Hertz emerges from bankruptcy; Buffett and Munger interview

Whitney Tilson’s email to investors discussing thank goodness for Enrique; Buffett and Munger interview; Robinhood pays record fine and plans for IPO; Hertz emerges from bankruptcy.

Q1 2021 hedge fund letters, conferences and more

Thank Goodness For Enrique

1) With the markets up strongly in the first half of the year – the S&P 500 Index rose 14.5% – my main thought is "TGFE": "thank goodness for Enrique" (my colleague Enrique Abeyta)!

Here's why...

With the S&P 500 now up 92% since its pandemic-crash low on March 23, 2020, and all of the foolishness in the markets this year – "meme stocks," cryptocurrencies, non-fungible tokens ("NFTs"), etc. – I likely would have turned bearish long ago, selling my winners, building cash, and ramping up my short book.

In other words, exactly the wrong thing.

I made such a mistake in 2010, in the aftermath of the global financial crisis – and it eventually cost me my business, as I discuss in detail in my forthcoming book, The Rise and Fall of Kase Capital (likely out by the end of the year).

But Enrique didn't fall into this trap – then or now. He understands that when you're in a bull market, you need to lean into it, not run away from it.

It's not just me – more important, Enrique's subscribers sure are benefitting from his insights.

Consider his Empire Elite Growth service... The average return of the stocks he has recommended is 40% versus 28% for the S&P 500. Subscribers who followed his advice on three stocks have doubled their money when he recommended selling half-positions for more than 100% gains.

And right now, Enrique has found what he calls "the most obvious potential 10-bagger I've ever seen."

It's a "back door" into a more than $2 trillion market... And a recent pullback in the stock has given long-term investors a fantastic entry point.

Folks who act now could make 10 times their money – turning every $5,000 into $50,000. The upside potential is so huge that Enrique even had to talk his analyst out of quitting the team to go buy shares for himself.

Enrique put the details together in a special presentation... Watch it right here.

Buffett And Munger Interview

2) I enjoyed this 43-minute interview CBNC's Becky Quick did recently with Berkshire Hathaway's (BRK-B) Warren Buffett and Charlie Munger.

In it, they discuss how they met, what they admire most about each other, Berkshire's unique culture, what they learned from their early investment in Diversified Retailing, and much more.

Munger also decried how our markets have turned into a "gambling parlor" (fueled by online stock-trading app Robinhood, which he said was "beneath contempt"), expressed admiration for how China's regulators cracked down on billionaire Jack Ma and fintech giant Ant Group, and said he wished U.S. regulators would "step in preemptively to stop speculation... I don't want all of the Chinese system, but I certainly would like to have the financial part of it in my own country."

Robinhood Pays Record Fine And Plans For IPO

3) Speaking of Robinhood, the Financial Industry Regulatory Authority ("FINRA") slapped it with a record $70 million fine yesterday. And that's only the tip of the iceberg, as this New York Times DealBook article notes. Excerpt:

That's on top of previous fines, including a $65 million one by the SEC [U.S. Securities and Exchange Commission] in December for misleading customers.

And the hits may keep on coming. Lawmakers, who pummeled Robinhood's CEO, Vlad Tenev, during a hearing in February, want tougher penalties: "Robinhood won't clean up its act with slap-on-the-wrist settlements," Senator Elizabeth Warren tweeted. "Our regulators need to show some backbone to hold Robinhood accountable." The company still faces several pending suits and investigations:

Nevertheless, Robinhood is moving ahead with its plans for an initial public offering ("IPO"). Now that it's settled with FINRA, it will soon publish its prospectus and likely go public within the month.

Hertz Emerges From Bankruptcy

4) Car-rental giant Hertz Global Holdings Inc (OTCMKTS:HTZGQ) is emerging from bankruptcy today and will now trade under the ticker HTZZ.

