Robert Wilson falls under the title of “the greatest investor you’ve never heard of.” He turned $15,000 into $230 million from 1958 to 1986.
Wilson was a long/short investor who wasn’t afraid to use leverage. He began his career as an analyst at A.G. Becker & Co. He went on to open his own hedge fund in 1968 called Robert Wilson Associates. Within a couple of years, he was strictly running his own money. He gave it up in 1986 because he promised himself that if he ever failed to beat the market for three years straight, he’d quit.
Near the end of his career, he talked with George Goodman on Adam Smith’s Money World. He discussed his investment strategy. He also highlighted how successful investments can go to your head.
In Wilson’s case, his ego got the best of him and produced his biggest loss.
It happened in 1978. Wilson bet against Resorts International. Resorts was a small casino operator with a single casino in the Bahamas, with a second casino planned in Atlantic City. The company bet its future on legalized gambling in Atlantic City.
Wilson believed it was a mistake. Nobody would bother with Atlantic City while Las Vegas was the gambling mecca of the U.S. Even if people did, competition from other casinos would be tough. Or so he thought. So Wilson took a 220,000 share short position against Resorts International at prices ranging from $8 to $25 per share.
But when the new casino opened, the stock shot up to $60. Then Resorts’ first year of earning came in at $50 million. It was a huge beat that pushed excitement around the stock even further. Within six months, its stock price was closing in on $200. It turned out that Resorts had a monopoly on casino gaming in Atlantic City for a couple of years before competition moved in.
Wilson began covering his short position at around $60 but the excitement around the stock created the perfect recipe for a short squeeze. He finally covered the last few shares at $187.
It was a $20 million loss! Wilson admitted to being massively wrong and how his ego got in the way.
His conversation with George Goodman is below:
Adam Smith: Robert Wilson has been tremendously successful following a strategy that focuses on stocks whose earnings are growing rapidly. And he bets against those whose earnings are going down. Wilson lives and works in the heart of New York City. When he’s not managing his money, he spends his time as an avid patron of the arts. He’s on the board of the New York City Opera and enjoys shop talk with general director, Beverly Sill, as much as stock talk with his brokers.
Some of the great investors do better out of New York. John Templeton lives in his flower garden in The Bahamas and Warren Buffett lives in Omaha, Nebraska. And both of them say that living out of New York keeps them out of everyday gossip and the hurly-burly of flow of overload of information. How do you survive in New York?
Robert Wilson: Well, in the first place, I would be bored to death simply living in either The Bahamas or Omaha. And so the most important thing is to enjoy life. But secondly, I never really did all that well in the market until I came to New York. Unlike. these other distinguished gentlemen, I am not an original thinker.
I tend to rely on other people to feed me, if you will, ideas. And I’m very interested in what a lot of other people are thinking. And more bright people are in New York, in this business, than anywhere else. I think the difference really is that they are original thinkers and I’m not. I’m a derivative thinker.
Adam Smith: A lot of people say you can’t beat the stock market consistently. And certainly, a lot of money managers say the stock market has beaten them, but you have beaten the market, and very consistently. What’s the principle that you’ve used to do this?
Robert Wilson: My philosophy is basically to invest in stocks where earnings are growing rapidly at the time when I’m investing in them. Conversely to short stocks where earnings are contracting rapidly or where the earnings are illusory for one reason or another.
I lead a rather Placid personal life. It’s been a quiet pleasant life. And the market provides to me the excitement and drama.
I like to be in things that have great potential for huge gains or, in the case of shorts, a great potential for losses. I often tell brokers who give me ideas, I say, I’m not interested in buying it if it can’t go down 30%. I’m not interested in stocks with limited downside risk. If the downside risk is limited, then the upside potential is probably also limited.
So part of it is a way of getting vicarious excitement out of an otherwise rather Placid life.
Adam Smith: Well, how do you find the companies that have the rapidly growing earnings?
