The Crash of 1987: Julian Robertson’s Test of Conviction
“Probably none of us have ever lost so much money so fast in our lives.”
If investing is an exercise in decision-making under uncertainty, as well as navigating one’s biases and emotions, then I believe firsthand accounts are at least as valuable as abstract knowledge of market history. We all know the market recovered from the 1987 crash. We all know the economy eventually escaped the grips of the Great Depression or the financial crisis. But what was it like to invest under those conditions?
A good example would be the book The Great Depression: A Diary. It is based on a lawyer’s journal and shows the difficulty of doing business when banks were failing and the future looked bleak. It also highlights the upswings, the moments of hope, which were inevitably crushed by another downturn. Above all, it allows the reader to understand why members of that generation would have difficulty believing in long-term bull markets again.
I’ve started a similar project of sifting through investor letters year by year, looking for insights, wisdom, and such firsthand impressions of history. Unfortunately, it is difficult to find collections of letters by great investors (whose names are not Buffett or Munger). They’re often either not made public or were never digitized and are tucked away in private archives (hopefully they’re not lost).
I’ve started working on letters by Bill Miller and tweeted a few of his thoughts already: on concentration and whether you should sell the Michael Jordan of your portfolio, his comment on Julian Robertson’s closing of Tiger at the top of the dotcom bubble, and on when to sell.
While mutual fund correspondence enters the public domain, that is not the case for hedge fund letters. Unearthing lessons from the likes of Julian Robertson would be a gift. In the meantime, we have to make do with public sources.
The following is an account of Julian Robertson during the crash of 1987. It is based on excerpts from his letters that were published in Outstanding Investor Digest, the book Julian Robertson, A Tiger in the Land of Bulls and Bears, and articles in Barron’s.
Whereas Paul Tudor Jones anticipated the crash and profited from it, Robertson found himself in the difficult position of navigating a fierce drawdown. Robertson, a rising star, shared Jones’s view of the Japanese bubble. But he discounted the growing bearish voices in the US. The crash was a defining moment for markets and a gut punch for his fledgling fund - the biggest test of his process and conviction yet.
Rising Tiger
Robertson started his career as a broker at Kidder Peabody. He left in 1980 to start Tiger with $8 million in assets. While he added global macro bets over time, at his core Robertson was a value-focused stock picker.
In 2000, he commented that “the key to Tiger's success over the years has been a steady commitment to buying the best stocks and shorting the worst.” In a 2008 interview, he noted that he had started out as “a cheapskate looking for dirt-cheap stocks.” Over time and with “many talented analysts,” he realized “it was better to go for more expensive growth stocks because the analysts could project earnings well into the future. If you have high assured growth, the price-to-earnings multiple really has to be out of sight for you to be taking much risk.”
By early 1987, Robertson was still a traditional value investor and had built a remarkable track record:
While Robertson saw a bubble in Japan, he found value in American markets. He expected Japanese investors to recognize the valuation discrepancy which would lead to “potential Japanese investment in American equities.” The dollar had been declining which Robertson expected to work “magic among manufacturing companies.” He saw a “rebirth of American manufacturing,” and expected “exploding earnings” among his companies. With a combination of cheap valuations and active share repurchases he felt optimistic about his portfolio holdings such as Jefferson Smurfit, a forest products company “selling at only 10 times 1988 earnings.”
1987 started off well and the fund was up about 20 per cent by March.
