The world’s greatest investors: Daniel Loeb

857-Loeb-634 — Activist investor Daniel Loeb

Daniel Loeb was born in Santa Monica, California, in December 1961. He gained a degree in economics from Columbia University, by which time he had been trading stocks for years. At one stage he made $120,000 before losing it all with a disastrous investment in a medical technology company whose respirators were responsible for several patient deaths. After a decade on Wall Street he set up his own hedge fund, Third Point Management, in 1995.

What is his strategy?

Loeb is known as an activist investor. He buys stakes in companies that he thinks could be better run and demands they make changes, hoping that the subsequent improvement in performance will boost the share price and enable him to sell at a profit. He is particularly well known for writing aggressive letters to company bosses and then leaking them to the press in the hope that the publicity will force them to take his advice. However, some of his investments follow a more conventional value approach of buying undervalued companies that already have good management teams.

Does this work?

Between the end of 1996 and 2016, Third Point Management has produced average returns of more than 16% a year compared with only 7.3% for the S&P 500. The assets under management have grown from $3.3m to $17.5bn. Loeb reckons he has made over $12bn for his investors over the years.

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What were his biggest successes?

Loeb bought 5% of beleaguered tech firm Yahoo in 2011. Having insisted on fresh thinking at the top, he then discovered that the new CEO, Scott Thompson, was exaggerating his credentials, forcing him to step down. Thompson's successor took Loeb's advice, selling its stake in the Chinese tech giant Alibaba, and using the cash to buy back its own shares. This caused its share price to double to $28 by 2013, enabling Loeb to make a $1bn profit on the deal.

What lessons are there for investors?

Loeb is not the only activist investor to reap outsized returns. The average investor is unlikely to able to persuade the companies they invest in to make changes, but buying shares in companies targeted by activists can be profitable. A recent study by Capital IQ of more than 1,200 activist campaigns found that if you had invested only in these firms, you would have beaten the market by an average of 8.2%. There are even several ETFs that automatically do this for you.