Forbes: You work with alternative assets. What asset classes does that entail exactly?
John Jacquemin: We deal with derivatives, derivative indexes, real estate tax liens, real estate commodities, equities and debt. We primarily focus on two funds other than some specialized tax liens funds. There is a large team that works on tax lien portfolios; they buy tax liens around the country. You need a really good infrastructure to both buy them and service them. Mooring does take positions in tax liens; we have 20% of our assets in tax liens in Florida as an example. In commercial debt, we have a staff of asset managers who do due diligence on debt that a financial institution, usually a bank, is selling. The most common way is to sell them through a loan sale adviser. Anyone interested can sign a confidentiality agreement and get all the information about the loan, submit a bid and the high bid gets the loan. If we win, when we win, our officers step into the role of the bank. We become the loan officer with the person. We work with them to restructure the loan; it's a very hands-on kind of operation. It's not like trading debt or trading bonds where you have no contact with borrower or debtor.
Watch Steve Forbes Interview with John Jacquemin.
How did you determine when you were first forming your business to delve into all of these asset classes rather than specialize in a few?
It was all a very logical evolution. We started as a middle-market equipment leasing company in 1982 and we evolved into buying commercial loan portfolios in the 1980s, so in effect we were buying distressed debt. Our first portfolio purchase was in 1992. In 1997 we started the tax lien company. We found in protecting our collateral in these transactions, we realized that debtors weren't paying their real estate taxes and then the real estate owner could take the houses. That led us to looking at tax liens as part of the business. We're now one of the top three or four companies in the industry.
The equities portion evolved as a part of the firm where we decided to invest up to 20% of assets in equities related primarily to distressed debt, financial institutions, real estate companies, and mortgage companies. We invested in equities of companies that we were pretty educated about. The derivatives were another step in our evolution. Back in 2006, we thought that we were in such a crazy time in the financial markets and real estate markets, assets of all types were tremendously over-valued. We thought there would be serious ramifications and corrections on the downside. We have seen situations like this before. We recognized the late '80s, early '90s real estate bubbles. This time we thought we saw a bubble of a different kind that was about to burst. We started the Opportunity Fund then with the goal of profiting with credit spreads and real estate.
One thing that you have been able to do in this financial crisis is to short financials, which has proven to be pretty profitable. How did you determine that you were going to do this and how do you know when to get into and out of these positions?
We started that in late 2006 in the Opportunity Fund and in early 2007 in the Intrepid Fund. Financial institutions had such huge amounts of bad loans on their books that their credit losses would overwhelm their capital and they would be insolvent. We sold Washington Mutual in the $40s in 2006. We held that short for over a year and a half. We were totally right, that institution was insolvent and went down. We did the same thing with BankUnited. It closed two weeks ago, but it should have been closed a while ago.
With these kind of negative returns that happen sometimes, when do you pull the plug and say enough is enough?
We felt very sure about our roadmap in '07 and '08. Even though a lot of these stocks went against us, 20-30%, we stuck to our positions and added to it, because we were 98% certain we were right. Today it's different. When you throw $14 trillion to $15 trillion at commercial and real estate markets, it's hard to tell what would happen. Our short positions have been hurt by this tremendous rally over the past few months. We have closed out most of our shorts, but we kept some as a hedge. We lightened up those positions, but we still hold some, but they've given back a lot of their returns.
Do you think that the economy has gotten into recovery mode yet and if not when do you think we will begin to see a recovery?
We're not convinced that the economy will be so quick to recover. Ninety percent of the economists have been saying that in the third quarter we will have a recovery and the recession will be over. The excesses were so great that they're not going to be fixed that easily. However, we have smaller short positions because the stock market has spoken and many bank stocks have doubled, tripled and even quadrupled from their lows a few months ago. We have shorts in regional banks. Those are very vulnerable to commercial real estate loan losses. We have shorts in commercial REITS, because we think we haven't seen the worst of the correction in commercial real estate. We are not nearly as heavily weighted as we were.
Why do you think it will take so long for the economy to recover?
For one thing, everyone's waiting for the consumer to start spending again, because consumer spending makes up 70% of gross domestic product. We don't think consumers will start spending more, they're increasing their savings. There's been disappointment that retail sales haven't climbed and that isn't a surprise to us. The consumer is over indebted with the drop in housing and equity values … consumers ought to be saving and spending less. The level of consumer spending from 2007-2008 was unsustainable. We [will] never go back to that level of spending 100% of disposable income, and we shouldn't. It'll be a U-shaped, not a V-shaped recovery. We're likely to have a U with a long base.
The other factor we think is crucial to a recovery is the stabilization of the housing market. The government, Fed and Treasury have used massive intervention to fix that market, so that we have zero down payment mortgages, with a combination of tax credit. We still can't overcome overnight the over-supply of housing. That'll take another year and a half to get supply and demand in balance. Before that, it's death to prices. And that's critical to consumer's balance sheet no longer declining, net worth.
Generally, the economy will take at least another year to start recovering. I think that we may have reached a bottom but we scrape along the bottom for quite some time. So I think corporate profits remain weak for another year and that doesn't mean they'll drop more, but it also [means], if we're right, that they won't increase for a while. They're at a low level right now. Analysts think they will start coming up.
