Whitney Tilson, co-manager of T2 Partners (along with Glenn Tongue), has seen the shine of the spotlight in the investing community as of late. On Tuesday, June 8th, with BP trading around $35/share, news came out that T2 Partners was “long BP”, at a time when the stock was down 41.7% and had lost over $80 billion from its market cap since April 20th, the day of the spill.
From the start of the first interview, Mr. Tilson made his argument for the investment short and sweet: “it’s just too cheap”. He goes on to explain that he does not think that BP will have to cut the dividend, because this is one of the most “widely held stocks in Britain”, and that “a dividend payer like this is held by widows and orphans.” He wonders, “Why would the British government, why would the U.S. government want to take $11 billion of cash out of British widows and orphans?” he asks. He states, in his mind, “That makes no sense”. As we found out less than a week later, BP had in fact cut their dividend, but that is beyond the concern of this article.
When later asked in the same interview what could shake T2 out of this position, Whitney’s response is one that throws me off. He says, “The long term danger here, the disaster scenario, and this is why it is a 4% position and not a 10-15% position, is the asbestos type of liability”.
From someone who has stated (in his 2006 Annual Letter) that one of his key investment principles is to not dilute “our best ideas with lesser ones”, I’m not sure what this comment is supposed to tell investors. From my perspective, he has either done the research and likes the long term prospects or he doesn’t. A 4% stake instead of a 15% stake is not a point of argument; it is a sign of fear. To me, that doesn’t sound like someone who is looking to preserve capital; I don’t know how much Mr. Tilson knows about BP or the oil business, but it sounds to me like he is happy with the small percentage chance of complete loss of capital, as long as he has his shot at the double on the upside. (Why this risk/reward balance concerns me will come up a little later)
The next day, Whitney was on CNBC again, and was again talking about the thesis and his thoughts behind the investment. He started by saying that he has continued buying shares, and has increased the position to 5% of their portfolio on the decline (BP shares fell another 15.8% on June 9th). This fact alone I completely agree with; for investors (not traders), adding to your position during pullbacks based purely on immaterial volatility is a tenet of your investment philosophy.
From there, however, Whitney loses me yet again. When asked the next question, he says, “by the way, we are not defending the company or the CEO. They have a terrible safety record, they botched the cleanup, the PR”, and goes on to talk about why none of this matters, because they can afford to clean it up and pay the fines.
Mind you, this is coming from an investor, who in his 2006 Annual Report to shareholders, outlined 12 investment principles “that govern both Tilson Funds”. Among them, number 2 reads, “We think about investing as the purchasing of companies, rather than the trading of stocks.” In my opinion this is the only way to invest, and agree with the both Mr. Tilson and Mr. Tongue 100%. But why would you want to purchase a company that you would not personally defend, nor its management? And if you agree that this company has a terrible PR and safety record, then what about this company attracts you to it is an owner?
This is much more Graham then Buffett, and as a self-proclaimed value investor, this might be Mr. Tilson’s view, but that seems questionable to me. I do not understand why they feel the need to step up and take a swing at BP when they can stand there all day and watch pitch after pitch come across the plate.
During that same interview, yet another response from Mr. Tilson caught my attention. At one point in the interview, he says “I’d say there’s a 10% chance that this thing could go to zero or very severe permanent impairment, even from here.” Again, on a pure risk/reward balance, that looks good on paper (if he believes the other 90% of the time this will double). But he is not buying this as an investment purely for his personal account; he is investing other people’s money, people who have trusted him to allocate capital as he said he would. This investment, in my opinion, (and based on what he himself said) directly contradicts what Whitney has promised investors in the past.
As listed in the 2006 Annual Report of T2 Partners, another one of the investment principles they follow (number 5) reads, “We focus first on trying to avoid losses, and only then think about potential gains.” Is there anyone that would like to try to persuade the SeekingAlpha community that Coca-Cola, PepsiCo, McDonald’s, Wal-Mart, or Nike will file for bankruptcy or see their stock fall to zero in the next 5 years? I would bet that most people wouldn’t put down a single penny if I offered 100-to-1 odds on any one of these companies filing Chapter 11 in the next 5 years. Yet even Mr. Tilson himself seems to be satisfied with the –potential 10% “severe permanent impairment” of his client’s money in exchange for the chance to catch an easy double if things get back to normal. To promise your investors one thing and to act in direct contradiction to that set principle is inappropriate as a fund manager in my opinion.
Just to be clear, none of this says a word about BP. I’m not sure what background knowledge Mr. Tilson has in the oil business or his understanding of the spill and the possible legal implications that may follow. I personally have no opinion on the company because it is currently outside of my circle of competence, and feel much more confident investing in other companies that I completely understand. To quote Warren Buffett, (ironically, a quote that Whitney Tilson added into his first annual letter to T2 investors) "I don't worry about what I don't know - I worry about being sure about what I do know." Whether or not he has followed this advice is something only he can decide.
Regardless, I question Mr. Tilson’s commitment to his listed principles when he now has 5% of his funds capital invested in a company with a comparatively high risk and a accepted potential for severe impairment to his investors’ capital.
Disclosure: Author is long PEP, no position in any other companies listed