The world’s greatest investors: David Tepper

Tepper was born in New Jersey in 1957. He graduated from the University of Pittsburgh and did an MBA at Carnegie Mellon University (where the business school is now named after him) before working for a steel company that was undergoing financial problems. In 1985 he joined Goldman Sachs during the junk-bond boom. But despite making tens of millions in profits for Goldman, Tepper was repeatedly passed over for promotion. In 1992 he quit to set up Appaloosa, a hedge fund, with Goldman bond salesman Jack Walton.

What was his strategy?

Tepper is a contrarian value investor. For much of his career he has focused on buying emerging market and corporate debt that is trading at a big discount to face value. In cases where a default is likely he targets firms with large amounts of assets, in the hope that even if the company goes bankrupt, bond investors will end up getting more money back than the market anticipates. However, in recent years his investments have become more varied, with the fund taking large positions in the shares of companies that Tepper thinks are undervalued.

Did this work?

Between 1993 and 2013, Appaloosa produced gross annual returns of 36%. This worked out to 28% a year after fees, which meant that $1m invested when the fund began would be worth $149m two decades later. Tepper has been returning money to investors in the past few years, but the fund still manages $14bn in assets. He has amassed a personal fortune of $11bn.

What were his biggest successes?

In 1993 Tepper bought bonds in Algoma Steel, a company that had recently emerged from bankruptcy. The bonds were secured against hard assets, yet he was able to buy them for 20% of their face value. The trade tripled his money within a year. In 2009, during the financial crisis, he invested in bank shares and bonds after the US government announced that it would be recapitalising banks, rather than nationalising them or letting them fail. Some of his shares went up by 330% in a matter of months, netting his investors a profit of $1bn.

What lessons are there for investors?

Tepper believes that making profits is relatively straightforward provided you are prepared to do research and ignore the crowd. He also thinks that you need to be prepared to back your ideas with enough conviction, even if that means short-term losses. At the peak of the financial crisis he invested around 30% of the fund’s assets in banks and financial companies.