Leon Cooperman’s 8 tips to achieve superior investment returns

Billionaire investor Leon Cooperman says that investors shouldn’t restrict themselves to a particular sector or a stock when making an investment decision, and should be willing to buy any stock or bond at the right price. Cooperman has made it known that although there is no secret sauce for investment success, it is very critical to look at free cash flow while choosing a company to invest in. “Free cash flow gives companies the luxury to do good things, whether it’s pay dividends, buy back stock, invest in new equipment, et cetera. Equally important is management and ownership and how they manage that cash flow,” he once said in an interview to a financial website.

A Wall Street legend, Cooperman built up Goldman Sachs’ asset management division during his long tenure with the investment bank. The son of a plumber in the Bronx, he went to public schools, Hunter College and then got an MBA from Columbia University. Cooperman founded Omega Advisors in 1991, a hedge fund known for its strong performance. He shut it down at the end of 2018. In 2019-2020, he began shifting more of his assets into his charitable foundation.

The finance guru stresses that family is the most important part of life, and that those who have achieved financial success have a moral obligation to help others in need. “To be successful in your chosen field of endeavor, be ready to give of your mind, of your body and of your soul to achieve that success,” he says.

Investment strategy

Cooperman always based his trading on the idea that stocks have a memory. “They know where they came from, so I tend to look at either the new low list or things in the middle of their trading range to get involved and I don’t like to buy the new high list,” he says.

In his 45 years of experience in the financial world, Cooperman says hedge fund managers must outperform others and react intelligently to the market. “You’ve always got to be on the balls of your feet — not resting on your laurels.”

His view is that it is better to invest in stocks over bonds. When vetting a potential investment, it is important to pick companies that generate cash-flow and run by honest and capable management who use incentives to make the company run well. “Find work you like to do and work with people you admire and respect,” he says.

Cooperman is of the view that investors should spend a lot of time to figure out the market. “Is the market undervalued? Overvalued? Is it going to go up? Is it going to go down? Because that determines how much risk you want to have in your portfolio.”

The hedge fund manager says investing comes with a lot of ups and downs. “In this business, if you don’t make mistakes, you’re either a liar or you don’t take many swings at the ball,” he once said.

Cooperman has always employed a classic value strategy and performed intensive research to identify undervalued stocks. He has kept an eye at micro company developments and also used macroeconomic analysis to find out how much risk to take and when to dabble in other asset classes, such as international stocks, bonds, currencies, commodities and equity indexes.

In his interviews, Cooperman has revealed some investment tips that can help many young investors achieve superior returns. Let’s look at some of these tips.

Look for mispriced assets

The Wall Street legend says the primary job of any value investor is to find assets that are sufficiently mispriced so that they can be bought at a bargain. The purchase price provides a margin of safety. “We’re looking for things that are mispriced, where opportunity for achieving excess returns exists.”

Make sure to be right while being contrarian

It is important to be right while following a contrarian strategy, the market veteran cautions investors. They can’t outperform a crowd by following a stock but at the same time, always avoiding what is popular is not the right approach. Cooperman is of the view that achieving investment success requires hard work and critical thinking. “With an average IQ, a strong work ethic and a heavy dose of good luck, you can go very far. The harder I worked, the luckier I got. If you don’t want to work and think, buy a low-cost index fund,” says the billionaire investor.

Be patient

Patience is a very important virtue and is very critical for a value investor as what price investors pay for an investment is not always what they get at the end, Cooperman says. “When you see an opportunity, you must also act quickly and aggressively. Few investors have the temperament to do this since they panic when the crowd is fearful. Inverting your emotions in an opposite direction from the crowd is not an easy thing to do. Almost everyone is better served by sticking to a low-cost diversified portfolio of index funds,” says the founder of Omega Advisors.

Have a margin of safety

Investors should always keep a margin of safety while making an investment decision. “If you buy at a substantial discount to intrinsic or private market value, you can make a mistake and still do just fine. And if things work out better than you thought, you get an additional bonus,” says the investment guru.

Understand the business you are investing in

Investors should understand all the aspects of the business they are planning to invest in. He says not knowing what investors are doing invites a lot of risk. “We have a very narrow assignment, and that’s to know the companies we know better than anyone else and own the right companies.”

Invest where competition is less

Cooperman says investing where the competition is dumb, misinformed and lazy is an excellent way to boost investment returns. Boring “get rich slow” approaches attract fewer competitors, though that is helpful in the competitive world of investing. “The good news here is that ‘get rich quick type’ people are those who you are competing against. If other investors and traders were not muppets sometimes, value investing would not work. Turning their dysfunctional behavior into profit is your opportunity,” he says.

Look for businesses with moats

The former Goldman Sachs executive says his view is that the key element in the quality of any business is a moat. “A business that has a moat around it, where it’s competitively insulated to some large degree.”

Be cautious of herd mentality

Cooperman says it is easy to get caught in the movement of a herd and it is easiest of all to follow the herd when it is close to the end of a cycle. “What the wise man does in the beginning, the fool does in the end. Even the wisest investors can fall victim to crowd folly. The basic underlying force at work is that people rarely make decisions independently. Fear of missing out (FOMO) and laziness make people follow the lead of other people and that process can snowball. Or not. And it will continue until it doesn’t,” he points out.

Investors have to respect the stock market, he adds, and if they don’t, they’re going to get wiped out.

(Disclaimer: This article is based on various interviews given by Leon Cooperman)