YouSaid · the spoken record

David Sherman

lines on the record: 62
first: 2021-09-24
most recent: 2021-09-24
sittings or episodes: 1
sources: podcast

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“So, look, I know you have a pretty sophisticated audience that's very well healed in financial terms and financial concepts. But I want to take us back to the basics for a second. So if you think about a company, there's basically two forms of capital that they use to grow and build their business. One is they raise equity money. I don't care if it's venture capital money, stock money from an IPO, it's equity money. You get the economic spoils, you get the economic failures, your bottom of the structure, that's how you participate. And then they borrow money. No different than if you have a house, you borrow money and a mortgage, and then you are the lender. You are the equity. And maybe in between, you get a home equity loan. So that would distinguish two different lenders, a mortgage lender, an unsecured home equity lender, and then you're still the equity. So debt is top of the capital structure. And then within debt, there's different tiers of...”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“That nursing home example. You know, if you can buy a nursing home at $20,000 a bed, you're going to make money, right? You're buying it into a cheap enough price if it's a well-run nursing home. So I think there's two different parts. So I don't think it's a coincidence that distressed investors or distressed firms became private equity firms in their evolution. Oak tree was a good example that Cerberus is a good example, that Apollo is a good example of that. They were all originally stressed as stressed investors or had a stress and distress back.”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“Should master Robert's rules of order, and then you have to do basic analysis. And again, a bad business, you can't say, I don't particularly like the steel industry, not because there's anything wrong with it, but it's got capital intensive commodity-driven product with generally a lot of leverage. Those aren't really good business models. And if you're going to do it, you want to buy when it's a cheap stock going into its cyclical upswing. But to be a lender, not so great. Another example would be nursing homes. Again, high operating costs, big expenses building it. You have the government, earning Medicare and Medicaid, basically leading the price saying of what you get paid for reimbursements. And if you do an excellent job, best of care, they reward you by capitating your price. So I think understanding a business model sort of is important. Now, as a distressed investor, take”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“KKR. This is one of the oldest, greatest ones that people talk about. Just too much debt, great business, too much debt. So the question was, how do you compromise or mitigate the capital structure, the debt structure, and who are the beneficiaries? So where do you want to participate? So a distressed investor really, really is an equity investor that uses the bankruptcy laws to help determine the rules of engagement. Some people focus strictly on making money by taking advantage of those rules engagement. There's a hedge fund called Aurelius that's extremely good at this. Lately, you've read a lot of articles about hedge funds being on the steering committee or the inside committee to cut a better deal for themselves by putting up new money, help the company come out of bankruptcy to the detriment of other bondholders that they're equal with in class. But in general, there's still rules. So you have to really understand the mass of those rules, no different than if you're a congressman.”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“So it's much more akin to being in equity analyst. And the good news is, unlike Equity, where you can easily lose all your money because you're at the bottom of the capital structure, here you have some protection so that if your analysis is off or management fails to execute, you have some cushion. It may not be enough, but you have some cushion. And in return, you're giving up unlimited upside, obviously. But you are top in the capital structure, depending on where you are. So a high yield investor, it's really about understanding the business model and also doing the analysis. And I think business model is really important. Now, companies either become distressed that we're investment great or they're high yield and they become distressed. So the best case scenario to find a stress or distressed investment, if you're a value investor, is to find a company with a great business that has a bad balance. So examples in the past is, for instance, RGR and Abisco that was leveraged by DAP.”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“Takes a lot of capital, and then you're getting a lesser return. At the end of the day, the best way to mitigate risk is to focus on protecting your principal first, which means you have to be a bottom-up high-yield investor. Unlike investment grade or treasuries, where you're making big macro decisions of, is the Fed this week in Jackson Hole? I know this is going to podcast in the future, but are they going to raise rates? Where's the shirt rate going to go? What's the curve going to look like?”