Ahmet Okumus – Istanbul to Wall Street Bull

Ahmet Okumus

This article is part of our 'Guru' series - profiles of successful traders, with takeaways for the UK private investor.
You can find the rest of the series here.

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Today’s post is a profile of Guru investor Ahmet Okumus, who appears in Jack Schwager’s book Stock Market Wizards. His chapter is called From Istanbul to Wall Street Bull.

Ahmet Okumus

Ahmet Okumus

Ahmet Okumus was born in Turkey, and after visiting the Istanbul Stock Exchange (which only opened in 1986) at the age of 16, he decided that he wanted to be a money manager.

  • That meant moving to America, which he did in 1989 (to attend college).

Okumus appears in Jack Schwager’s book Stock Market Wizards.

  • His chapter is called From Istanbul to Wall Street Bull.

College

By the beginning of my senior year, I was devoting 90 percent of my time to the stock market, and I quit school altogether.

My teachers knew a lot less than I did about the stock market and investing.They teach you theories, and theories don’t work most of the time.

The efficient market hypothesis is ridiculous. Different market participants will do research of varying quality. The market price will reflect the average assessment of all investors.

Track record

Okumus began trading in 1992 with $15K from his mother.

  • By 2000 he had turned this into $6M.
  • That’s an average annual growth rate of 107%.

He launched his first hedge fund – the Okumus Opportunity Fund – in 1997.

Schwager interviewed Okumus in 1999, just after his worst trading in year.

  • In 1998 he made only 5%, although the S&P rose 28%.

Okumus explained that he had been up 30% at the start of December 1998.

  • Then he shorted (sold out of the money call options on) internet stocks – Schwab and Amazon (at that time just an online bookshop) in particular – too soon.
  • More than a year too soon, as it turned out – the market peak was in March 2000.

All of the metrics (price to sales, to EPS, to cash flow and to book value) were already at record values, and company insiders were starting to sell a lot of stock.

  • But he lost 29% of his equity on those two bets.

I kind of know how he feels, albeit at a much smaller scale.

The volatility of the dotcom stocks was seen as unprecedented at the time (though I’m sure the same kind of thing happened in the 1920s, and 1999 was certainly worse than 1998).

But more recently (only a few months ago) we’ve had ridiculous volatility in the crypto-currencies, which certainly knocked me out of positions when I wasn’t expecting it.

  • Of course, I was only risking a tiny fraction of a percent of my portfolio at a time (as I was new to the asset class and simply wanted to learn more about its behaviour).

Getting back to Okumus, he felt that he had learned his lesson:

Don’t get involved when there is too much mania. You can’t forecast mania. If a stock that should be selling at 10 is trading at 100, who is to say it can’t go to 500.

It turns out that Okumus had had one worse month than December, in Augist of the same year (down 53%).

  • Again, gearing was the culprit – he was 200% long when the market crashed.

The earlier loss didn’t upset him as much because his stocks ended up trading on an average PE of 5, and he knew they would recover.

  • With the internet stocks, he had no idea when they would stop going up.
Objectives

My main goal is not to lose money.

Okumus updated his trading rules after the August decline to be never more than 100% long or short (he was 200% long in August).

He also “started using options for the specific purpose of reducing downside volatility.

  • He admits this was partly in response to investor feedback – they didn’t like the monthly volatility.

When I was managing money for only myself, my family, and a few clients, my sole goal was long-term capital appreciation. [Now] I’m focusing a lot more on the monthly numbers because I want to grow the fund much larger.

The stocks I buy are all well-known names with lots of liquidity, so more money in the fund won’t make any difference.

My goal is to be the best money manager in the industry. I hope to have the best track record for the prior ten years, nine years, all the way down to five years.

Trading style

Okumus’ style hasn’t changed since he was a teenager trading the Istanbul market.

  • Then, he would buy stocks that had been limit (10%) down for three days, and sell on the first price bounce.
  • He still looks for stocks that are down, and offer value.

I trade on the fundamentals. I have an idea of the value of the stock in my head, and when the stock goes low enough relative to that price, I’ll buy it.

Say I believe a stock has a value of $35. In order to give myself a wide margin of safety, I might buy it if it goes down to $20.

