26-27 July 2014 Edited by Shelley Gare: sgare@afr.com.au

The ruling elite of the investment worldare an eclectic bunch. There’s the grey-beardedsovereigndebtraider,PaulSinger,aNewJerseynativewhobrazenlyconfiscatedan Argentinian navy ship in an African portas he took the South American nation tocourt to demand payment on his bonds.There’s Bill Ackman, a wealthy New Yorkinvestor who has pursued Herbalife, the 30-year-oldnutritionproductsmaker,claimingit’s a pyramid scheme and betting against itsshares.Asotherhedgefundshavetakenhimon, he has created a battleground based onmorality,class,egoandprofit.There’sDavidEinhorn, the 45-year-old New Yorker whohelped topple shaky financial firms such asLehman Brothers with undermining slide

shows. And Dan Loeb, a Californian knownfor penning vicious letters to the manage-ment of companies – and for the prominentarches on the balcony of his penthouse atthat enclave of New York’s new rich, 15 Cen-tralParkWest.

Then there are the greatest investors ofall:WarrenBuffettandCharlieMunger.Theevergreen duo have invested studiously andconfidently in the long-term prosperity ofAmerica in a way that seems too simple, tothe point where young kids, pensioners andcitizens of the world flock to hear himaddress his Berkshire Hathaway sharehold-ersatthecompany’sannualmeeting.

THEROAD FROM

OMAHA

Photography The traveller and the lens p46 Society Revenge of the typewriters p50

The world’s greatest investorswere putting on their shows –from Nebraska to Las Vegas.

Jonathan Shapiro wentalong to extract their secrets.

America’s industrial might has been itsfinancial markets. They have taken capitalfrom businesses and projects where it’s notneeded and directed it to sectors, businessesandsecuritieswherethereturnsarehigher.

The nation’s investment capital con-verges on Wall Street, a short stretch of con-crete in downtown Manhattan that hascometoembodypower,wealthanditsinflu-ence. But Wall Street is on the wane. A tech-nologicalarmsracehasmadeapit,afloor,orany location where people physically gathertotrade,redundant.

The great financial crisis of 2008, whicheroded the public’s trust – and engenderednew rules to prevent a repeat – has strippedthe Wall Street banks of their role in allocat-ingcapital intheeconomy.

In today’s post-crisis world, it is the greatinvestors and hedge funds that haveemerged as the kingmakers in the capitalmarkets. Their hot money means theyhave a growing role in shaping not justthe financial markets, but the economy,society,politicsandculture.

Night has just fallen at theBellagio hotel pool andI’m sipping a strawberrymartini alongside “MrBlack Swan”, NassimNicholas Taleb. As if thatwasn’t surreal enough, aharlequin on a pogo

stick comes bouncing through the crowd ofcocktailwaitressesandchinos-cladmen.

Most don’t see the springing interloper;their eyes are fixed on a platform where ahalf-naked violinist in high heels and angelwings is scratching out a tune between twofire-breathingacrobats.

I have landed in Las Vegas for a three-dayhedge fund extravaganza of pool parties,rockconcertsandinvestment ideasbutnowit looks as if my mission has taken an indul-gentturnfortheworse.

The brief was a simple one; to find thesecret tomakingmoneyfromthebest inves-tors intheworld.Americaisalandthatcele-brates capitalism. Money, and the men andwomenwhomakelotsofit,areidolised.Andthose men and women are also shadowedand analysed so that others can try to cap-turewhatthey’vemanagedtoachieve.

It’s a nation built by titanic captains ofindustry. Rockefeller, Carnegie, Ford andJobs had the vision to build businessempires as technology changed the world.But I wasn’t after the builders and creators.My quest was about the investors and trad-ers: those who have accumulated vast for-tunesbymovingcapitalaroundandmakingprofitsasitsvaluechanged.

