Lunches with Legends with Leon Cooperman: Do Your Homework
In this episode of our Lunches with Legends series, Leon (Lee) Cooperman, Chairman and CEO of Omega Family Office, breaks down his journey to success and gives us some insight into the modern market’s shortfalls. The legendary investor is worried about the market’s long-term outlook but believes that investors can still choose winners if they do their homework.
Hard work, a lot of luck, and intuition are Lee’s keys to success, with intuition being the factor that Lee highlights. Intuition led him to leave dental school early – after only eight days. It was intuition that led him to accept a job at Goldman Sachs over 15 other (some better) job offers. At Goldman, Lee’s intuition and persistence pushed the company into the asset management space. Finally, intuition led him to launch Omega Advisors.
Lee is now in his eighth business cycle, and it’s like nothing he has seen before. In his eyes, the whole market structure has been destroyed. He believes this is partly due to the elimination of the “uptick rule.” The SEC (1) had established the uptick rule to prevent downward momentum when securities prices are already falling (by requiring short sales to be conducted at a higher price than a previous trade). Lee noted a rise in quantitative trading systems that focus only on price (rather than value) accompanying this rule’s abolition.
2020 has been the year of firsts, and that does not exclude the business cycle. This is the only cycle in history where there was a broad-scale shutdown of the economy, and in Lee’s eyes, we are heading down a dark road where we could end up in a rolling depression. He also warns that governments’ unprecedented bailouts and involvement today will lead to them having more say on the cycle’s upside. By keeping interest rates low for an extended period of time, governments’ monetary policy pushes investors out on the risk curve and forces them to take on more risk to make a return.
My view is simple; the economy has been on some form of life support since 2008. This should reduce PEs (price-to-earnings ratios), all things being equal. We never made it out of QE (quantitative easing), and now it’s been free money for a long time. No one seems to care about the massive debt created. I do. Future growth is likely to be less than historical, given the need to allocate more income to debt service.
It is not all doom and gloom for investors, however. Lee has been focusing on market sectors that have been generating modest returns. Not the FAANG nor the Robinhood markets (Lee believes these will end in tears). Lee focuses on everything else. He believes there are many securities out there that are reasonably priced; they might be outside the index and might not be clear beneficiaries of the world’s current condition, but they are out there.
The best part is that anyone willing to put in the work can gain insight. Lee looks for free cash flow, insider ownership, proper capital management, and resilience through cycles. If you do your homework, Lee Cooperman remains confident that Mr. Market will prove you right.
Head to our YouTube channel to hear the full recording!
- US Securities and Exchange Commission