Ken Heebner: America's Hottest Investor

Ok, in theory I should not be posting about a fellow competitor since I want your money ;) but actually a lot of future investors who have emailed me have mentioned they also own CGM Focus so perhaps a paired trade of long CGM Focus/long Rising Tide Growth (short Kool Aid) will be a nice bedrock for the portfolio ;) Either way, I admire this guy for his focused strategy, going heavy into the names he believes in, and his passion for the work. He doesn't always get it right (flat with peers in 2006 and trailing in 2004), but he is usually 2 steps ahead of the pack. Much like myself, I've heard him say "I'll never retire" because this is just what he loves to do. (there goes my chance to take over CGM Funds once he hit the golf links) Certainly traits I like to share; frankly some of the quotes in the story could be direct links from the blog - a bit staggering. Fortune has a huge writeup so let's see what's going on in Heebner World.

• His flagship fund, CGM Focus (CGMFX), has already made a killing on energy and agriculture, and Heebner has no patience for the pet theories of this or any other analyst (or economist or strategist). "I want information, not opinions," Heebner will later tell me.
• Heebner is one of the few fund managers who routinely engages in short-selling.
• Heebner is multiple steps ahead of everyone these days. At an age when most of his contemporaries have either retired or given up the daily grind of running publicly traded funds, the 67-year-old Heebner is putting up the best numbers of an already exemplary 30-year career. He's Barry Bonds without the steroids. "He's a rock star - he's Bono," quips his Irish-born (and U2-loving) analyst Catherine Columb.
• Just how good has Heebner been? We may well be witnessing the most dazzling run of stock picking in mutual fund history. Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500.
• 2007 that will be remembered as Heebner's pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500.
• Launched in late 1997, Focus has had only one money-losing calendar year (2002). (this is even more impressive for someone like me who likes to manage risk)
• Heebner is a true contrarian, who says he's most confident as an investor "when everyone else thinks I'm nuts." He works long hours trying to identify emerging trends in the economy. When he finds a promising one, he'll go all in, making huge bets on the stocks poised to benefit. Asked how long it takes him to identify those stocks, Heebner answers, "About ten minutes. I've been at this a long time."

This is my favorite part of the story

• Heebner shorted tech and telecom stocks with gusto from January 2000 to September 2001, profiting mightily from the bursting of the bubble.
• In December 2000, he began buying homebuilders like D.R. Horton and Lennar, convinced that falling interest rates would be good for housing. But toward the end of 2004 he grew uncomfortable with the spread of what he termed "funny-money mortgages," and by January 2005 - mere months before the industry started to collapse - Heebner had sold off every homebuilder share he owned.
• Used profits... to load up on oil and coal stocks, positions he'd started to establish in 2004. He even bought coal stocks for the Realty fund - a move that style purists might criticize but for which Heebner makes no apologies. "I did it because it was the best thing for shareholders," he says, noting that Realty's prospectus explicitly defines "companies involved in the real estate industry" to include mining companies, which obviously own a lot of real estate.
• In August 2005, Heebner doubled down on commodities by taking big stakes in copper miners Southern Copper and Phelps Dodge. The price of copper - and of copper stocks - doubled in a little over a year.
• In November 2006 he built large positions in fertilizer companies Mosaic and Potash Corp. of Saskatchewan. This time the stocks quadrupled.
• In October 2005 he shorted mortgage lender Countrywide. Heebner was early on that one, but he stuck with the short for two years, and his conviction was rewarded in 2007 when Countrywide collapsed from $40 to $8.

Boo Yah! By the way, I noticed Heebner has begun rebuilding his coal position as of the 3/31 holdings in one of his funds.

Onward....

• Not every one of his moves worked out so well, of course. ....one of Heebner's many strengths is knowing when to cut his losses. "A lot of fund managers fall in love with an idea and ride it all the way down," Kemp says. "Ken's quick to admit when he's wrong."
• Heebner actually began 2007 with a quarter of Focus's money invested in five Wall Street banks. The holdings could have proved disastrous, but by June - before the credit crisis really snowballed - he was out.
• He continued to put up excellent returns until the mid-1990s, when tech stocks started to dominate the market. For Heebner, that was a problem, because he usually shied away from technology. The barriers to entry were too low, and forecasting winners and losers too hard. Focus eked out single-digit gains in both '98 and '99, whereas many rival funds were soaring 40% or 50%.