For more than a century, the lubricant of

Top investors andhedge funds arethe new kingsof the markets,drawing pilgrimsdetermined towin riches forthemselves.PHOTOS: GETTY,BLOOMBERG

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somethingthatcanbeperfectlyreplicated.“Ifyouaregoingtodothingslikeeveryone

else, you are going to perform like everyoneelse,”shesays.

She describes a private talk given to agroup of fund managers by Todd Combs –oneofthetwomortalsanointedbyBuffett tomanage Berkshire’s multibillion-dollarstockportfolio.“Iwon’tgiveoutanysecrets,”Siebels says. “He was looking at stocks thatwe all know ... but he was looking at themdifferently. He was using different valuemetrics and things of that nature. If theylookedatstocksinthesamewayaseveryoneelse, theywouldn’t findanything.”

The concept of buying undervalued com-panies – and then profiting – will resonatewith amateur investors. But the ability toassignvaluetobusinessesinthefirstplaceisaskill thatfewpossess.

Omaha has turnedmanyinvestors, includ-ing Australian pilgrims, into successfulones. But as the circus rolls out of town, it istimeformetofollowthemoneybacktoNewYork, where the city’s warring princes arejostling to succeed Buffett as the world’sgreatest investor.

The magnificent Avery Hall in the Lin-colnCentre,withitsgrandhalls,squaresandstaircases, on the Upper West Side of Man-hattan, is the destination. Once a year, on aMay afternoon, the city’s philharmonicorchestra vacates to be replaced by the

brashestofhedgefundmanagers.These high-profile investors front the

vast,2600-seaterhalltopitchtheirbesttradeideas, and all in the name of charity. This isthe Sohn Investment Conference, ahigh octane, market-moving showcase formastertraders.

Before the presentations get under way,Evan Sohn gathers the press together tospeak about his kid brother, Ira, who died ofcancer as he was beginning his career onWall Street. Ira wasn’t particularly talentedbut he was a “mensch”, and so his friendshavekepthislegacyalivebyputtingtogetheran investment conference that has becomeoneofthemostprestigiousgigsaround.

For the hedge fund industry, Sohn ishighly anticipated and, for $US5000 a ticket,the audience wants a show. The city’s finan-cial media have their twitchy fingers on thetweet trigger, ready to broadcast every stocktip – and to move markets towards the pre-senter’s position. The result is investing fire-works. Jeff Gundlach, the eccentric west-coast bond investor, is one of the star acts.When his art collection was stolen in late2012, Gundlach helped the FBI find thethieves by suggesting they track Googlesearchesoftheartists.HisSohnpitch,whichincludes intermittent homages to ’50s popartist Jim Flora, dismisses the widely heldview that the US housing market is on thepath to recovery. Americans, he argues, areContinued next page

Superstar investorWarren Buffett’sBerkshireHathaway annualmeetings, top, havegrown from small,cult gatherings tomass media events.Jonathan Shapiro,above, on his quest.

ernance and their performance with trade-markwit.Bythetimeit’sfinished,morethanfour hours later, the essence of BerkshireHathaway’ssuccesshasemerged.

Buffett and Munger have the ability tofind businesses that make money and theyknow how to direct that cash within theirown vast empire of businesses, from candymakerstorailroadoperators.

They are pulling the strings in their owncarefullyassembledeconomy.

Why do people travel fromaround the world just to heartwo octogenarians pontificatefor four hours on intrinsic

valueandcorporategovernance?One shareholder says it best: “It’s like

going to church. You know what the mes-sage is going to be, but you still need to hearitregularly.”

Themessageof“valueinvesting”isahardone to define. Generally, it describes buyingsomething for less than it’s worth and thenprofitingasthemarketrealises its truevalue–or“buying$1for50¢”.Buffett learnthowtofindundervaluedcompaniesfromthefatherof value investing, British-born BenjaminGraham (1894-1976). Thousands have sincetriedtoemulatebothmen.

