What does pulling teeth have to do with building a multi-billion-dollar hedge fund?
Apparently not much. While a college student, hedge fund honcho Leon Cooperman thought he was going to be a dentist until he enrolled in dental school at the University of Pennsylvania. Eight days later, he quit, giving up $1,500 in tuition to re-enroll at Hunter College, part of the City University of New York.
There he excelled in economics and finance and the rest, as they say, is history. Now 69, Cooperman runs Omega Advisors and is said by Forbes to be worth $2 billion. He got to hedge funds via a 24-year stint at Goldman Sachs, where he ran research and started the firm's asset management business.
Along the way, he developed some deeply held political beliefs. He sent President Obama a letter last November arguing that that the president's rhetoric was "polarizing" and his characterization of the wealthy tantamount to class warfare. Obama hasn't written back, Cooperman says.
We caught up with Cooperman to chat about striking out on his own, his thoughts on the election and financial regulation reform and why he plans to work into his 70s.
JS: Your father was a plumber. Growing up, could you have envisioned becoming a hedge fund manager?
LC: I had no idea whatsoever. I was the first generation born American in my family. I'm the first generation to have gone to college. I had no grand plan, really. I went to public school and high school in South Bronx and went to City University of New York, where I met my wife of 47 years. We met in our sophomore year French class.
Leon Cooperman tells FINS reporter Julie Steinberg about his decision to give away his wealth.
JS: You originally planned to be a dentist. What happened?
LC: When I was in college, they had a program where if you completed your major and minor in three years, you could count your first year of dental or medical school as your fourth year in college. So I worked very hard in summer of 1963 so I could start dental school in the fall.
I finished off my major and enrolled in University of Pennsylvania's dental school in August of 1963. After eight days, I was wondering whether I was pushing myself in a direction that wasn't really my true calling. I went to the dean of the dental school to explain I wanted to finish my fourth year of college and make a decision a year later.
He put me on a guilt trip and explained I deprived the 101st applicant of a dental school application. I also lost $1,500 in tuition. The only person who understood was the dean of Hunter College [a constituent school of City University of New York] in the Bronx. I told him I wanted to re-matriculate.
I had nothing but electives available so I took 10 courses in economics my senior year and I got 10 As. So even though I majored in chemistry and minored in math and physics, I graduated with honors in economics. That crystallized my interest in this field.
I worked for Xerox for a year or so, then went to Columbia Business School, which opened the door to Goldman Sachs.
JS: How did you get the job at Goldman?
LC: I was a poor kid and got kind of lucky. I had 16 job offers when I graduated from Columbia. I was an attractive package because I had straight As in finance. I also had a six-month old child.
I had a job offer from Bob Danforth [at Goldman] for $13,000. Because I had been besieged with job offers, several that would pay me more than Goldman, I was dragging my feet. Bob called me up and asked "Is there anything we can say to get you here?" I said, "Bob, if I work hard can I make $25,000 a year in five years? He said "if you work hard, keep your nose clean, I think you can do it."
JS: What was your time at Goldman like?
LC: I spent over 24 years there. I loved pretty much every minute. I would still be there if, and I say this with a big smile, the firm were slightly more progressive. I joined as analyst in investment research. In 1972 I was made co-director of research and in 1976 was named partner in charge of research.
Shortly after, I said I think we're making a mistake not being in asset management. Gus Levy had a notion that brokerage should be a brokerage, you shouldn't compete with your customers. But the world was changing and pretty much everyone was in the business. The straw that broke camel's back was when Salomon Brothers announced Salomon Brothers Asset Management. The firm came to me and said, "We made a mistake, we should have gone into the business earlier, are you prepared to leave research and start this business for us?"
JS: Why did you leave in 1991?
LC: Asset management was beginning of my exit from the firm. It was very clear we had somewhat different interests. The firm wanted to build a big business of scale. I wanted to build an investment record. So I wasn't really too mindful of [the amount of] assets under management; I was mindful of investment returns being generated.
After a couple of years of doing it, it became clear our interests didn't align completely. I wanted to start a hedge fund within the asset management business. I proposed raising a fund and they were very reluctant to do it because they had this vision that if we short investment banking clients at the firm, the clients would find out and be very unhappy.
