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October 2, 2006 9:05 pm

James Altucher: Discover treasure without the pirate

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Let me tell you the best joke ever. Ultimately, it is a tale of revenge. First off, remember that cover New York magazine did in November 2004? The cover story was about hedge funds and there was a guy on the cover bathing in a bathtub filled with money.

Whenever I have to give a talk at a conference I try to break the ice by reminding people of this cover. Then I tell a joke: “I showed this cover to my wife and I said: ‘See, honey, this is what I do. This is about hedge funds.’ And she looked at it and looked at me and said, ‘Does this mean you’re going to start bathing more regularly?’ ”

That is always a pretty good way to start off a talk. But this week this joke turns more serious with the news that Pirate Capital is facing redemptions and has fired half of its analysts. What do my joke and Pirate Capital have to do with each other? First off, the story in the magazine was about Pirate Capital, the aptly named hedge fund that focuses on shareholder activism.

Second of all, it brings back memories. I invested in Pirate (indirectly, through a family office I advised) in May 2004 and was out by the end of 2005 when I felt they were getting too big (they hit more than $1bn in assets under management compared with about $60m in early 2004). But my main issue was this: once I was doing research for an article on one of the smaller companies that Pirate invested in.

I called the Pirate analyst on the case and he was very helpful, giving me their side of the story (all publicly disclosed in their filings, but helpful nonetheless) and I was able to directly quote him, although he shall remain nameless as he has already suffered enough this week.

Unfortunately, I got his name confused with the rogue doctor on the 1960s show Lost in Space. So I got his last name wrong in the article, but it was dead-on about the company and stock involved and I was very bullish on it (and still am).

His response was to call me and tell me I was an idiot. “Can’t you get anything right?”

Now, I was an investor in his fund. I had echoed his view in an article I had just written. So maybe I should have said: “Yeah, I can’t get anything right,” and hung up. But I just apologised and let him hang up on me.

All of this is to say: blame the messenger but don’t listen to the message. With the news of a troubled Pirate, a lot of people are willing to take the concept of shareholder-activist investing out behind the shed and shoot it. Well, it is just not the case.

As a group, activist hedge funds are up 9 per cent this year, says hedgefund.net, compared with a return of 5 per cent on the S&P 500 through August. There is an idea that the strategy of forcing chief executives to focus on shareholders instead of their own pockets is somehow reaching capacity. But this is ludicrous when you consider there are 8,000 public companies in the US alone, and many are being called to testify in options backdating scandals or other egregious examples of CEO compensation and mismanagement.

A good source on the never-ending foibles of CEOs and their pay-packets is found at footnoted.org. Activists are nothing more than deep-value investors in the style of Warren Buffett, who take the next step of trying to get management and the board of a company to unlock shareholder value more quickly.

I think a better approach than getting locked up in a sinking Pirate ship is to piggyback the public filings of activist investors. Whenever a hedge fund buys more than 5 per cent of a company (and also when they sell), they have to file, promptly, a 13D filing with the Securities and Exchange Commission more or less stating their intentions, what they bought, and at what price.

You can set up an account at 10kwizard.com so that you get emails when a filing comes out. Or go to stockpickr.com, where you can browse all of the positions of the major activist investors.

The activist investor Bob Chapman does not like this approach, since it allows other investors essentially to hire him without paying anything and fire him at a moment’s notice simply by selling the stock. But that is fine with me. I don’t need to make many friends. But every now and then I need a good story to tell.

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