Editor’s note: This article was first published in March 2013 and looks back at the 2008–2010 crisis; Les Leopold’s job title and the hedge fund figures it cites date from then.
Les Leopold is executive director of the Labor Institute in New York. He recently carried out a piece of research that he set out in the book How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning Off America’s Wealth. It contains some figures that are curious and surprising, to say the least.
It’s often said that the most profitable investment is starting your own business, because according to various studies, a well-built and well-run business will give us a higher return than any investment we could make. According to Les Leopold, that isn’t true: in today’s world, the money is in the financial markets, although you have to know how to go about it and have the necessary knowledge, intelligence and cool head to grab it. Fortunately, we have good teachers. “Don’t waste your time inventing products or making things. That’s not where the money is. The money tends to be in things that produce nothing for the economy,” says Mr Leopold.
In 2009, David Tepper, head of the hedge fund Appaloosa, made $4 billion. That’s more than $1 million an hour. As incredible as that figure may seem, the following year it was beaten by John Paulson of Paulson & Co., who broke Tepper’s record with $5 billion in earnings.
Each of these firms made more than $20 billion. And they did it in the financial markets during the most chaotic years since the Great Depression of 1929. Another curious fact is that they made those sums with a workforce of fewer than 100 people, earning almost as much money per hour as companies like Apple, which has more than 30,000 employees in the United States and generates 700,000 indirect jobs.
These hedge funds create hardly any jobs or wealth for the economy, although they do generate money for their own portfolios and those of their clients. In other words, they don’t create wealth, they own it.
Would you start a business if you had the chance to make money this way?
According to Daniel A. Strachman, who has written several books about hedge funds, the people who work at these firms are simply brilliant, to the point that many people on Wall Street can’t understand why some entrepreneurs waste their time trying to create gadgets while sweating blood to get through all the red tape of starting a business, problems with employees, inspections and so on.
For Strachman, smart people don’t start businesses; they invest in other people’s businesses. It’s simpler, less work, you have more free time and you make more money.
These people, according to Strachman, can see markets and investing in a way the rest of us can’t even begin to imagine.
How do they take criticism from the public?
Since the recession arrived, the public has pointed at most Wall Street investors as if they were the devil, when the truth is that everyone would like to do and achieve what they do. They use tools that are within everyone’s reach, since today anyone can invest in the same investment products they do.
Of course, very few people are willing to make the effort needed to learn it. Many of today’s hedge fund managers come from humble families, but one day they decided to devote themselves to this universe of possibilities. Everyone would like to be a millionaire, but most people want to get there without effort, from the comfort of their sofa, and that way you get nowhere.
There are only two ways to achieve financial freedom: starting a business or investing. These people have chosen the second option. “Which option have the people pointing their fingers at us chosen?” asks the head of one of these funds.
What strategy did they follow to make so much money during the recession?
Tepper says that when the crisis was looming, they bet on the crisis even before Lehman Brothers collapsed, because it was already clear what was going to happen. Everyone knew what the subprimes would cause. When the moment came, with all investors in a state of tremendous panic, “we bet that the recession wouldn’t last as long as many analysts were predicting”.
A large part of their buying was in Bank of America and Citigroup, because Tepper understood that these banks weren’t going to be nationalised by the government, despite the fear some analysts were spreading. “You only had to analyse these companies’ solid fundamentals to know they wouldn’t fall, just like many other banks and credit companies. With these investments alone, we made almost $6 billion,” says Tepper.
With hindsight, Tepper’s risky bets, against the rest of the analysts, suggest that this man understands perfectly how capitalism works once a recession arrives: when a recession comes, you should never forget that big business and government are exactly the same thing. You can criticise the government’s protective measures towards the banks, or you can invest knowing that the government is going to protect them, and make money from it.
Tepper’s secret, besides exhaustive analysis, was that while everyone was fleeing these stocks, he had the guts to buy them very cheaply. Later Warren Buffett came in, and after him the rest of the investors. Everyone had the same information.
As we can see, some of Benjamin Graham’s commandments turn up again, although applied to pure speculation, which is also an art.
Further reading
- Warren Buffett’s 16 best investing tips
- Warren Buffett: you don’t need a high IQ to get rich
- 5 steps to building a dividend investing strategy
Featured image: Kidfly182, CC BY 4.0, via Wikimedia Commons.