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“That question, I think you need to break down high yield from the stress and distress market. So think of the stress and distress market as a credit opportunity. Think of high yield as money good paper or paper you believe will be money good where you're clipping coupons and you're clipping returns significantly higher than the investment grade world or other fixed income. So in the high yield world, quite frankly, financial analysis is the key to mitigating risk. Today, you could overlay and put hedges on using CDS, CDX. These are derivatives on the index for specific credits or specific companies. You could even just as simple as buy puts on HYG, the ETF, or short HYG, or JNK. The ETF world has been great at segmenting asset classes to allow you to have access to these things. But then you're hedging away broad-based market risk. A lot of people can't do that.”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“Information by digging and also doing research. And if you look at the general high yield market, historically over 10-year periods of time, the high yield market has produced quite similar returns to the equity market, slightly less, but quite similar, with significantly less volatility. So it's sort of a hybrid equity, which would explain why firms like oak tree were very attracted, because it gives you a very good risk volatility or risk return analysis or a better sharp ratio. So I just sort of got lucky and I'm a curious person and it piqued my curiosity.”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“Asset liability management, investment grade, asset-backed securities, mortgage-backed securities, and interesting things we don't even talk about today, like dual securities where they paid your principal in US dollars and the coupons were in Swiss francs. And I always got to be exposed to all this. I was the treasurer of those insurance operations as my line responsibility. Even going out to Russia early days in 94 with vouchers. So it was a great place to learn. And I was fortunate that I put education and learning over making money. I did perfectly well, Acadia, but I couldn't have gone on Wall Street, you know, had a very narrow vision and not expanded it. But I stayed with high yield because if you look at high yield, whether it's distressed or stressed or high yield, the entire area is intellectually interesting and it's not well followed. So just like a good value investor, it was less crowded in those days. You could find better opportunity if you were good.”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“Forefront of the crypto investing today. And I got lucky. Good space, very well, great mentors, great opportunity. Came back to St. Louis during the school years and rated the investment banking client list and saw that one of the clients was an insurance company owned by a company called Lucady Nashville. And I decided that they were able to get me an internship as an analyst, Junk Bond analyst. Again, more being focused on junk ended up joining them full-time by senior in college. Locati has a great reputation among value investors and that was a great place to learn under Joe Steinberg and Ian Cumming. I stayed there for 10 years, left as a senior executive, and there I got the experience of not only managing junk bonds and looking at the junk bonds, but looking at distressed junk bonds, looking at stress junk bonds, looking at deals and transactions that are actually investments, taking insurance company assets and understanding”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“A lot of yield. The thesis was some are going to lose a lot of money, but on an aggregate basis, the net return would be very attractive. And of course, I was very attracted to the yield. My clients was an easy sell. They wanted more yield. But it seemed kind of stupid to me to do a static high yield portfolio knowing you were going to have losses. And just like an insurance company has to predict future losses in a property casualty company, for instance, have incurred but not reported. You knew this was going to happen. And the question was, how do you get rid of or how do you minimize the risk of incurred but not reported losses? As a result of doing work and networking, I was fortunate enough to be offered an internship at Druxel Burnham in LA working on Milken's trading desk. And that obviously by definition through a young college student right into the heart of high yield right as 1985 and 1986, it was the beginning and it was super exciting. It would be like being in the”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT
“First of all, thanks for having him on the show. It's great to be part of a group of terrific investors such as Mr. Marks. So my road to high yield is quite simple. I went to Washington University in St. Louis. I saw this add up my fresh mirror that said Dean Winter, cold calling. I didn't know what the dean he was of what department or school. I didn't know what cold calling was, but I paid a whole bunch of money per hour. And I found out very quickly it was Dean Witter Reynolds and it was a brokerage company and I decided I would only cold call if I could become a registered stockbroker while I was going to stock. And this is back in 1983. And in 1983, interest rates were coming down very quickly and people were seeking yield. And it was the real beginning of high yield debt or junk bond taking root per Michael Milken. And Dean Witter had a product called High Income Trust Certificates. They were going to buy a portfolio of high yield bonds that produced”
2021-09-24 · We Study Billionaires · TIP381: High Yield Masterclass w/ David Sherman · IDENTIFIED FROM THE TRANSCRIPT