It's a remarkable turn of fortunes – the judge overseeing the bankruptcy case described the outcome as a "fantastic result" that "surpasses any result that I've seen in any Chapter 11 case that I've faced in my 20-plus years."

I tip my hat to those who correctly anticipated this outcome – they have been well rewarded, as the stock has skyrocketed 583% this year.

That said, it's important not to learn the wrong lessons, as wrote in my May 13 e-mail (when the stock was at $5.72; it closed yesterday at $8.74, up 53%):

Following up on my April 22 e-mail, where I said, "I might end up being wrong on car-rental giant Hertz (HTZGQ)," one of the 25 stocks in my "Short Squeeze Bubble Basket," the stock rose 55% yesterday after the company's announcement that it had reached a deal to emerge from bankruptcy, which would value the stock at roughly $8 per share: Hertz Shares to Recover $8 Each in Knighthead Win; Stock Soars. Excerpt:

In a deal that hands a huge victory to shareholders of bankrupt Hertz, the car renter picked Knighthead Capital Management and Certares Management to buy the company out of Chapter 11, capping a dramatic brawl for control of the company.

The deal, which gives a reorganized Hertz an enterprise value of $7.43 billion, was picked over an offer from a competing group led by Centerbridge Partners, Warburg Pincus and Dundon Capital Partners, according to people with knowledge of the matter, who asked not to be identified because the plan hasn't been made public. The Knighthead-Certares plan would give equity holders a recovery of about $8 a share – a package that's made up of about $240 million in cash and warrants for nearly 20% of the reorganized company, the people said.

Of the 25 stocks I included in my Short Squeeze Bubble Basket on January 27, this is the only one that has risen – and 22 have collapsed by more than 20%. Excluding Hertz, the other 24 are down by an average of 52% (42% including Hertz, which has risen 192%), during a period in which the S&P 500 rose 8%.

I am officially removing Hertz from my basket.

So did I make a mistake including Hertz in it? Given that the stock has nearly tripled, the obvious answer would appear to be yes.

But I'm not so sure...

To be a successful investor, it's of course critically important to learn from both your winners and losers.

But just because you made money doesn't mean you did something smart... And just because you lost money doesn't mean you made a mistake.

To understand why this is the case, here's a simple example: Let's say I give you the opportunity to bet any amount of money, roll a regular six-sided die, and if a 1 comes up, I pay you 100x, but you lose all of your money if a 2, 3, 4, 5, or 6 come up.

Thus, you're going to lose all of your money 83% of the time (5 of 6 rolls), even though the expected value is incredible: $16.67 for every dollar wagered (a 100x payoff one-sixth of the time).

How much would you bet if I let you play the game once? Three times? Ten times? A thousand times?

My answer: The more times I could play, the more I'd bet each time. But even if you only let me play once, I'd still bet a fair amount because I rarely come across 17-to-1 expected value payoffs.

But imagine you were watching me and I played three times, each time wagering $5,000. If I lost all three (a 57.9% likelihood), would you say, "You idiot, Whitney – you just pissed away $15,000!"?

Or would you be wise enough to say, "Those were three great bets, Whitney. You were smart to make them, even though they didn't pay off this time. The next time you see a 17-to-1 expected value opportunity, please let me know!"

Turning back to Hertz... I don't know the exact number, but almost all bankruptcies end in no recovery for shareholders.

I'm also quite certain that the vast majority of investors who had driven the stock from a post-bankruptcy low of $0.40 to $1.92, when I put it in my basket, weren't making a judgement that Hertz was likely to exit bankruptcy with substantial value remaining for the equity.

No, they weren't smart – they just got lucky.

I'm happy for them – and for the company.

But as investing legend Charlie Munger once said:

If you run through a dynamite factory with an open torch and happen to make it to the other side without blowing yourself to kingdom come, that doesn't mean it was a good idea!

Think about that the next time you do something really foolish – but it still turns out well...

Best regards,

Whitney

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