My main goal is to make money on every investment, not necessarily to catch every trade. Since 1992, 90 percent of my trades have been winners.

I’m much stricter on my entries than [other value managers] are. They may be willing to buy a company at sixteen times earnings, whereas I’m not willing to pay more than twelve.

I very much liked Stock Market Logic by Norman Fosback. It taught me to focus on insider [director] trading. I also found Warren Buffet’s methodology very useful. One Up on Wall Street by Peter Lynch gave me an appreciation of the importance of common sense.

I spend a hundred hours a week on research. I follow all the stocks that I have researched at one time or another during the past eleven years, which is a substantial number.

I also pay close attention to stocks making new fifty-two-week lows. I usually don’t even consider buying a stock unless it’s down 60 or 70 percent from its high.

In the seven years I have traded U.S. stocks, I have never owned a stock that made a new high.

I always have a target price at which I will get out, assuming the fundamentals haven’t changed. Usually it is 20% to 25%. I never go for home runs.

If a stock I buy goes down 10 percent and the fundamentals haven’t changed, I might well buy more.

I don’t buy any companies that have even a remote chance of going bankrupt. I buy companies that have a good balance sheet, a high book value, consistent business track records, good management, and large insider buying ownership.

I hold about ten positions at a time. My top ten ideas will always perform better than my top hundred.

The maximum I would hold on any single stock is about 30% – it used to be 70%.

At the end of the second quarter in 1999, Okumus was only 13% invested:

There are no bargains around. I’m not risking money until I find stocks that are very cheap.

Director trades

If an insider buys more stock than his annual salary, I consider that significant. You also have to make sure that insider buying represents purchases of new shares, not the exercise of options.

If management already owns a significant portion of the company, they don’t have to buy more. Bit in companies with low insider ownership, management’s primary motivation will be job security and higher bonuses, not a higher stock price.

Put options

Okumus often sells out of the money puts on stocks that he is bullish on.

Any stock that I sell a put on, I am happy if they exercise the put. I don’t sell a put unless I would be happy to own the stock at the strike price.

If you sell put options, you don’t have to be right about the stock going up; all you need in order to make money is for the stock not to go down by much.

Shorting

On the short side, I look for stocks that are trading at a huge multiple to earnings. After the internet stocks, I’ve added a rule that there has to be a catalyst for change. I make sure that the fundamentals are broken before I go short.

All my longs are long-term investments, but my shorts are usually short-term because of the unlimited risk.

The bull market

Analysts don’t have a logical reason why a stock should be at a given price. If a stock reaches their target, they will just raise the target, even though the fundamentals haven’t changed.

I think we are witnessing the biggest financial mania ever. The PE ratio is at a record high, and the the average profit margin is at its highest level ever. There is virtually no room for further improvement.

I hope we get a bear market. All the momentum players will get killed; all the Internet players will get killed; all the growth players will get killed. The value players, however, will do okay. I’ll just hold. I know the value of my companies.

Checklist
  1. A good track record of growing earnings per share, revenues per share, and cash flow per share.
  2. An attractive book value.
  3. A high return on equity.
  4. The stock is down sharply, often trading near its recent low.
    • “This weakness has to be due to a short-term reason while the long-term fundamentals still remain sound.”
  5. Significant insider buying or ownership.
  6. (Sometimes) a new management team with a good track record of turning companies around.
Conclusions

It’s been another interesting chapter, though I think Okumus’ strict value / contrarian style and very concentrated portfolio would not suit many private investors.

As Schwager says, Okumus has one goal: to select trades with a high probability of gain and a low level of risk.

  • So he lets lots of winners pass and leaves a lot of money on the table.

I like the strategy of selling out of the money puts and plan to try it out in the future.

  • I need to do more work first on restricting the universe of stocks for which this is a safe strategy.

It’s also worth noting that Okumus is an exception amongsts Schwager’s Wizards in not believing that you should Cut Your Losses.

He can afford to do this because his strict value approach means that downside risk is already taken care of.

As Schwager says:

There are many roads to trading success, although none are particularly easy to find or to stay on.

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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Ahmet Okumus – Istanbul to Wall Street Bull

by Mike Rawson time to read: 6 min
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