How Did David Tepper Make His Money?

Who Is David Tepper?

When you hear about a trader who became wealthy through his skills in trading and investing with the leverage of other people's capital, David Tepper is among them.

David Alan Tepper, born on September 11, 1957, grew up in Pittsburgh's East End. As a child, David loved baseball and football. This made him memorize baseball stats from baseball cards he had gotten from his grandfather.

His education started right in Pittsburgh's East End, as he graduated from Peabody High School in Pittsburgh's East Liberty district. And he continued at the University of Pittsburgh and completed his studies for a Bachelor of Arts in Economics with honors. But his desire to pursue the MBA made him further his studies at Carnegie Mellon University's business school.

He later got employed by Republic Steel in the Treasury Department of Ohio. But after some time there, he started working for Keystone Mutual Funds, a division of Evergreen Funds, in 1984. He was hired by Goldman Sachs in 1985, and after working there for six months as the company's chief trader on the high-yield desk, he held that position for eight years.

He had a focus on bankruptcy law and unusual circumstances at the time. At the end of 1992, he left Goldman Sachs, and in early 1993, he started his own company, which is known as Appaloosa Management. David Tepper is a hedge fund billionaire who started as a nobody but was determined to make something out of his fantasy. His net worth, which is over billions of dollars, explains how successful he is today.

How did David Tepper make his money?

David Tepper's trading strategy, investments in hedge funds, and acquisition of distressed financial stocks are the sources of his wealth. And he is known to invest in distressed debt, stocks, currencies, real estate, and other securities.

He became a billionaire mostly from the fees he received and his cut of the profits from Appaloosa Management. With net gains of $30.70 billion, David Tepper's Appaloosa Management is one of the most profitable hedge fund firms. But how did he even make the money to launch his own company?

In the 1970s, David Tepper tried his hand at options after spotting a lucrative pattern. He discovered that some option prices move slowly and attempt to catch up to changes in the value of the underlying securities.

Tepper saw this as a great chance for arbitrage and was able to produce a steady income. Additionally, he had great success with option arbitrage trading and was able to use the profits to fund his college education. David Tepper's unique skill in trading junk bonds was his gate pass to working for Goldman Sachs. And he made a lot of money for the company.

The 1987 Black Monday stock market crash made his skills obvious in the trading world. During this period, almost every trader at Goldman Sachs lost money except David Tepper. He saw the crash coming and shorted his entire portfolio when others went long instead.

The desire to open his firm grew after he was denied the opportunity to form a partnership with the company. So while at Goldman Sachs, Tepper took his trading more seriously to raise funds to start his firm. Appaloosa Management was the result of his hard work during this period.

David Tepper’s Net Worth

According to Forbes, David Tepper's net worth is around $18.5 billion as of May 2023. David Tepper's financial standing has increased over time. David Tepper's net worth from 2017 to May 2023 is shown below when compared to his wealth seven years prior.

Aside from being a top trader and investor, David Tepper is a sportsman. He owns the Carolina Panthers of the National Football League (NFL) and Charlotte FC of Major League Soccer (MLS). After purchasing the Panthers for $2.3 billion in 2018, statistics show that David Tepper is the eighth-richest sports owner in the world.

What is David Tepper's Trading Strategy?

David Tepper's trading strategy employs a value investing approach because he thinks that fearful environments tend to devalue stocks with strong fundamentals. His approach is that of a deep-value investor who spends most of his time searching for significantly undervalued commodities, currencies, or stocks.

So he buys the debt of businesses that are about to file for bankruptcy, but with the conviction that these businesses can fight their way out of their distressed situation. He bets that this asset will rise and return to its intrinsic value.

Tepper believes that investing is an unemotional endeavor. So he tends to invest in preferred stock, bonds, and distressed debt without fear but with the necessary risk management strategy. He is interested in acquiring assets at a significant discount and generating significant returns later.

For such an investment, David Tepper believes you need a cool head so that when others panic, you tend to be strong and unshaken during market turbulence. David Tepper believes that traders need to be savvy enough to put themselves in a position to be fortunate. So, when it comes to investing, luck is not a factor.

Overview of David Tepper's trading strategy

He never uses leverage when trading or investing and always has a large margin of safety. He only gambles with the money he has already put up.

