David Tepper’s tips on how to deal with big market corrections

Eminent value investor David Tepper says investors who keep their heads cool when others panic tend to do well, as growth is natural and optimism tends to get rewarded over time.

Tepper is one of the most followed and admired hedge fund managers of the past decade, and is often spoken of as one with the wisdom of Warren Buffett, analytical skills of Jim Rogers and trading sense of George Soros.

Tepper likes to invest in high yield bonds, distressed debt, and equities in the US and emerging markets. He is also the owner of the Carolina Panthers of National Football League (NFL) along with Charlotte FC in Major League Soccer (MLS).

Tepper is famous for making money in recoveries from big market corrections like the crash in emerging markets in 1997, the tech bubble burst in 2000-2002 and the Global Financial Crisis in 2008.

Tepper's investment journey
In 1985, he joined at Goldman Sachs as a credit analyst and within six months of his service, he was made the Head Trader. During his tenure of eight years at Goldman, he specially focused on bankruptcies and special market situations. Tepper is also known for having played a major role at Goldman after the market crash in 1987.

He launched his own fund, Appaloosa in 1993 with $57 million working capital ,out of which $7 million was his own money. Since then, he has seen impressive gains spanning decades.

Within the first 6 months, Appaloosa delivered 57% returns; the asset value of the fund grew to $300 million in 1994, and $20 billion by 2014.

New York Times named Tepper the top-earning hedge fund manager in 2009, and in 2011, he was awarded the Institutional Hedge Fund Firm of the year. Forbes pegged Tepper’s net worth stood at $13 billion in July 2020.

In 2018, Forbes listed him as No 3 among the highest earning hedge fund managers. He was referred to as the ‘golden god’ by an investor in the New Yorker magazine in 2010.

Big market corrections provide big opportunities
Tepper says big market corrections create big opportunities for investors and they need to spot those opportunities to become successful in investing.

He feels nobody is entirely clear why deep market corrections occur, but without them, many of the best performing long-term investors would have never achieved their spectacular returns.

Tepper provides some valuable tips and insights, which can help investors tide over uncertain investment climate during market corrections.

Spot best opportunities
Tepper says investors should always remain optimistic and be on the lookout for the best ideas. If one is able to spot the right opportunities, especially during market corrections, she can get very rich.

The investing legend advises investors to remain updated on all the market information and conduct thorough research before investing in a company to understand the best opportunities available.

“A lot of people have gotten rich with their best ideas. Do your best to stay updated on the market and do your research well to understand the best opportunity available. To become rich, it is important to spot the opportunity and make the best use of your investment idea,” he said in an interview.

Keep emotions in check
Tepper says when panic sets, the market tends to devalue stock values. It is important for investors to keep emotions separate from investments, as the former can get in the way of investors making rational decisions.

“Fearful environments affect the market. It is important to not mix emotions when it comes to investment and refrain from making emotional decisions about investments,” he said.

Diversify your portfolio
Tepper says it is important for investors to diversify their portfolios, as this can help them mitigate losses. He believes investing in only stocks is not enough, and it is best for investors to put their money across various other investment options like bonds, etc.

Tepper is famous for investing in distressed debt and converting it into equity ownership. He believes equity ownership can help gain certain rights with the investment and get the returns one desires.

Stay patient
Tepper believes patience plays a key role in investing success, as sometimes it can take longer than usual to spot good investment opportunities. He says no market approach works all the time, as the investment climate is not always the same.

There are times when investors should be aggressive and sometimes they should just sit and wait, says he. “The key is to wait. Sometimes the hardest thing to do is to do nothing. When it comes to investing, people usually think doing more than required will help get favourable returns. It is important to be an active investor, but be patient when it comes to investing in the market,” he says.

Tepper says investors should continuously replay their losses in their heads, as it is the only way they can learn from their mistakes.

Be enthusiastic
Tepper says in order to attain success in investing, it is very important for young investors to have the ambition and enthusiasm to achieve bigger things.

Giving his own example, Tepper says although he was satisfied with his position and job profile, he never stopped learning and opted for higher education and qualification.

“Ambition is not just about wanting more. It includes the action of bringing you closer to a realisation of your goal. First don’t be satisfied with mediocrity. Visualize your next level, and then continue to take positive action that draws you closer to your vision,” says he.

See setbacks as opportunities
Tepper believes investors shouldn’t get upset by setbacks during market corrections, as they pave the way for more learning and opportunities.

“Opportunity comes in strange, lumpy and, often non-linear, ways. Success rarely takes the form of a steady process similar to climbing a ladder, nor does failure operate in the other direction,” he says.

Do not panic
Tepper believes investors should back their portfolios, and not panic, if they have performed good research and sound analysis even if they lose money initially.

He feels in order for investors to have an edge over others, they need to be fearless as without an edge outperformance in investment is not possible.

“Some of our best positions were ones on which we initially lost money. An investor can be too early or too late and still win. Most people can’t put their fears aside. So they often sell at the worst possible time. This is sometimes called “performance chasing” or “the behavior gap. A very small number of people have ice in their veins when it comes to investing,” says he.

Wait for the right time to invest
Tepper believes there can be times when the investment environment might not be very favourable. During such times, investors should look to be defensive and not lose money.

“In times like this, the best thing you can do is preserve what you already have. Investing is a probabilistic activity. If you don’t have an investing thesis, which is the output of a sound investing process that is net present value positive, then don’t invest. It’s that simple,” he says.

Avoid herd mentality
Tepper says in order to outperform the market, investors must try to be contrarian and avoid the herd mentality.

“You must be right about that contrarian view often enough, so that the financial math works. But there is big risk and uncertainty in this approach. The good news is that because most people would rather fail conventionally than succeed unconventionally, assets can sometimes be mispriced,” he says.

Have the right balance of aggression and patience
Tepper says although patience is the key to achieving investment success, so is aggression when the time is right. Although many investors find the combination of being patient and yet sometimes aggressive odd, they eventually find out that it is the right approach.

“When bargains do appear, it is not only a rare event, but a fleeting event. If you snooze when a bargain appears, you lose. Fortune favors the person who is patient, brave, aggressive and swift to act when the time is right,” he says.

(Disclaimer: This article is based on some of David Tepper’s interviews.)