David Tepper: from junk bonds to millions of dollars

David Tepper was born in September of 1957. He’s the head of the Appaloosa management hedge fund. He specializes in investing in companies that are going through financial difficulties.

Tepper grew up in a Jewish Family at Pittsburgh’s East End, specifically Stanton Heights. when he was younger, he memorized the statistics in the back of baseball cards, showing the first signs of a virtually photographic memory. He attended the University of Pittsburgh and helped pay his college studies by working in the library and developing an options trading system. He graduated with honors and received his Bachelor of Arts degree in economics.

After graduating, he ventured into the financial industry, working for Equibank as a credit analyst in the department of economy. In 1980, not quite satisfied with his position, he went to the Business School of the Carnegie Mellon University to continue with a master’s degree in Sciences of Industrial Administration.

Tepper was an exemplary student. He was known by asking all the difficult questions. After obtaining his master’s degree at 1982, he accepted a position in the Treasury Department the Republic Steel Corp. This gave him first-hand labor experience at a company with difficulties.

A couple of years later, in 1984, he started working as an analyst at Keystone Mutual Funds in Boston, and in 1985 he was recruited by Goldman Sachs. In just six months, Tepper became the best trader of Goldman and worked there for eight years. When the junk bonds bubble exploded in 1989, Goldman Sachs managed to stay afloat thanks to Tepper’s skills. He purchased the bonds of the banks that had been severely punished by the bubble. When these institutions got out of bankruptcy and the market recovered, his investments went through the roof.

He finally quit Goldman Sachs in 1992. Michael Price, an investment fund manager and Goldman Sachs client, lent him an office. Tapper then started negotiating aggressively all by himself, with the hopes of making enough money to start his own fund. He started by founding Appaloosa management with Jack Walton, another junk bonds trader at Goldman Sachs, in early 1993.

The fund started with 57 million dollars. In the second semester of 1993, his fund obtained a net earning of 57.6%. The  assets under his management went up to 300 million dollars at the end of 1994, 450 million at the end of 1995 and 800 million at the end of 1996.

One of his first investments was in Steel Algoma, who got out of bankruptcy in 1993. After studying the company, Tepper realized that the shares of Steel Algoma were really mortgage bonds. He purchased these shares at $0.20 each and sold them in a year from 60 to 80 cents. In 1995, his purchase of the Argentinian sovereign debt increased his fund in 42%. He came to the conclusion that the increase in bank deposits presaged a strengthening economy.

In 1997, since the Korean currency fell 50% due to the Asian financial crisis, Tepper acquired cattle futures and bonds of the Korean government. His fund obtained 30% that year.

He made quite an expensive mistake in 1998. He bet that the Russian government wouldn’t pay its debt, and unfortunately it did. His fund lost 30%. Since Russian bonds went down, Tepper kept on buying. When the market recovered, his position helped him obtain 60% in 1999.

In 2002, the junk bonds market plummeted again. His fund lost 25%. Tepper purchased the bonds of three big bankrupt companies: Enron, WorldCom and Conseco. The following year, these positions helped him get 148% in benefits.

From 2002 to 2003 his purchases of debt of public service companies with difficulties, such as Williams Co., also increased his profits. Around 2003, Tepper’s personal wealth went above a billion dollars for the first time. He donated $55 million for the Carnegie Mellon University Business School, encouraged by Kenneth Dunn, his old professor, who got to be the school’s Dean. Tepper accepted the suggestion but he suggested that the name of the school was changed to “David A. Tepper School of Business”.

In 2008, Tepper had a big loss once again: 200 million dollars in a failed offer to invest in Delphi, a provider of automobile parts that went broke. In 2008 he purchased preferential shares in Wachovia and Washington Mutual for $0.20. Later, these two companies were acquired by larger rivals and shot up the price of those preferential shares, thus increasing the value of Tepper’s investments.

In 2010, the New York Times reported that Tepper’s success turned him into the world’s best paid hedge fund manager in 2009, and in 2010 he was listed as one of the wealthiest people in the world by Forbes Magazine.

University of Pittsburgh
Image courtesy of Ronald Woan at Flickr.com

Tepper has also made great donations to the University of Pittsburgh, including several scholarships and support to create academic and college centers to execute community extension programs.

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