In Omaha, a cottage industry of confer-encesandseminarshassprouteduptocapi-taliseontheinfluxofinvestmententhusiastsahead of the AGM. There’s a sense that theBuffett pilgrims consider themselves to be a“chosenpeople”–theyhavegraspedthesim-ple philosophy of value investing that willleadthemontoapathtoprosperity.

Coulditbethateasy?“I applaud everyone for coming here and

studying ‘The Genius of Warren Buffett’,”says Jane Siebels, founder of Bahamas-based hedge fund Green Cay. “But the thingyou need to do with the great investors is fig-ure out their essence – and then do thingsyourownway.”

Siebels grew up not far from Buffettin neighbouring state, Iowa. Her ruralupbringing meant she could fly a planebefore she could drive a car. She found her-self managing money alongside two of thegreatest investors of all time – Sir John Tem-pleton and Julian Robertson. If she has anyadvice, it would be that investing is not

It’s like going to church. You knowwhat the message is going to be, butyou still need to hear it regularly.

All these successful investors have variedqualities but all are ultimately admired fortheir investment returns. And what are thequalities that make them great investors?Well, ifyouask,theymightjusttellyou.

“The great thing about this business iseveryone is trying to help you,” Seth Klar-man, founder of the $US15 billion ($16bil-lion)Boston-basedhedgefund,Baupost,toldan audience of students in New Yorklastyear.

“WarrenBuffetttellsyouhowtoinvest;hedoesitgenerously.”

Klarman is considered one of the greatshimself, a wonkier, more reclusive versionofWarrenBuffett.Withhiswordsringinginmy head, I set off across the United States tohear from as many of the country’s greatinvestors as my travel budget and relativelyprivilegedaccesswillallow.

The journey begins right in the heart ofAmerica, inOmaha,Nebraska.

The town may be in the middle of a greatprairiebutitswealthisvisible.Sleek,modestofficetowersmakeupthesmallcentralbusi-ness district although the second tallest, the“Woodmen of the World” building, is still areminder that, while this may be a moderntown,it’sanagrarianone.

Omaha has its charm but, were it not forCollege World Series baseball, a catchy songfrom Counting Crows and Warren Buffett, itwould share the obscurity of nearby townssuchasLincolnandDesMoines.

Buffett’swealthhasgrowntoastaggering$US65billionthroughthepowerofthecom-pounding returns he has generated forshareholdersofBerkshireHathaway.

The Buffett brand transcends investmentcircles because, as well as his enormousriches, there’shis folksywitandhumblelife-style. At a time when Americans are grow-ing increasingly resentful towards thewealthiest “one per cent ”, the man who rep-resents the smallest fraction is cherished bymostasawholesomesymboloftheultimateAmericandream.

Over 49 years, Berkshire Hathaway’sannual general meeting has grown from acorporate formality, to a cult-like gatheringof 1500 at the city’s Orpheum Theatre, to amajorinternationaltouristattraction.

Today,40,000shareholders lineupatthecrackofdawn.Themedia–arrivingfromTelAviv, Tokyo and everywhere in between –are seated high up in the skybox with a viewof the entire arena. That makes for a greatvantage to observe the running of the bulls:middle-aged men holding their glasses ontheirnosesastheychargeforthebestseats.

The show begins as it always does with ashareholder video, a plea from Buffett for itnot to be recorded and a collection of skits.Last year, Buffett sold peanut brittle to Wal-ter White of Breaking Bad, This year heangles for a major role in the Entouragemovie. After that come the questions andanswers.BuffettandMungerareassharpasever, deflecting the most prickly about gov-

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falling out of lovewith homeownershipandfor that reason it is time to bet againsthome-builders.

Activist Bill Ackman appears, to stick upforhedgefunds,andFortress’smacrotraderMike Novogratz, a former army helicopterpilot who campaigned to restore wrestlingtotheOlympics, tells investorstobuyBrazil.