• His ideas come faster, his focus is more intense, and his ability to sift through massive quantities of information and zero in on what matters is downright spooky.
• There's no simple formula that captures his investing principles, and explaining his approach is something even Heebner struggles with - which may be why CGM manages only $13 billion (including private accounts), a relatively modest amount given Heebner's track record. (my note: this is the stupidity of the 'big money' - they want you pegged into a square hole so they can do their asset allocation - funds that switch from large cap growth in 1 year to small cap value 2 years later make them upset - so they'd rather give up gains, to make sure you stay in a certain style box)
• Basically, he's the last of the gunslingers - a go-anywhere manager who can be investing in left-for-dead U.S. value stocks one day and red-hot Brazilian growth stocks the next. (my note: last? you speak too soon! Generation X coming baby)
• Heebner is a workaholic who's up at 5:30 a.m. reading stock reports and checking business news and who never leaves the office at night without a stack of articles and research that make up his bedtime reading. (sounds vaguely familiar)
• CGM is pretty much a one-man show. Heebner's entire investment team consists of two traders - Elise Schaefer and Sue Small - and Columb, the U2 fan. Being an analyst for Heebner is a bit like being a beauty consultant for Halle Berry, so Columb knows better than to try to suggest stocks. She operates more like a sleuth. Heebner will ask her to dig up the latest information on, say, scrap steel prices in China or deep-sea oil rig leases, and within an hour or two her findings are on his desk. (that's what I need - a sleuth)

Now for some scary stuff... some identical quotes from Heebner to what I've been typing

• These days Heebner is keeping close tabs on the latest economic data out of China, because China is the key to his enormous bet on commodities. As of March, 64% of Focus's assets were invested in commodities-related stocks. His biggest stakes are in steel (ArcelorMittal, Nucor, and United States Steel) and in oil (Apache, Devon Energy, Petrobras, and Schlumberger)
  

I wrote in this entry [May 18: Bookkeeping - Weekly Fund Changes Week 41]

We've had an enormous moves in the prices of commodities, and almost all themes now relate directly or indirectly to the voracious appetite of China to continue to consume and prop up much of the world. Commodities, China, and inflation hold the keys for our near term.

Ok that is sort of scary.

• Petrobras, the Brazilian oil company that has announced two giant offshore oil discoveries, is his favorite. "Petrobras could become the biggest stock in the world," he says.
  

I wrote in this entry [Apr 14: Petrobras Just Went Vertical]

Off the Tupi discovery alone, I believe Petrobras was headed to be the largest company in the world, passing Exxon; before what could be happening today.

• He also thinks inflation will hit double digits within the next five years

I write... ok every week, I write about the "World of Shortages" and the effects of inflation. I'm starting to feel like a mini me.

• Yet he is constantly on the lookout for any sign that the economic slowdown in the U.S. may be infecting emerging economies abroad. That would deep-six his whole investment thesis, which hinges on China and other emerging nations using more energy and building more infrastructure. "I'm not waiting for Morgan Stanley to tell me there's something wrong in China," Heebner says. "By then it's too late." (Bingo)
• One oil expert Heebner has consulted is Matthew Simmons, a Houston-based investment banker who's become the oracle of "peak oil" since his book Twilight in the Desert was published in 2005. Twilight argues that Saudi Arabia is running out of oil faster than we think, and Heebner's own research leads him to the same conclusion.
• Heebner enjoys his job enormously, which is the key to his longevity. "It's not a business for him, it's a pleasure,"
• In fact, the line between pleasure and obsession sometimes gets a little blurry. Heebner doesn't take vacations, he insists he'll never retire, he knows less about pop culture than my 8-year-old twins (which, come to think of it, may be a good thing), and other than sailing and politics, he has few interests outside the investing world.
• For better or for worse, the hyperactive trading has always been one of Heebner's calling cards. The turnover rate in CGM Focus, which typically holds 20 to 30 stocks at a time, was a whopping 384% last year, which in theory means he traded enough to buy and sell the entire portfolio nearly four times.
• After getting his MBA, Heebner wanted to go to work on Wall Street as an investment banker. Nobody would hire him. "I think my energy level back then was so high that I just made people uneasy," he says.