They asked that I not do it, that I go on the executive committee and build the business as a business manager, not as a money manager. But my heart was in money management. I retired from the firm November 30, 1991. And I started Omega Advisors December 1, 1991.
I'm a little bit of a workaholic. It's a very competitive business. There are roughly 10,000 hedge funds managing money. You need to be committed to the totality of the business.
JS: It sounds like your achievements moved you ahead at Goldman. Did you have sponsors or mentors?
LC: I watched people carefully. John Whitehead and Jon Weinberg were great leaders. Gus Levy was a legendary figure. You learned through osmosis. You absorbed things. It was a highly ethical firm and extremely charitable. So you watched and developed their value systems.
JS: Tell me about the people who work at your company.
LC: We have 35 employees in total. Eight analysts cover about 1,000 companies, looking for the best ones to invest in. Four people in the fixed income group, a couple people on the trading desk, a couple people in the macro area. Also two in-house attorneys. I'd never thought I'd say that but the business has become so complex.
JS: How does someone impress you?
LC: I have a very old-fashioned view. To be successful, the business has to be all consuming. It's a vocation, the way I make my living. It's an avocation, I enjoy investing, I enjoy finding something that someone else doesn't see. It's a means of supplementing my income. All I have to invest is capital.
I look for similar crazies who enjoy what they're doing. As Warren Buffett says, tap dance to work and the money will take care of itself. Generally we're organized along economic sector lines. We have financial services people, health care, etc. There are probably eight or nine of us doing research.
JS: Do you get hundreds of job applications?
LC: We get a lot. It's a sad thing to see some very qualified young women and men looking for positions. People from Harvard, Brown.
Our hiring right now is tied mainly to replacements. Our growth hiring is very limited. Maybe one person here or there sort of thing.
We have a lot of people interested in us. We need to size the business to the economic opportunities that exist. The last thing you want to be is so overstaffed that if you're going through a difficult economic environment, everyone would be unhappy.
JS: What is Omega's approach to generating returns?
LC: We try to make money for our investors in five ways. The first way is observe that stocks are high risk financial assets, short term bonds and cash are low risk financial assets. We spend a great deal of time trying to determine whether the stock market is undervalued or overvalued. That determines our exposure to risk assets. If we're optimistic and think the market is going up, we want to be in equities. If we're defensive and think the market is going down, we want to be in cash and bonds.
The second way is asset allocation. We'll look at stocks vs. bonds, high yield bonds vs industrial bonds. We're constantly looking for the straw hat in the winter. People aren't buying straw hats in the winter; they tend to be on sale. We're looking for things that are mispriced, where opportunity for achieving excess returns exists.
Third, our bread and butter business is looking for undervalued stocks on the long side. Our touchstone is the basic belief that most publicly trading companies have two values. The so-called auction market value, or the price you and I pay for one share, and the private market value, or the price that a strategic investor would pay to buy the entire business. We look for companies that are selling discounts in the public market to what we perceive to be private market value where we identify catalyst for change. At any point in time, maybe 70% of our funds are invested in undervalued equities.
The fourth way, which hasn't been particularly productive, is overvalued stocks on the short side. It takes more of a detective mentality than an investment mentality. Finally, we do a certain amount of macro investing, where we might be long or short bonds, long or short the dollar. In 2009 and 2010, we made a great deal of money in high yield. In 1993 we made an enormous amount of money in government bonds. In 1995, 1996, and 2007, we did very well in emerging market debt in Brazil and Turkey.
JS: You've been vocal in your criticism of President Obama, particularly in a letter you sent him last November. Have your views changed?
LC: I have no ill will toward the president. I thought he was going down the wrong path which is why I was motivated to write [to him]. If the president simply said, "we're in difficult economic times and all of us have to do more, particularly those who can afford to do more," I would completely agree.
Leon Cooperman tells FINS reporter Julie Steinberg about his decision to support Mitt Romney for president.
But to villainize wealthy people and villainize the American dream? I embody the American dream. I started with nothing and now people allege I'm worth a great deal of money. I did it through hard work and a great deal of luck. That should be praised, that should be admired. I don't think there's anything to be gained from creating this environment of class warfare.