The Sohn Conference also lures out theonce brash but now reclusive southerner,Paul Tudor Jones. He’s another cult hero,partly for his starring role in an outrageous1980s TV documentary, Trader, that cap-tured him hysterically screaming ordersdown a clunky telephone and living it up onthe ski-slopes of the Swiss Alps. Copies arerare; Tudor Jones apparently employed asquad of lawyers to try to buy up or shutdownanythatmightsurfaceontheinternet.

This is an older, wiser Tudor Jonesthough, who laments, in his distinct drawl,how depressing a typical week in his life isnow, in a time of “low volatility”. When themarket isn’t moving, there are few ways fortraders to make money, especially whenthey’repayingandplayingforthebigmove.

The show-stealer at Sohn is the closingact, David Einhorn, who has the audiencerolling in the long wide aisles. His target isthe spruiky and hyperactive Jonathan Bush,chief executive of Athena Health – capturedin a video montage reciting every imagina-ble buzz-word to sell his stock. By the timethe crowd gather in the early evening sun-shine for cocktails and jazz, Athena’s stockhastankedmorethan10percent.

Thisis investingasaperformingart.

Afewdayslater,afarmorehumblegather-ingisputonbytheNewYorkSocietyofSecu-rity Analysts. The young student organisersays he made the event in honour of the120th birthday of Benjamin Graham to getsomebignamesalong.Ithasworked.

There may be only about 60 people in theclassroomhighupinamid-townskyscraperbut the speakers are impressive. Headliningis Howard Marks, the billionaire founder ofLos Angeles-based distressed debt fund,OaktreeCapital.

Marks is one of the pioneers of distresseddebt investing. He has lately become knownfor his truisms on the art of investing. Hismessage this drizzly Manhattan morning iswe should think more deeply about what is“normal” – a concept often shaped by ourexperiencesandthoseofourparents.

Marks’s parents lived through the GreatDepression so he grew up with catch-phrases such as “eggs in one basket” and“savingforarainyday”.Hetellshisaudience,“The young investors of today don’t have

From previous page

towardstheactivistfundsdeliveringontheirpromises: to shake out returns from busi-nesses that are either mismanaged or toopatientforthemarkets’ liking.

Activists are the new black in thehedge fund world. But fashionchanges with the weather andmarket conditions. Where does

onegotoavoidthedistortionofstyle?Vegas, baby, and the Bellagio, the biggest,

boldest and tackiest hotel on the strip.That’s the venue for the three-day Sky-BridgeAlternativesConference,orSALT.It’san ostentatious gathering of hedge fundbrethren peppered with politicians andA-grade celebrities. For $US7000 a ticket,this is the opportunity for mere mortals tomingle with these masters of the universe intheirnaturalhabitat: thehouseofrisk.

TheringmasteroftheSALTconferenceisSkyBridge’s ubiquitous founder Anthony“The Mooch” Scaramucci, a salesmanextraordinaire with a Harvard law degreeandanunfettereddesiretobestinkingrich.

Forthis,TheMoochassemblesAmerica’sbiggest names in sport and entertainment –all of whom speak off the record. Basketballlegend Magic Johnson talks about his sport-ing and business instincts over lunch,while director Francis Ford Coppola showshowmuchskilfulnegotiationittooktomakehis films according to his vision. Oscar win-nerKevinSpacey, leadinHouseofCards,dis-s e c t s h o w f l u i d p o w e r a n dinfluence has become in politics, financeandevenentertainment.

Thegatheringseemstobeacelebrationofpower and wealth. So it is striking to learnwhat the departing generation of privateequity tycoons are actually doing withtheir billions. David Rubenstein, the 65-year-old founder of private equity firm Car-lyle Group finally realised harnessing thepower of leverage and carried interest to flipbusinesses doesn’t make his mother proud.Hehasbecomeaphilanthropist.

“My mother never once called me when Iwas building Carlyle; now, when I am givingaway money, she’s calling me all thetime. Maybe the mother test is the best one,”hesays.

