TIP758: Current Market Conditions & Investment Opportunities w/ Derek Pilecki
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
Derek Pilecki, portfolio manager at Gator Capital Management, returns to discuss his exceptional investment track record and current market opportunities. Since launching his fund just weeks before Lehman Brothers' collapse in 2008, Derek has compounded returns at 21.8% annually versus 11.9% for the S&P 500. (02:24) The conversation covers his process of seeking 26% internal rates of return on new investments, his navigation of the tariff tantrum earlier in the year, and how Warren Buffett's philosophy shaped his approach to investing.
- Key themes include finding undervalued opportunities in regional banks, fintech companies, and European banks while managing both long and short positions in volatile market conditions
Speakers
Derek Pilecki
Derek Pilecki is the portfolio manager at Gator Capital Management, a fund he launched in July 2008, just weeks before the collapse of Lehman Brothers. He has achieved one of the most impressive investment track records, compounding at 21.8% per year since inception versus 11.9% for the S&P 500. Derek previously worked at GSAM and Clover Capital, where he learned to combine fundamental analysis with technical awareness. He is a graduate of the University of Chicago business school and specializes in financial sector investments.
Key Takeaways
Combine Value Investing with Momentum Awareness
Derek emphasizes that successful value investing requires more than just buying cheap stocks - it requires understanding momentum as a factor that drives returns. (09:08) He learned from Mike Jones at Clover Capital that classic value investors often "buy too early and sell too early." The key is waiting for some kind of base formation in the chart before buying and letting momentum run rather than cutting off returns at predetermined price targets. This approach helps avoid the trap of throwing good money after bad when stocks continue declining.
Focus on Ideas with Clear Path to Doubling
Derek applies a rule of thumb requiring potential investments to have a clear path to doubling over three years, equating to a 26% compound return. (04:53) This high bar prevents him from being "too cute" and buying names where he expects only 20% returns. He provided examples like Carlyle, which he bought at $29 and saw reach $65 in under three years, demonstrating how this framework forces concentration on substantial money-making opportunities rather than tying up capital in mediocre ideas.
Maintain Long-Term Optimism Despite Short-Term Challenges
Drawing from Buffett's philosophy, Derek advocates for being permanently optimistic rather than bearish, as "optimism makes you more money." (19:20) He recalls Buffett saying that if he could change anything in his career, he would have been "more optimistic and taken more risk." This mindset leads Derek to use leverage in his portfolio and invest in companies that aren't the highest quality, betting on long-term value creation by talented people acting in their economic interests.
Be Flexible and Willing to Change Direction
Derek's Robinhood investment perfectly illustrates the importance of flexibility in investing. He initially shorted the stock during the 2021 speculative bubble from $25 down to $10, then reversed course and went long at $8 in November 2023. (46:27) The stock subsequently increased over 14 times. This requires abandoning ego and being willing to reassess situations based on new information, valuation changes, and technical setups rather than being wedded to previous positions.
Look for Operating Leverage Opportunities
Derek identifies operating leverage as a powerful but often overlooked factor in generating substantial returns. (55:43) Companies like Robinhood, which went from losing over $3 billion in 2021 to earning $1.7 billion in the last twelve months, demonstrate how tech platforms can dramatically scale profitability once they've built their customer base. This operating leverage, combined with financial leverage in some cases, can create explosive earnings growth when business conditions improve.
Statistics & Facts
- Since Gator Capital's inception in July 2008, the fund has compounded at 21.8% per year versus just 11.9% for the S&P 500 over the same period. (00:24) This represents a remarkable outperformance of nearly 10 percentage points annually over a 16+ year period.
- In 2024, Derek achieved a 41% return net of fees, and through July was up another 21%, positioning the fund for three consecutive years of strong performance. (02:24)
- During the tariff tantrum earlier in the year, the KRE regional bank index was down 13-14% in just two days following Liberation Day. (13:13) Derek used this volatility to his advantage by covering regional bank shorts that had become oversold.