David Tepper in The Big Short

The Big Short typically depicts David Tepper's trading activities, particularly the 1987 Black Monday stock market crash. The movie's plot is based on a true story, and Michael Blurry's character in the film reveals more about David Tepper. It is based on a nonfiction book by Michael Lewis.

It is 2005, and for Michael Burry, a hedge fund manager at Scion Capital, the focus turned to the subprime market. And in his observations, he believes that the robust US housing market is essentially a bubble in assets inflated by risky loans. His analysis was based on bank balance sheets from 2003 and 2004 and mortgage lending practices from those years.

As millions of borrowers with low incomes and no assets purchased homes using a lot of leverage, he faulted the subprime market. And this, to him, makes sense, as there are no down payments for mortgages should interest rates rise.

Burry resolves to use derivative financial instruments to short the housing market after realizing this would not be feasible over the long term. With a total position of $1.3 billion, he purchases credit default swaps from various investment banks against these securities.

Interestingly, the market began to move in the direction of Burry's analysis in 2007. His profit was over $100 million, and more than $700 million went to his investors.

What concept about David Tepper's trading strategy was evident in the big short movie?

A large margin of safety is always maintained by David Tepper when trading or investing, as was already mentioned earlier in this article. The concept Michael Burry used to get rich is traced to Benjamin Graham’s and David Dodd’s 1934 book “Security Analysis”, the core text for value investing, saying: “All my stock picking is 100% based on the concept of a margin of safety.”

The ideas presented in the film correspond exactly to what was learned in the SimTrade course. The film also demonstrates how sophisticated structured financial products like credit default swaps, synthetic CDOs, and collateralized debt obligations (CDOs) play a critical role in generating revenue for large investment banks.

The movie offers great insight into the operations of the biggest investment banks and the events that contributed to the severe financial crisis in 2008. It demonstrates how executives at significant hedge funds and investment banks amassed enormous wealth.

David Tepper's advice for beginners

David Tepper's predictions on economic trends and investment decisions are based on critical observations. This skill made him a millionaire in a market that sank other investors' funds in 2008. His perseverance and success served as an inspiration to numerous investors who were doubting their trading skills.

Tepper is renowned for employing a contrarian approach to investing, which involves seeking out undervalued assets that the market has overlooked. "I was never afraid to go back to Pittsburgh and work in the steel mills", Tepper said in response to the question of where he got his unwavering confidence.

Some of Tepper's investment philosophies, influenced by his global macroeconomic analysis, that can be a tool for beginners are:

1. Look out for opportunities while being optimistic

As a beginner, staying current on market information and doing extensive research before investing in a company will put you on the fast track to becoming a top trader and investor. Also, there is a need to maintain optimism and be alert to the best opportunities. Taking advantage of the right opportunities during market corrections is the secret to financial success.

2. Invest without involving emotions

Some of David Tepper's investments were terrifying when you consider the risks and potential net loss. Tepper advises investors to learn how to keep their emotions out of their financial decisions to make wise choices.

3. Train and discipline your mind

Be upbeat and resist thinking about the downturn. Fearful environments affect the market and can deter a fearful investor from investing. Investors are obstinate and persistent, so develop inner toughness and self-control before investing.

4. Don't be afraid to diversify your portfolio

Always remember that investing carries risks, but you can invest wisely to lower the risk you will be exposed to on each investment. Tepper asserts that portfolio diversification is crucial for investors because it can help them reduce losses. Investors should spread their funds across other investment options.

5. Don't be in a hurry to invest

Every novice trader needs to have patience as a feature to be able to recognize good investment opportunities. However, this does not imply that a trader can take it easy while making a trade because no market strategy is consistently successful. After all, the environment for investing is not constant.

Therefore, think carefully about when you should be aggressive and when you should simply wait. Being an active investor is crucial, but patience is essential when making market investments.

6. Reflect on previous investments

Tepper says investors should continuously recount their losses and gains at their leisure. It's the only way to learn from mistakes and maximize future investment strategies.

7. Desire for greater success and zeal

Tepper counsels would-be investors to possess the motivation and aspiration to achieve more. "Set yourself the objective of becoming the best trader or investor, and avoid getting too comfortable with your stage of investing. Visualize reaching your next level, and then keep taking steps in the right direction to get there", he advises.

Tepper claims that despite being content with his position and job description, he never stopped learning and chose to pursue higher education and credentials.

David Tepper quotes and books for beginners

Below are some of the popular quotes by David Tepper:

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