if they didn’t do what they said in print.”
Tepper and his team began buying the equity and debt of major financial institutions at deep discounts. “I felt like I was alone,” he recalled. “No one was even bidding.”
Appaloosa scooped up as much as it could find, sometimes paying as little as 5 cents on the dollar for securities of AIG, Bank of America, Citigroup, and other banks. For example, Tepper bought Bank of America preferred stock at 12 cents on the dollar, Citigroup preferred at 19, and AIG CMBS at nine cents.
“There was a lot of paper available and we had a pretty high conviction that we were right. It was all so deeply discounted—it was crazy!”
“We actually bought the hybrid bond preferreds and some equities. We exchanged preferred for common for Citigroup and Bank of America. We were one of the biggest holders of this paper next to the government.”
"Most of the upside was on the preferred and debt side. That's perhaps why so many people missed this trade. They just couldn't see it."
Markets were still weakening and by March, Appaloosa was down another 10 percent. Tepper was now on the phone himself to get a feel for the market. He was told that he was the only big investor doing much buying.
“Do I have to be a genius here? Normally one or two others are buying along. This time there was no one - not even the guy in Omaha.”
Some investors asked him about how he hedged the trade. “A shotgun,” Tepper answered. “That's what we'll need to protect our homes if I'm wrong."
“It was like that scene in Trading Places with the orange-juice futures. The whole market and the whole world were in pure panic. Everyone was too scared to do anything.”
At the end of 2009, Tepper had cemented his reputation as one of the best investors of his generation. Appaloosa was up 132 percent or $7.5 billion. Tepper had been a billionaire already, but now he was the richest man of New Jersey and famous to boot. He had always cultivated the image of being a “middle-class dad trapped in a rich man's body.” Now he was “ready to be rich.”
“What do you think I should do with it?” he joked with a reporter. “I could buy an island. I could buy a private jet—but I have NetJets. I could get myself a 22-year-old!”
Instead, in 2012, he spent $50 million on the 6,200-square-foot Hamptons home formerly belonging to Jon Corzine, the man who had once blocked his ascent to partner at Goldman. Tepper had the house torn down to build his own mansion. “You could say there was a little justice in the world,” he said with a grin.
After a being a minority investor in the Pittsburgh Steelers for many years, Tepper bought the Carolina Panthers in 2018. He also started to reduce the amount of time he spent in the office, noting "they will survive without me being here all the time. You can't work the same way at 52 as you did at 35."
In 2019, he announced that his firm, with $13 billion AUM of which 70 percent belonged to employees, would be converted to a family office. Tepper had returned assets to investors before, noting that "Appaloosa is more art. It is hard to create art. It can't be that big and create art." Bouncing back for the third time had been his master stroke, completing the painting of a lifetime.
I love his story for many reasons. Tepper was an outsider and unafraid to walk his own path. He was unafraid to buy when the market was in a state of panic and emerged from every drawdown a better investor. Tepper kept evolving and has long left behind the narrow lane of pure credit and distressed investing. And he kept having fun.
While some other investors who made fortunes during the crisis turned into doomsday prophets, always looking for another tail event, Tepper recognized that the exceptional volatility would be followed by a lengthy return to normal. He didn’t let his win define him and returned to his bread and butter of marrying macro conviction and with bottom-up diligence.
“To get to the new normal will be a grind,” he said in 2010. “This is really boring compared with what we just had. So, you got to grind, grind, grind. But boring doesn't mean you can't make money.” His appearances on CNBC, such as in 2010 and 2013, became closely watched and market-moving.
Aside from his book of public equities, Tepper was also active again in distressed and reportedly made close to $1 billion in the restructuring of Caesars Entertainment (though the effort was led by Jim Bolin as recounted in the book The Caesars Palace Coup).
You can find my takeaways, remaining quotes, and a list of sources for further reading in this addendum.
I hope you enjoyed this write-up. Feel free to share it with any friend who likes to learn about the most interesting people in investing.
Have any other anecdotes or sources related to Tepper? Email me!
David Tepper often throws a $20 bill on the floor when he's weighing a big investment with analysts at Appaloosa Management LP. "Would you pick that up?" Tepper, founder and president of Appaloosa, asks them. His point: The best trades can be like found money. Dealbreaker
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Disclaimer: I write for entertainment purposes only. This is not investment advice. It does not constitute an offer to sell or the solicitation of an offer to buy any securities mentioned or discussed. Seek your own financial, tax, legal, accounting, or other advisor’s advice before making any investment decisions. Do you own work. I am are not your fiduciary or advisor.