Seeking Investment Opportunities — Learning From A “Capital Allocators” Podcast
I came across a podcast that my son had recently introduced to me and was blown away by the new investment perspective that the 2 guests were talking about. I had to listen to it a few times to grasp the themes and thought processes they were applying so that I can mimic them for my own investment portfolio. It was an eye-opening experience for me to understand another perspective of investment which was new to me.
Before I go deeper into this podcast, a back story. Earlier this year, I decided to reread The Big Short book by Michael Lewis again. I felt that I needed to understand the details of the winning trade positions during the 2008 GFC (Global Financial Crisis) and why the heroes of the book did the things that they did. I even watched the 2015 movie again to understand the trades initiated which I may have missed the first time around.
The names of the characters in the book were changed but they were based on real companies and persons working in them. One of the investment firms called FrontPoint Partners had a very outspoken leader that was always in your face to aggressively question CEOs and banks whenever he sees non-logical behaviour or moves motivated by personal greed manifesting their actions to screw the retail investor.
Two of the persons working for this leader Mark Baum (based on Steve Eisman) were Porter Collins and Vincent “Vinnie” Daniel. They have since moved on and started their own family office/hedge fund called Seawolf Capital right before Covid happened. Their fund’s return to date is amazing and you can see for yourself in the summary write-up of the podcast below:
“Porter Collins and Vincent Daniel are the founders of Seawolf Capital, their family office managed as an old-school hedge fund. Previously, they were two of the three members of Steve Eisman’s team at Frontpoint Capital and found themselves in print and on the silver screen as protagonists in Michael Lewis’ The Big Short. Regulations prevent us from disclosing investment returns almost all the time on the show, but Porter and Vinnie manage only their own money today and are an exception to that rule. In the three full years since they started managing their own capital, the pair is up an extraordinary 9x, coming off a 169% return in 2022.
Our conversation covers Porter and Vinnie’s background, the Big Short trade, the launch of Seawolf 1.0, a short stint at Citadel, and lessons learned along the way and put to work at Seawolf 2.0, their family office. We discuss their contrarian value investment approach, the transition from financial sector specialists to generalists, investment themes, and the banking system. We close with their perspective on the hedge fund industry and the future of Seawolf.”
I will attempt to distil the essence of this podcast today to try to summarise the main points and my thoughts on how it could help change my investment outlook and strategy as I look at current themes to fine-tune my portfolio.
Both Porter and Vinnie stated that they had a PhD in what had happened, having prepared and waited patiently for almost 2+ years for the 2008 GFC to finally start. With a prior experience in the late nineties on a similar meltdown of excesses, they were well positioned by then. But it was coupled with a lot of pain watching their positions in the red for a long time while the banks screwed with their mark-to-market calculations.
The concept of Vols (Volatility) targeting was discussed. It dictates capital flows which they watch constantly. Strangely, low Vols attract more capital, especially from funds that position for an explosion of volatility eventually.
Funds naturally gravitate to long short-term momentum via leverage in order to maintain high returns as taking contrarian positions takes too much time. Hedge funds make money when the VIX (Volatility Index) spikes. So when the Vix falls, they add more leveraged money. This move creates an opportunity for Seawolf to initiate short positions when the one-sided explosive move happens and Vix surges. During their stint in Citadel, they also did not understand why hedge funds had the concept of Aging in portfolio management, to force them to sell stocks held for too long even though they still like to hold them.
Seawolf prefers to be a value-oriented investor. They start with a small investment in a stock they initially like. They will accumulate and build up the position if their views are reinforced over time through more internal debate and discussions.
For example, their play on Exxon when Salesforce replaced it as a component stock in the DJI (Dow Jones Index) on Aug 2020. They found that major fund management names have very low exposures to energy names right before Covid. It should have been a critical asset to hold. That worked out well for them as they continue to accumulate more into 2021.
