The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (19 page)

“A” for Appaloosa

Tepper knew by then that he was ready to strike out on his own, and so by early 1993, after eight years at Goldman Sachs, he made his move. With the assistance of mutual fund legend Michael Price, who had been a Goldman client, Tepper started trading aggressively for his own account off of a borrowed desk at Price’s office, hoping to raise enough money to start a fund. Just a few months later he was ready to launch with partner Jack Walton, a former senior portfolio manager for Goldman Sachs Asset Management. They had collected $57 million in assets from fund of funds, insurers, and investors they met at Goldman.

Tepper and Walton only needed the perfect name for their new venture. Greek mythology was popular at the time and they first decided on Pegasus, the flying horse, before discovering it was already taken. So Walton went to the library and came back with a book on horses. They knew they needed a name that started with “A” to be first to receive faxes on trades, which was how orders were processed back then. They had learned well from their stints at Goldman that two minutes could make or break you. The first name they came across was “Achaikos,” but they found it too hard to pronounce. So they skipped ahead and settled on “Appaloosa.” And the fund was born.

Growing up, Tepper always wanted to be a millionaire by the time he was 30. “Like many kids, growing up without much money was inspiration enough to do well,” he says. Barely into his early 30s, Tepper was on the brink of building a business that would go on to earn him billions, making him one of the richest men in the world before his fiftieth birthday.

The Early Days

David Alan Tepper was born on September 11, 1957, the second of three children. He had a lower-middle-class upbringing in a four-bedroom brick row house in the Stanton Heights neighborhood in the East End of Pittsburgh, Pennsylvania. His father, Harry, worked as an accountant (not a CPA, Tepper specifies). His mother, Roberta, was an elementary school teacher who taught in a number of different Pittsburgh public schools over the years. The son of “just” an accountant, Tepper was exceptional at math from a very young age. He was so remarkable that his older sister Sheryl brought him into her second-grade class for show-and-tell. “I was only four or five years old but I could already do multiplication and complex adding. I could barely even talk at the time but I could do math,” he says.

Tepper had been shy in grade school, but later he grew into the role of class clown and became active in sports. “I was a big kid and was quiet in the beginning, but as I got into football in high school I turned into a joker and was well liked,” he says. He spent time during his teen years with his maternal grandfather, Benjamin Tauberg, who shared with his grandson a love of baseball and the Pittsburgh Pirates. Tepper collected baseball cards as a kid: “I knew every player in the major leagues. You could pull a player’s card, and I could tell you the statistics.” Also an avid football fan, he fulfilled a lifelong dream when on September 25, 2009, Tepper signed a deal to purchase a 5 percent noncontrolling interest in the Pittsburgh Steelers. He reportedly flies on a private jet with four of his closest friends to attend every home game.

Tepper attended Peabody High School, an inner-city school in the East Liberty neighborhood near his family’s home. Tepper recalls that the school had a reputation for being “combative” and, during most of his sophomore year, fights would break out with other teams. Eventually, the school decided to bar all students from attending games.

Though Tepper was in the scholars program, he frequently found himself in the vice principal’s office. One such time, after his English teacher threw him out of class, the hall guard stopped him to ask what he was doing in the hallway. Tepper responded, “My English teacher threw me out of class. He told me to roam the halls and act like the animal I am. I’m doing the best I can.” He laughs at the memory, saying, “I wouldn’t say I was a bad kid, though, just bored.”

On another occasion, Tepper was sent to the office along with his friend Will Wanamaker after starting a fight in the hallways with squirt bottles from chemistry class. “I was just squirting water,” he says with a chuckle. The punishment for bad behavior at Peabody was either 10 days of suspension or 10 whacks with a wooden paddle. “I remember the paddle—it was square and had holes in it so it would hurt more because there was no wind resistance,” Tepper explains. He and his friend were sitting in the corner of the vice principal’s office contemplating which one was worse, when the fire alarm went off and Tepper and Will were shooed out of the office. “That was the only time I ever got close to that darn paddle,” he recalls. “I was questioning whether to tell my parents, which could have been worse. It was a really interesting choice. I think I was leaning toward the whacks.”

No “A’s” in High School

Even though he was in the scholars program in high school, Tepper wasn’t motivated to work hard and never earned an “A” in four years. Often, he would skip class and go to the seminary across the street. “I went there because they’d give you free pancakes,” he remembers. “Afterwards I’d hang out with the priests. I’m Jewish, but I still wanted the free pancakes!” he laughs. “It wasn’t like I was a bad student. I just didn’t take it seriously.” Some things in high school, however, he did take very seriously. During his senior year he won Peabody’s Best Actor award for his role as the father in
Bye Bye Birdie
and even received a standing ovation during the awards ceremony. By then, Tepper had surely gotten over his introversion. “You can’t be totally shy and get the best acting award in high school,” he points out cheekily.

Though his father was not the soft and cuddly type, Tepper used their shared love of numbers to learn about investing while growing up. “I remember my dad had made some small investments in a few companies, so I would track them and see how he was doing.” His dad wasn’t a great investor, but Tepper was intrigued and can remember talking to his high school teachers about the stock market. When he was a junior, he bought his first stock, Career Academies. He bought about 100 shares of the $2 stock, “but then the whole thing went bankrupt,” he shrugs. “It was a bad investment, but that didn’t deter me.” Years later, after Tepper started his career at Goldman Sachs, his father won the lottery, giving him $30,000 a year, what he calls his dad’s “pension.”

