Ben Gordon, founder and head portfolio manager at Blue Grotto Capital, shares his journey from analyst to managing his own hedge fund. He discusses his unique research methodologies, emphasizing historical regressions and the resilience of specific business models. Gordon reveals insights on successful investments in Spectrum Brands and Cedar Fair, while also highlighting the challenges of shorting stocks—a 'dark art.' He reflects on lessons learned from past investment missteps, particularly in the fashion industry, underscoring the need for adaptability in fluctuating markets.
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Quick takeaways
Ben Gordon emphasizes the importance of conducting rigorous research and trend analysis to uncover asymmetrical investment opportunities.
His experiences at GMT Capital shaped his unique investment philosophy, highlighting insights into market cycles and management integrity.
Gordon discusses the strategic concept of optionality in investments, using VMware as an example of assessing long-term growth potential despite temporary declines.
Deep dives
The Origins of Blue Grotto Capital
The podcast discusses the origin story behind Blue Grotto Capital, founded by Ben Gordon. The name is inspired by a memorable personal experience in Capri, Italy, where Gordon enjoyed cliff diving and swimming in the Blue Grotto. This distinctive name choice reflects the challenge of finding an original name in a saturated hedge fund market. Gordon emphasizes the importance of a meaningful name that resonates with his personal journey, as many hedge funds tend to have generic names linked to elemental or geographical themes.
Gordon's Investment Journey
Ben Gordon's career began with an internship for the Joint Economic Committee of Congress, leading to a role in equity research at Raymond James. He transitioned to GMT Capital, where he served as an analyst and later as a portfolio manager, managing a sizeable portfolio. During his tenure at GMT, Gordon honed his skills in identifying investment opportunities and developed his creative approach to investing, which contributed to his growth within the firm. The experience at GMT provided him with valuable insights and mentorship that eventually shaped his investment philosophy at Blue Grotto Capital.
Navigating Investment Opportunities
Gordon shares insights on his investment process, highlighting the strategic identification of asymmetric opportunities in various markets. He discusses successful investments, such as emerging market wireless carriers and companies like Smurfit Kappa, where he analyzed supply and demand dynamics to predict potential growth. His creative approach involves looking beyond typical investment metrics and understanding market cycles to capitalize on undervalued stocks. Gordon emphasizes the necessity of rigorous research and trend analysis to uncover potential winners before they gain traction in the market.
Learning from Mistakes
Throughout his career, Gordon has learned significant lessons from his investment mistakes, particularly the importance of assessing management integrity and market dynamics. He recounts experiences with investments like Michael Kors, where he overlooked warning signs related to excess inventory and market saturation. Gordon stresses the necessity of conducting thorough research and ongoing assessments of investment theses, avoiding stubbornness in holding onto failing positions. This reflective practice ensures that he continuously adapts and evolves his investment strategies while remaining aware of potential risks.
The Importance of Optionality in Investing
Gordon explores the concept of waiting for the stars to align regarding investment decisions, advocating for the evaluation of optionality in potential investments. He illustrates this idea with VMware, where the stock's substantial decline presented an unparalleled opportunity due to its high-quality underlying business and future growth prospects. By assessing various factors, including market conditions and competitive advantages, Gordon identifies investments that offer significant upside potential despite temporary setbacks. This approach combines a thorough understanding of the underlying business with patience and strategic foresight, essential components of successful investing.
This week I had the privilege to talk with Ben Gordon. He is the founder and head portfolio manager at Blue Grotto Capital. This episode is a deep dive into Ben’s process of researching and finding ideas, why he started Blue Grotto, his prior work at GMT, why he went long on Spectrum Brands and Cedar Fair Entertainment, and why shorting is a dark art.
Here is the time-stamp:
[0:00] The Story Behind Blue Grotto
[3:00] Who is Ben Gordon?
[6:40] From Analyst to PM: Emerging Markets Wireless Carriers
[10:00] Reply and Smurfit Kappa
[12:05] Using Regressions to Find Ideas
[16:30] The IT Business
[18:20] Lessons from Bad Investment Ideas: Michael Kors
[22:10] Importance of Walking Away from an Investment Theme
[30:00] The Catalyst to start Blue Grotto
[36:05] Spectrum Brands
[46:00] Cedar Fair Entertainment: The Theme Park Business a Regional Monopoly
[49:10] Shorting: The Dark Art
[55:30] Shorting Orthopediatrics $KIDS
[1:00:00] Position Sizing while Shorting
[1:04:00] VMware: Optionality and Themes Case Study
[1:12:40] Ben Gordon’s Investing Mosaic
[1:22:00] Improving Weaknesses
[1:27:10] More from Ben and Closing Questions
If you liked what you heard, check out Ben's website here.
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