Mastering Concentrated Investing: Insights from Harris Kupperman

Harris Kupperman, founder of Praetorian Capital Management, recently shared his unique approach to concentrated value investing on the We Study Billionaires podcast. His strategy focuses on absolute returns, finding asymmetric opportunities, and capitalizing on market inefficiencies. Here are some key insights from the interview:

The Power of Concentration

Kupperman's investment philosophy centers around making concentrated bets on high-conviction ideas. He explains:

"When you look at concentration, the first thing and this is the most important - is what's your downside? If you're looking at a situation where there's almost no downside, I mean like everything has downside, you know stuff happens, you know exogenous events happen you can't predict, but when you don't think there's a lot of downside, you think there's a lot of upside, well then you put it on and you size it up."

He aims to find situations with limited downside risk but significant upside potential. This allows him to take larger positions with confidence.

Balancing Event-Driven and Core Positions

Kupperman's portfolio consists of two main components:

1. Event-driven trades: These are shorter-term opportunities based on corporate events like spinoffs, privatizations, and restructurings. They provide consistent cash flow and help fund longer-term positions.

2. Core positions: These are longer-term, high-conviction bets on macro inflections or undervalued assets.

He explains how this approach provides flexibility:

"Event driven means a lot of things to me. We're tracking about 25 event-driven sort of corporate events. These are like spinoffs, privatizations, demutualizations, you know restructurings, and you know CEO changes. We're tracking about 25 of these things."

"They tend to give you really interesting setups where you know something's going to happen, you know roughly the timeline of the thing happening, and there's usually a probabilistic sort of trading opportunity around those sort of events."

Focus on Absolute Returns

Unlike many funds that focus on relative performance, Kupperman prioritizes absolute returns. He explains:

"I approach this with a very different approach. I say look, this is my PA (personal account). I'm going to run it like my PA, and if anyone wants to come along, they can pay me a fee and they get exposure like it is my PA."

This mindset allows him to pursue the best opportunities without worrying about tracking an index or smoothing returns.

Finding Opportunities in Overlooked Areas

Kupperman often finds value in areas of the market that others avoid:

"ESG is a weird thing because for the history of investing, and it goes back thousands of years, people were lending money to guys who own a ship and they were going to move a cargo from one place to another. This has been going on forever. And for the first time ever in the history of society, a bunch of people decided they didn't really want to make money - they were going to try to make the weather better."

He capitalized on this trend by buying undervalued energy assets that others were selling due to ESG concerns.

The Power of Patience and Conviction

Kupperman emphasizes the importance of patience and conviction in his investment approach:

"A lot of my success in this business is being really patient, being really stubborn, and I'm willing to suffer a lot. I find a lot of my friends, you know, something happens and stock's down 10% and they're like 'What's going on? What should I buy? Should I sell some?' I don't know. Like, stocks move, you know. Stuff happens."

He advises investors to avoid constantly tinkering with positions and instead let their thesis play out over time.

Embracing Volatility

Unlike many hedge funds that aim for smooth returns, Kupperman accepts and even embraces volatility:

"I know there's gonna be volatility. I know that about every 18 to 24 months we're going to have a down 30-35%. I tell my clients this. You know, when the market really gets hit hard, we might have a down 50. We had a down 50 during COVID. It's going to happen again."

He believes this approach allows him to capitalize on opportunities when others are panicking.

Focusing on Inflection Points

Kupperman looks for businesses on the verge of positive change:

"Wall Street wants to see that growth and they want to see it accelerating. Remember, rate of change. So you look at a bunch of industries and you say, 'What industry will next year have both revenue growth and earnings growth, and the rate of change is going to accelerate?'"

He believes these inflection points often lead to significant re-ratings in stock prices.

Conclusion

Harris Kupperman's approach to concentrated value investing offers valuable lessons for investors seeking to generate alpha in today's markets. By focusing on absolute returns, embracing volatility, and finding overlooked opportunities, he has developed a strategy that stands out from the crowd. While his methods may not be suitable for everyone, they provide food for thought for investors looking to refine their own approach to value investing.

Article created from: https://www.youtube.com/watch?v=nIY8f6jaqYo