Politicians past and present are sprinkledthroughout the agenda. Karl Rove, the mas-termindbehindGeorgeW.Bush’scampaignfor the White House joins James Carville, anadviser to Bill Clinton, on a panel. FormerBritish prime minister Tony Blair and ex-USArmy General David Petraeus, who are nowembracing the lucrative speaking circuit,makeappearances.

Finance’sbrightestmindshavejettedinto

this. Most [of their] parents have livedthrough eerily optimistic times ... investorshavemadeatonofmoney.”

The comments reflect the thoughts oftemperamental bond king Bill Gross. Grossruns PIMCO, a multitrillion-dollar bondfund but his web posts – dubbed “Insights” –cover all sorts of issues. In his April 2013note, “A Man in the Mirror”, he wonderedwhether he or other great investors of hisgeneration were really that good ... or hadthey been helped by a 40-year “epoch” ofcreditexpansion,wherethosewhotookrisk– but were protected by the advantageoustimes–rosetothetop.

“The problem with the Buffetts ... theGranthams, the Marks ... and the Grosses oftheworldisthatthey’ll likelyneverfindout,”wroteGross.“Epochscanandlikelywillout-last them. But then one never knows whattimehasinstoreforeachofus... ”

Marks made his name from embracingthe asset class most shunned: junk bondsand the debt of companies in distress andfacingbankruptcy.

Distressed debt funds are sometimescalled “vulture funds” and, while Markscommands respect, distressed debt inves-tors, along with short sellers and corporateraiders, are still seen by some as pariahs,scavengersandmanipulators.

Therealityisoftentheopposite.Thesearemisunderstood catalysts of value. The dis-tressed debt funds can be financiers of lastresorttotroubledcompanies.Theshortsell-ers actually work like shadow regulatorsbecause they smoke out fraudulent compa-niesthatthey’vebetagainst.

Meanwhile, activist raiders, who targetpoorlyrunbusinesses,canendupenforcingbetter governance and improve returnstoshareholders.

Today, themodern-daycorporateraidersor activists are enjoying a golden age. A newgeneration – and some survivors from the“greed is good” 1980s – are shaking downcorporateboards,raidingcashboxes,break-ing up companies and firing CEOs as a wayto squeeze more juice out of a stock marketthatistearingaway.“Valueinvestorsonster-oids”ishowoneactivistdescribedit.

A compelling case for activist investing ismadebyPershingSquare’sPaulHilal,tellingthe story of the remarkable fight for Cana-dian Pacific, one of Canada’s oldest compa-nies. It began with a tip from disgruntledinvestors,turnedintoafierceandpubliccor-poratepowerstruggleandendedwithaneartripling of the stock price as the railroad’sprofitmarginswerelifted.

It doesn’t always end that well. Activismcan turn the investment process into opencombat between boards and shareholders,withincreasinglysophisticatedweapons.

But with cheap and easy money pushingevery stock or bond towards a high-watermark, the big pension funds are gravitating

The SohnInvestmentConference, aboveleft, is a high octaneshowcase formaster traders.Bill Ackman, aboveright, is one ofnew elite of theinvestment world.An original copy ofBenjamin Graham’s1949 The IntelligentInvestor, below, ondisplay at the NewYork Society ofSecurity Analystsconference.Graham was theinspiration forWarren Buffett.Below right, some ofthe scrum at theOracle’s annualshow in Omaha.PHOTOS: BLOOMBERGJONATHAN SHAPIRO

The road from Omaha

Lenny Kravitz belts out his hitsto an audience of men wearinglanyards and earplugs.

Vegas. One is Nassim Nicholas Taleb, theoutspokenauthorofTheBlackSwan–asem-inal work in finance literature that focuseson our inability to predict things. Another isLarrySummers, thedivisiveeconomistwhohasjustmissedoutonthemostpowerful jobin finance as chairman of the Federal

Reserve. Taleb barks and Summerschews and hisses in an ill-tem-

pered debate about whether gov-ernments were right to bail out the

banks – punishment and moral hazardversuscapitalandlivingwills.

