Robert Wilson is a lesser-known legend on Wall Street. He turned a small inheritance into $800 million, then gave away the bulk of it to charities before his death.
Wilson began his career in 1949. He spent the first two decades as an analyst, bouncing between several firms, including a hiatus while serving in the Korean War.
In 1968, he set out on his own. He set up a hedge fund, Wilson & Associates, with about $3 million in capital from friends and family. The timing could not have been worse. That same year, the market topped and by the lows of 1969, his fund was down 35%.
Withdrawals came next — reducing the fund to about $350,000. His clients bailed out at the lows. Within the next three months, his fund bounced back to break even. Then he ditched the last of his clients and truly went solo. He only managed his own money going forward.
Wilson ran a true hedge fund. His portfolio was a diversified group of both long and short positions. And he wasn’t afraid to use leverage. He looked for growth companies but used short positions to protect his capital. The ancillary benefit of short positions gave Wilson more money to bet on the long side.
The gist of short selling is to borrow stock to sell, in the hopes of buying the shares back later at a lower price. Wilson used the funds from the sale of borrowed stock to buy more stock.
Since he was after innovative companies transforming their industry, he often experienced exceptional gains throughout his career. His average return over his career was roughly 30%.
He walked away in 1986 at the age of 59. He had promised himself that if he ever failed to beat the market three years in a row, he would retire. But the 30-year run prior to that — 1953 to 1983 — he only failed to beat the market twice — in 1970 and 1978. From his retirement to his death in 2013, Wilson outsourced the management of his money to others.
Most of the information that exists on Wilson today comes from a handful of interviews he did throughout his career. It’s enough to get a sense of his investment philosophy, his thought process, and what drove his spectacular returns.
On His Investment Strategy
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 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.
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… 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.
I was always net long. When I was bearish, I was maybe 25% net long, and when I was bullish, I might be 125% net long.
I would not buy a stock simply because it had a low price-earnings multiple or high yield.
I tend to always look at those companies and those industries that are innovative. That, I think, is always where the real big stocks are.
I have a lot of positions… I have, on the long side, over 100 positions, and on the short side, I have about 60… I do diversify a lot.
On Shorting Stocks
When we go short, it is not so much to make money as it is to protect capital… We’re doing it defensively as insurance, because it’s a very hard way to make money. In the first place, all you can really make on a short sale is 100%, whereas theoretically you can make many times your money in a long position.
Most people who are successful in the market are basically optimists, and most of these people are very uncomfortable when they are on the short side.
In spite of what the text books say, stocks with large short interests do go down.
To the extent that we short, we almost always do it on the fundamentals. I’ve been in this business long enough to know that I really don’t know what the price earnings multiple for a particular stock should be. As a result, if a company’s earnings are rising, and it seems like they’re going to continue to climb, I won’t short it no matter how high it looks… We look for fundamental shorts that we think will go down in a sideways market.
I would say from the beginning to the end of it…I may have broken even on my shorts… It permitted me to make a lot more money on the long side.
What really makes money for you is good management. It’s not always that easy to find, but it’s very easy to spot the companies where management is uninspired. This is something you have to do. Over the years I have been bagged in a number of stocks where the story was good but management wasn’t. Good management has an extraordinary way of making money for you, and bad management, no matter how favorable the environment, has a way of missing the opportunities.
A good record doesn’t necessarily prove good management. Outside economic factors such as the business cycle can make any company look good for a while. What’s important is how a management responds to the opportunities available to it. A seemingly dull record might reflect an able response to tough business conditions.
Probably the most important thing I look at is the attitude of the people below the president. I don’t usually concentrate on the top man unless it’s a very small company or a turnaround story… I’d rather talk to the underlings. Are they as optimistic and knowledgeable as the top man? Do they seem inspired? These guys are typically more astringent and more apt to be in touch with reality than the president, who is very often a super-salesman.
The times I lose money tend to be the times I get infatuated with something.
My ability to forecast the market is no better than anybody else’s, which means it’s quite poor. Some people are successful in calling one or two or even three turns in a row, but they are even worse off than I am because once somebody thinks he can forecast the market he tends to put increasing amounts of money behind his opinion. When he finally makes a mistake, he really gets destroyed.
On Market Crashes
Everything seems to suggest that we’ll see a major market crash sometime during our lifetime. I won’t have the prescience to see it coming, which is why I feel it’s important to protect myself and my clients by maintaining a hedged position.
The quicker and more intense the panic is, generally the more ill-considered it is, and markedly improves prospects for a correspondingly quick and appreciable recovery.
Adam Smith’s Money World
The TSC Streetside Chat: Robert Wilson
Broker’s Choice, Barron’s
Turned On and Turned Off, Barron’s
Two-Thirds’ Exposure, Barron’s
Blessing in Disguise, Barron’s
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