Learning and Earning

Things changed very quickly for Tepper when he entered college at the University of Pittsburgh. He sums it up in seven words: “I had to pay for it myself.” Having done very well on his SATs and earning 4’s and 5’s on his AP exams, he was able to get enough college credit to skip one semester and graduate in only three and a half years. “Since I had to pay for it all myself, that was really important to me. It was funny, in high school I never had an “A,” but in college I almost never didn’t have an A.” To pay his way through school, Tepper worked at the Frick Fine Arts Library on campus and took out loans.

After college and before graduate school, Tepper also began dabbling in trading. “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.” Until the stock market took a sharp turn in 1982, Tepper was able to make enough money to pay for his tuition and room and board, about $2,500 a semester. Despite, or perhaps because of, all the hard work Tepper put in, he remembers his college years fondly. “I wish I was still in college,” he says with a sigh. “I just remember it as a really fun time in my life.”

In 1978, Tepper graduated summa cum laude with an honors degree in economics and started as a credit and securities analyst in the Trust department of Equibank in Pittsburgh. Two years later, unsatisfied with his position, he enrolled in Carnegie Mellon University’s business school. “I was really nervous because Carnegie Mellon was such a good school. I thought I might not be as smart as some of the other people because I had only gone to Pitt, but that wasn’t the case.” His first year in business school he earned straight A’s. “So my grades actually got better with every level of education because I kept getting more serious—and school kept getting more expensive,” Tepper finishes with a laugh.

These days, Tepper gets boatloads of letters from kids asking him to pay their college tuition. “I’m gonna have somebody put together a form letter for that,” he told
New York
magazine when they did a profile of him in September 2010. “I think people should be self-reliant. You should work and be self-sufficient. That’s what I did,” he says.

By 1982 he earned his MBA, then known as an MSIA or master of science in industrial administration, and began his real education: two years in the treasury department at Ohio’s Republic Steel. There, he was introduced to the junk bond market by working on financings of non–investment grade debt. In 1984 he was recruited to Keystone Mutual Funds in Boston, where he met his wife, Marlene, while she was working at Wang Laboratories. He worked as an analyst for their junk bond group for about a year before being recruited by Goldman Sachs.

Through the years, Tepper has made several large donations to the University of Pittsburgh, including endowed undergraduate scholarships, university-run community outreach programs, and academic centers. In March 2004, a year after he had officially become a billionaire, Tepper announced that he would donate $55 million to the Carnegie Mellon Graduate School of Industrial Administration, after being encouraged by his former professor, Kenneth Dunn, who later went on to become dean of the school. As a result, the name of the school was changed to the David A. Tepper School of Business.

Fierce and Fearless

“I’m lazy competitive, if you know what I mean,” Tepper says one winter afternoon over lunch of spicy tuna rolls at Appaloosa’s offices across from the Hilton in Short Hills, New Jersey. His 30-person staff is predominantly male, and, at a glance, Appaloosa has the air of a very high-end frat house. But no matter how it appears to outsiders, Tepper is very focused on running a fierce and fearless operation. “The main thing that makes Appaloosa stand apart from the pack is the depth of our analysis and the fact that we’re not afraid to be the first one to act on our convictions. If you look at our history over the years, we are usually the first mover in a country or situation, time and time again,” says Tepper.

As of January 2012, Tepper’s firm had about $12 billion under management, divided into two separate funds: Appaloosa and Thoroughbred. After starting with $57 million in 1993, the funds grew quickly, and by 1996, it had already hit $700 million. What Tepper means when he describes himself as “lazy competitive” is that in his everyday life, he’s a pretty laid-back person. But in business, he likes to win. That’s why one of the most painful lessons Tepper learned over the years didn’t even involve huge dollars losses but rather a lost opportunity to “win big.” The takeaway: never listen to pushy investors. “It’s the manager’s decision to make the right calls for the portfolio,” he says, “not the investors.” What Tepper is referring to is a large short position on the Nasdaq in 2000, which he covered merely five weeks before the tech bubble crash due to constant investor pressure. Though he didn’t lose much money, he considers it one of the worst trades of his career. In fact, Tepper’s regret is that he missed the opportunity to make a fortune.

“So I have a combination of laid-back competitiveness on the field of play,” he explains. “You see that with some athletes that come in with earphones on and are hanging with the music. And then when you get them on the field, they’re focused and they’re fierce. So in the outside world, I’m that easygoing person. But if I’m on the field, I wanna win. And we win a lot,” he says, looking at me with a sideways smirk as he sips his orange soda.

Titanic Track Record

Tepper is right. Besides having one of the best track records of any hedge fund manager in the business, returning an average of 28.5 percent net to the firm’s investors since 1993, his fund is consistently ahead of the industry on deals as well. Appaloosa stood at approximately $16 billion in total assets under management coming into 2011, following a stellar 2010 when the firm was up 28 percent net. But outshining both of these recent wins is its 2009 performance, when the fund was up 132 percent net and raked in almost $8 billion in profits betting on bank debt and stocks like Bank of America, AIG, Citigroup, and Wells Fargo when they were at their weakest.

Three times in the life of Appaloosa it has lost more than 20 percent: 1998 (down 29 percent), 2002 (down 25 percent), and 2008 (down 27 percent). And all three times, the firm made its high-water mark back in six months en route to a stellar year thereafter. Indeed, Tepper’s investors have been trained to look
forward
to down years at Appaloosa. The year after Tepper lost money in each of the three years he was down, he had record performances: up 61 percent net in 1999, up 149 percent net in 2003, and up 132 percent net in 2009. “This is a good place to be during a panic. If you came to our office when we were down 20 percent, you wouldn’t see a difference. It’s another day at Appaloosa. The best time to invest with me is when I’m down,” he told hedge fund publication
AR
+
Alpha
in February 2010.