You have three daughters, one of which will be going off to college next year. Would you encourage them to go into finance after you've seen everything that you have in the past year or would you tell them to select another career path?
I would encourage them. I made them investors in our fund, they own a small piece of my piece. They get reports, they get quarterly reports and I sit down and go over them and I show them how their investments are doing. That's a bit of a little high level for high school students, and especially the grade school one. They have a fairly light interest in their world to get into finance, minus shopping and spending money. I would encourage them to take a few economics courses, even though I know the one who's going to college is more of a liberal arts student. My oldest daughter has never really been into math and science and I don't think she's really that interested in numbers, [and] an interest in numbers helps. I would want them to at least be knowledgeable because when I'm gone they need to do a family foundation.
As a parent, how have you taught your children about finance?
They've always gotten an allowance, half of which was designated for long-term savings. At some point, about five to six years ago, that half went into Mooring Capital Fund through my piece so that they could track how much they were putting in, how much they were making every quarter in investment returns. It's gotten to the point now where … the return is greater than the new contribution made each quarter. If you make good investments, the effect is dramatic overall. I want our employees to know that too, especially our young employees, to get into our matched 401(k).
What do you think of the credit card holder's bill of rights and what kind of impact could that have?
From what I've read, it sounds like it's a consumer-oriented bill and I don't know if it goes too far, but some of the things I've read make sense. Someone who's quoted as saying I've paid my bill on time every month, but because my credit score is bad, my interest went up from 14% to 39%, this bill would protect against that. That's healthy. We were short credit card stocks for quite a while.
Do you have any friends in the industry who have lost a job and do you anticipate that they'll be able to find a new position in the industry? Do you have any advice for them?
I know people at
The business will recover. Unless you were concentrated in the mortgage securitization business, which shouldn't recover to the extent that it was, but in terms of the finance, investment business, I think it's healthy that we have wrung out some of the excesses. We had 3,000 hedge funds close down, because we have 5,000 too many hedge funds. We probably still have too many hedge funds. We don't need that many hedge funds. They're beating each other over the head to find alpha. I would try to reinvent myself as a hedge fund manager if I'm out of work. Smart, financial people, as the economy recovers, there will be jobs.
Speaking of the number of hedge funds that have closed up shop recently, how does it feel to be one of the few still standing and what do you think can be attributed to that? Does any of it have to do with luck?
I don't think luck had much to do with our success. We were one of few funds that had positive returns in 2007, 2008. One of them had really stunning returns, it was the riskier fund, Intrepid. In effect, this month, the 10-year anniversary of Mooring Capital Fund and Mooring hasn't had a down year since it started. We did quite well in 2007, 2008. Other than Bernie Madoff's funds, and we know where that performance came from, we have very high returns.
We follow basically the same precepts that we always have. We look for situations in which the downside risk is much lower than upside potential. We stay disciplined. We buy assets and invest in assets when we think the valuation is very much in our favor. If we can't invest at those levels then we'll get liquid, we'll be in cash. I think the most important thing is to pay the right price for assets. Whether distressed commercial loans or anything. We stay disciplined. It was tough in 2007 and 2008 because we were not buying many new assets.
Our investors were overpaying tremendously to get these assets. We didn't change our approach, we stayed disciplined; those funds who are the buyer of those assets will take losses on those purchases. We've had a good sense from a macro standpoint of where many important factors stood. We have our roadmap; that roadmap started to develop in '05 and '06 when we were looking at all the excesses happening. We keep re-evaluating it on a regular basis to make sure that it's still accurate. Sometimes we feel certain about when it's taking us, sometimes we feel less certain. It helps us in choosing our level of risk and investments.
Regarding how to correctly value an asset and knowing if you've gotten your money's worth from an investment, how do you know? What can retail investors do to be sure that they're getting a good value?
Retail investors really can't invest in most of the assets that we invest in. Frankly, I think a retail investor should be using index funds and allocating percentages to various types of equities as well as fixed income funds. They should not be making major buy and sell decisions but should mostly buy and hold. It might create criticism for saying that, but for investors who buy and sell, they tend to do worse than if they had an index fund and held onto it. They tend to buy when everything is bullish and when equities and more fully priced. If you buy high and sell low, your performance is going to be less than mediocre. Obviously there are exceptions, astute investors who have insight into the industry they work in, or more astute than most people, by and large.
What is one of the best business books that you've read?
Good To Great, by Jim Collins, was a great book for someone who's running and operating a business. That book isn't really for an investor. There were some catchy phrases used in summing up some of the advice, but one of them was get the right people on the bus and drive the bus. In other words, if you don't hire the right people, you're not going to have a tremendously successful business. Another book I was impressed with from an investment standpoint is the one written by David Swensen, who manages the Yale endowment. That's an excellent one for any investors.
Referencing making sure that the right people are on the bus, how do you hire the right people?
You don't necessarily know if the new hire is going to work out unless they've been with you for several months. For our funds and our analysts, one thing that's worked out well is to hire summer MBA students because then you get to look each other over for 10 weeks and both sides pretty much know that we want to work together. That's a great tool for a company that hires MBAs. And we have one starting next month who was a summer intern with us last year. That's a great way.