It becomes clear that much of the actionat the SALT extravaganza is taking placebehindthescenes.Butblatantpoliticalover-tures show The Mooch is not hiding hisambitions.Heisnolongersimplyamediatorbetween retail investors and hedge funds,but a conduit of private hedge funds wealthandtheRepublicanPartycause.

ThefunctiononthesecondnightofSALTis titled “American Dream”. Nineties rockgod Lenny Kravitz belts out his greatest hitsto an audience of middle-aged men wearinglanyardsandearplugs.

Vegas is one hell of a party but someonehastopayforit.Myvisit toSinCityleavesmewith a better sense of the unholy alliancebetweenfinanceandpoliticsthanitdoestheartofinvesting.Asmyflighttakesoffintothedesertsky,IdarenotlookoutthewindowforfearImightturnintoapillarofsalt.

On my journey from Omaha to Vegas, Ihave seen the two faces of America’s invest-ment industry. Big, brash and loud on the one hand; sleepy, steady and patient on theother. The characters of the great investorscover the full spectrum – from the flashy tothefolksy.Theirsuccessisbasedonmergingtheir investment style with individual tem-peraments. The hyperactive trade every dayto constantly pick the pocket of the market.The patient out-stalk it. You can learn muchfromthegreats,buttheirDNAisdifferentsoduplicating them doesn’t work. If I am goingtobecomerich,Ihavetodoitonmyown.

My final stop is Greenwich, Connecticut,the leafy capital of the postmodern hedgefund.Thiswealthytown,anhour’strainridenorth of New York, is the optimal distancebetween where the action is and where per-spectivecanbesought.

Iheadtothefourth-floorofficesofAQR,a$US105 billion hedge fund that doubles for afinancial markets think-tank. There I am tomeet Cliff Asness, protégé of Eugene Fama,the Nobel Prize-winning economist whocameupwiththe“efficient-markethypothe-sis”. The principles of EMH are hardwiredinto the brains of every student who under-takesaformaleducationinfinance.

That is, that the market price reflects allknown information, therefore it’s not possi-ble to beat the market, because you cannotknowmorethanit.Quitbeforeyoustart.

Asness,acomic-bookfanwithalowtoler-ance of fools, showed otherwise. He con-fronted his mentor’s central tenet and usedhis findings to form AQR – a quantitativehedge fund which trades systems that havebeen proven to beat the market, systemsbased on the assumption the marketremains irrational. Investors continue tomake mistakes and the anomalies that AQRidentifiescanbeexploited.

InhisimpeccablyneatbutcosilycrowdedofficeoverlookingthegreenexpanseofCon-necticut, Asness explains,“People ask me,‘Are you worried the world has suddenlygotten rational?’ Over my career we’ve seentwo of the greatest bouts of irrationality ofthe last century. I don’t spend a lot of nightsawake worried that the world won’t makemistakes again.” The conversation turns toBuffett. Asness has publicly criticised Buf-fett’s view on taxes – Buffett thinks taxdoesn’t matter to investors – but he’s a greatadmirerofBuffett, theinvestor.

AQR produced a paper, Buffett’s Alpha,that attempted to quantify why the Oraclewas able to be such a successful investor.The key to his success isn’t so much hisinvestment process but his dogmatic devo-tion to his principles: “One of the biggesttraits is sticking with his process throughridiculously harrowing periods with no signofputtinghisfootonoroffthepedal.”

Buffett isn’t so much a super-humaninvestor as a man who has a super-humanadherencetohisprocess.

“He lost quite frequently but less oftenthan when he won,” Asness says. “And hedidn’t waver. It seems like a very easy roadmaptobecometherichestmanintheworld.Obviouslyit’snot.”

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