Robert Wilson: Well, I really rely on brokers to call me. I give a lot of money out in commissions and I tend to sit at my desk, waiting for people to call me.
Adam Smith: But rapidly growing earnings, those companies are prizes. They are scanned for by computer screens. Emerging growth mutual funds look for them. Isn’t this quality already reflected in the price of each of those stocks?
Robert Wilson: Maybe I can refine what I said. The only way one makes money in the market is when the market’s perception of a stock changes.
So basically I am looking for stocks where perhaps the earnings have not started to improve yet. Or if they have started to improve, they’re going to accelerate. There has to be an improved perception of that particular stock and that company to make money. So you’re absolutely right about that.
To buy a stock simply because earnings have been going up 30% a year for the last three years and to just do that on a rote basis could be a very good way to lose money fast because when the earnings slow down, the stock could easily go down.
Adam Smith: Tell me about the short side. That’s what characterizes you as a little bit unusual.
Robert Wilson: Yes. About the short side of…
Adam Smith: Or first let’s, we better tell people who don’t what that is.
Robert Wilson: Well, when one buys a stock long, one buys a stock and then later sells it. In the case of a short, one sells the stock first and then buys it later. Now, how can one do that?
Well, let’s say you are bullish on IBM and you own some IBM stock. And you think it’s going up in price. And I think IBM’s going down in price. I say to you, let me borrow your stock and I’ll pay you for borrowing it. Just as I would have to pay you if I borrowed your money.
And I will borrow the stock and I’ll return it to you at some future date that we would agree on. And so I will go out and sell it. And if it goes down, I will make money because I can buy it back and return it to you at a profit. If it goes up, you’re the one who makes the money and I lose money.
Adam Smith: So you would sell a stock at 50 and buy it back at 25, hopefully, later?
Robert Wilson: Hopefully yes.
Adam Smith: Haven’t you had an experience on the short side that was at least chastening?
Robert Wilson: Yes, indeed. During the 1970s, when the stock market was by and large going down, I shorted, I would think, a thousand different stocks and they had been wrong about five times. I mean, I was almost godlike in my ability to pick shorts. And you know, what happens to gods who inhabit earth rather than the heavens. They begin to think that just because they short a stock, it will go down.
And this happened to me in the case of Resorts International, which I shorted because I did not think Atlantic City would amount to anything as a gambling center.
And the earnings came in and I was just so sure that because I had shorted it, I would be right. It was hubris, sort of, run riot. It’s a very human thing and it happens to all of us. And I think it particularly happens on Wall Street.
We tend, in this business, to be terribly right for a while or terribly wrong. And no matter how long, how often we have been wrong in the past, when we have a period when we are right, it’s so wonderful, that we think we’re so good.
Adam Smith: Well, what happened?
Robert Wilson: And well, I lost a great deal of money and I made the front page of the Wall Street Journal. I’d often aspired to make the front page of the Wall Street Journal, but not quite in the role that I made it.
Adam Smith: If a young person came to you today, just out of college, and said to you, when I’m your age, I want to be as rich as you are or where you are today. How do I it? What would you tell him?
Robert Wilson: Money in the abstract, not what money will buy, but money in the abstract has to be the most important thing in the world. It is not the most important thing in the world to the vast majority of talented people.
Adam Smith: You have an end object in mind in your investing career.
Robert Wilson: Yes. To make a billion dollars.
Adam Smith: Really?
Robert Wilson: Yes. I’m not at all sure I’ll be able to do it, but I’m going to try. It isn’t really so important that I do it. The important thing is to try to do it.
Adam Smith: I think you can see that as different as these three remarkable investors are, they have some traits in common. They have independence of mind. They’re not afraid to act alone when the crowd’s going the other way. They trust their own perceptions. They stick to the style they know. And they are all smart. They all probably would have succeeded at anything they turn their hands to. And finally, and most significantly, after decades of investing, they still find it so much fun. They can rarely stand to do anything else.
See your next week. I’m Adam Smith.
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