The whole budget ceiling debate was debilitating and unnecessary. After it was done, rather than being Lyndon Johnsonesque and bringing people together and praising all the parties for their conciliatory actions, he attacked wealthy people, the energy industry and the private aviation industry. One of the major exports of this country is aviation. Warren Buffett has an airplane called "The Indispensable" for what it does to enhance his productivity. If someone can afford to buy an airplane, what's wrong with that? Planes are made largely by union people, which are Obama's constituency.
This dialogue that smacks of class warfare really turns me off.
JS: So you're supporting Romney?
I am. I believe this election is very crucial. We have to decide whether we want to remain a capitalist nation or go down a socialist path, which the president has been taking us down. The old model is preferable.
JS: How much have you given Romney?
LC: $50,000. I'm not motivated by politics and this is by far the largest contribution I ever made and it underscores my view of the importance of the upcoming election. I think the president has been taking us down the wrong path and I think Gov. Romney advocates a view of the world that resonates more with me.
JS: Did you hear back from Obama to your letter?
I've heard from everyone around the world except the president. This divided government isn't working, They're not getting anything done. Perhaps if we had a landslide with a mandate we could get something done. The people who can afford to should pay most. My first priority is the government getting more efficient.
We need leadership in the country and we're not getting it. We have to make decisions. We can't continue to operate with a divided government.
JS: Over the past few years hedge funds have come under a lot more scrutiny. How do you think that affects the industry?
LC: It's made it more difficult for start-ups to survive, but the industry has been heavily regulated industry for some time. Sometimes the press makes it sound like the hedge funds are a bunch of unregulated cowboys. I'm registered with the Securities and Exchange Commission. They have the right to come inspect my books.
JS: What are your thoughts on the Volcker rule?
LC: I'm very negative on Dodd Frank and the Volcker rule. The great strengths of Goldman was diversified profit centers. When one business was weak, another was strong. If you take a business that historically has been a profitable business for the firm and force them out, you're weakening that enterprise.
JS: Many proprietary traders are leaving banks and starting their own funds. Are they going to last?
LC: Everyone knows how to swing a golf club, but some do it better than others. Money goes where it is treated best. So if they produce acceptable returns and do it with the proper amount of leverage, they'll grow and prosper.
JS: You've said that high frequency trading should be banned.
LC: I don't see the value that it creates. All of this came into being as a result of the elimination of the uptick rule. You see a lot of crazy stuff. I had lunch with the head of the New York Stock Exchange and he alleged 70% of trading on the NYSE had nothing to do with fundamental investing. He said it had to do with slicing and dicing of exchange traded funds and high frequency traders.
They go home at night flat and by definition come in the morning flat. Their average holding period is a couple minutes. All of this liquidity isn't quality liquidity. It's scaring away the investor and creating a gambling type environment in the stock market. That is detrimental to the cost of capital to American business. I could be wrong and I'm happy to be explained to why I'm wrong, but I would curtail high frequency trading and reinstate the uptick rule.
JS: You're 69 years old and you maintain a pretty heavy workload. How long do you think you'll continue?
LC: When I started Omega, people said, "You're a comfortable guy financially, why are you doing this?" I said I'm going to keep doing it as long as three conditions exist: I'm healthy, I feel good, I've got energy.
No. 2 is I deliver acceptable performance. I'd like to be in the top quartile of performance. If I'm not going to do well I don't want to embarrass myself in public.
No. 3 is I enjoy the business.
There will come a time when I've got to cash in. Kenny Rogers said you need to know when to hold them and when to fold them. Hopefully I'll have the wisdom to know when to fold them. I don't want to die in the saddle.
I have no plans to retire. I'm hoping in my 70s that I come back in a slightly different role and will continue to do a good job for clients.
JS: Do you have any final advice?
LC: I get to the office at 6:45 every morning. I said to my wife, Monday through Thursday is all business, the weekend starts Friday at 4 p.m. We date on weekends. My wife has her career, she works with learning disabled, neurologically-impaired children. She doesn't want to retire. We're both purposefully engaged and it works for both of us.
There are roughly speaking 10,000 mutual funds that are happy to manage your funds for 1% or less. And roughly 10,000 hedge funds that have the chutzpah to ask for 2 and 20. If clients are going to pay 2 and 20, they have a right to expect more. You're always on the balls of your feet.
Don't be threatened by strong people. Surround yourself by the very best people out there, properly incentivize them and benefit from their knowledge.
Write to Julie Steinberg at firstname.lastname@example.org