Seawolf’s preference is to hold stocks that have a low PE (Price Earning ratio) of 5 or less. The downside is low and when the stock is finally rediscovered, the upside move could be explosive. This allows them to sleep well at night, looking for great investments and just wait. They agree that Seawolf cannot beat the funds with their sophisticated machines and hence have to specialize in this niche.
They also like Uranium and Nuclear now, calling them the Elemental powers. They are now safer than imagined, as the general public view is clouded by historical nuclear accidents that happened a long time ago.
They also like to long Gold, likening it to a short position against the global financial markets, a hedge against the growing US deficit. Generally, they are also negative on the banking system because of long-term cyclical issues. Savers (CASA) are less sticky to the banks now and have the ability to quickly park their idle funds into T-bills and money market funds.
When deposits leave the banks, they will have funding issues. Seawolf had successfully shorted the stocks of the recently failed US banks as this had happened. Banks’ last resort is always the Fed to try to stay afloat. They are more risk-averse to bank lending and are less likely to make loans to corporate names nowadays. Private equity names are now taking over this space as they do a better job of assessing the risk than banks. Commercial real estate is a concern and would be challenging down the road.
On the topic of inflation, developed countries like the UK and Australia are still seeing elevated levels with little growth. Brazil stands out as its inflation is going down. It is also a self-sustaining country with plenty of natural resources. Brazil's stocks remain cheap and they are fiscally neutral. They historically also do not start wars. The political risk from last year has subsided as Lula is declared the winner. They like Petrobras and are accumulating as the PE is only 2 and the yield is 20 to 25%.
The Fed’s 500 bps aggressive rate hikes to date are a big worry for them. Vinnie cannot understand that the Risk-Free rate of return which all investments are measured against is actually derived from these hikes while the US deficit is ballooning and more than doubled in less than 10 years. It blows his mind as it could snowball into a bigger risk as more money printing is required to support the interest payments of the sovereign debts. Who wants to buy more US debt and is the crowding out factor coming?
Seawolf wants to remain small and nimble while remaining patient with its positions to pay less for value stocks. They buy when there is mispricing to extreme levels which lasts much longer nowadays. They also avoid stocks that have bad management that cannot execute. Finally, Potter talks about the life lesson he learnt from his grandfather — that life is about the journey and one must cherish its ups and downs.
After listening to this particular podcast 3 times to distil the essence of Seawolf’s message, I have decided to do the following steps. I studied the financials of Petrobras with the help of my son and an analyst friend and decided to buy the ADR (PBR). I might accumulate more in the near future.
Separately, I will also look into buying Brazil mutual funds or ETFs and nuclear-related stocks once I do more research on them. I have a small long gold against USD position which I am encouraged to hold on to because of their views.
On my personal investment portfolio front, I have been taking some money off the table from my long-term positions in the last few weeks (Apple 8x and Nvidia 12x to date). It is tech-heavy and the PEs look too high and frothy now.
My other bold contrarian move is to buy China. I believe that the negativity is overdone. As Buffet said, when everyone is fearful, it is time to get greedy. There are encouraging signs that the supertanker is slowly turning around as the Chinese authorities make plans to energize the economy post-Covid. Alibaba is finally off the hook after paying its final fine. The government is also beginning to court China’s tech names to generate ideas to jump-start the economy.
I bought more Alibaba shares to average my previous longs with the expectation that it is best positioned to ride this China wave when it turns. The recent announcement of breaking itself up into 6 IPOs could also be a bonus. I believe that the sum of its parts will be greater than the market value of the current mothership. A small short USDCNH was also initiated recently. I also used my SRS funds via Endowus to average down on my China-focused mutual fund portfolio a few weeks ago.
Let’s see how it goes into the second half of 2023. The Fed may still hike another time but a rate cut will only happen in 2024 at its earliest into their presidential elections. This week’s blog will serve as a reference point for me to review again in a few months’ time. Wish me luck!
