Investing Lessons from Bill Browder
Bill Browder will be among the presenters at the CFA Institute European Investment Conference in Madrid on 25–26 November 2019.
Unless you’ve been living at the bottom of a well these past few years, you’re familiar with the remarkable story of Bill Browder, an American-born hedge fund manager whose adventures in the murky world of Russian business have been splashed across the front pages of the planet’s newspapers and whose voice is by now familiar to cable television watchers and podcast listeners.
To wit, his persecution at the hands of Russian “law enforcement” authorities and their murder of one of his attorneys, Sergei Magnitsky, eventually evolved into Browder’s sponsorship of the Magnitsky Act, a major flash point of US-Russian relations.
Part of Browder’s allure is that he is a rara avis, the grandson of the leader of the American Communist Party and son and nephew of three world-class mathematicians. As he relates in his memoir, Red Notice, he seethed with rebellion against his family’s ideological and intellectual expectations: “Toward the end of high school, it hit me. I would put on a suit and tie and become a capitalist. Nothing would piss my family off more than that.” The one thing Browder left out of his account is just where he learned to spin a story: Had he not succeeded at finance, he would easily have had a career as a novelist.
Browder has given the world a tour through both the miasma of corruption that is today’s Russia, and through the intricacies of the US legislative process. Not many, after all, have beaten both the Russian financial mafia and government at their own brutal games or almost single-handedly pushed a controversial piece of legislation through congress and a reluctant president. His remarkable personal voyage particularly commends itself to the financial analyst, for tucked inside his memoir is the story of how he pulled off one of the greatest investment coups of all time, and what that has to teach today’s practitioner.
Browder, it turns out, inadvertently followed in the footsteps of Benjamin Graham, John Templeton, and David Swensen. All three made their mark not in the best-lit chambers of the world’s securities markets, but rather in their undiscovered nooks. Graham didn’t have instant online access to the balance sheets of thousands of companies. In that era, such data could be a closely kept secret that not infrequently required getting on a train to a distant city and sweet talking an executive’s secretary. Perhaps his greatest triumph came when he found, before any other outside shareholder, Northern Pipe Line’s huge cash hoard and managed its deft disgorgement,
How many US investors do you imagine traveled to Japan before World War II looking for stock bargains? Templeton did, and the valuations he found popped his eyes out. Alas, in those days the Japanese authorities didn’t look kindly on Americans shopping for company shares, and he came back home empty-handed. Soon thereafter he noticed that small-cap companies — which back then simply meant any company selling for less than a dollar per share — sported attractive valuations. He decided to purchase 100 names, and since in those days such shares generally traded by appointment, this meant calling in some favors. Within four years, he had quadrupled his money. After the war, he returned to Japan. Foreigners were now allowed to invest, and he hoovered up bargains that yielded high returns for his funds’ shareholders.
Swensen similarly broke new ground in the alternatives arena, which he described in his nonpareil Pioneering Portfolio Management. Alas, all too many focused on the last two words in that title, not realizing that the most important word was the first. Most simply parroted Swensen’s alternative-rich asset allocation and failed to realize that the trick was getting to it ahead of anyone else.
In short, Graham, Templeton, and Swensen succeeded by arriving early at the banquet table, loading up on prime rib and lobster tail, and leaving the fried chicken and casseroles for those who followed.
Browder’s career did not have an auspicious start. His youthful rebellion prominently featured mediocre academic performance. He barely gained admission to the University of Colorado, a notorious party school where he caroused until one of his fraternity brothers was jailed for robbing a bank to support his cocaine addiction. At this point, he buckled down, upped his grades, and transferred to the University of Chicago.
Upon graduation, his CV still didn’t compare with those of the hordes of competitors from Harvard and Stanford. How to distinguish himself? As the grandson of Earl Browder, of course, with supposed expertise and contacts in the Wild East of newly ex-communist countries.
His first heartbreaking gig in Eastern Europe with the Boston Consulting Group involved a flailing Polish bus manufacturer that could only be saved by firing almost all its employees, which devastated the small town he had been stationed in. One morning at breakfast, he noticed his translator reading an article that prominently featured a table of numbers. Since he didn’t speak Polish, he asked his translator what the figures represented: the financials of newly privatizing companies. One entry, $160 million, turned out to be the profits of a particular company. The next, $80 million, was its market capitalization. Bingo: “Isn’t this exactly what I went to business school for?”
Browder rapidly cycled through positions with Maxwell Communications just in time for its scandal-ridden blowup to obliterate his résumé, and then with Salomon Brothers, whose recent Treasury Auction scandal made it the only place where he could find work. With each posting to the former Eastern Bloc, he stumbled across ridiculously priced assets: in one case, a Russian fishing company selling for 0.5% the value of its trawlers. What was more, the Russian voucher system put a large block of former state-owned enterprises on the market at similarly absurd prices. Not coincidentally, his success attracted the attention of Templeton, who arranged to meet the wunderkind.
Frustrated with bureaucratic delays at Salomon, with the backing of the legendary Edmond Safra, he established the Hermitage Fund. Browder soon found he had competition from Russia’s “oligarchs,” well-connected ex-communist officials who grew fabulously rich by bypassing the public voucher system to scoop up assets nearly for free. At this point, his account morphs into a geopolitical thriller that would do John le Carré or Robert Ludlum proud, and whose cliff-hanging financial ending I will not spoil, except to note that the Russian authorities, tired of his exposés of corrupt securities procedures and outright theft, finally expelled him in 2005.
After frantic legal and diplomatic efforts, it dawned on him that he wasn’t going back to Russia any time soon, and he lamented that “I couldn’t imagine returning to America to compete against thousands of people just like me.”
Exactly. Browder’s message to security analysts is stark: The truly outstanding practitioner is a solitary creature who works in a depopulated landscape, where they just might stumble across real opportunity.
For more from William J. Bernstein, check out his contributions to the Financial Analysts Journal.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.