Release Date: Nov 17, 2004
Appaloosa Management, L.P., is an hour's train ride from Manhattan. Its open-floor office is perfectly glamorous and comfortable. But because of its small size and single floor, it is an unassuming place to meet the man who manages one of the most profitable hedge fund companies in the world.
David A. Tepper, Appaloosa's CEO and founder, walks into his company's board room. He is casual and down-to-earth, wearing a yellow Ralph Lauren polo shirt, khakis and tan-colored loafers making him look more like a business man on vacation than Wall Street superstar. He fixes his own coffee and suggests talking in his office, a quiet room in the back of the suite with an executive desk and a black leather couch set.
Business people and financial journalists around the globe revere Tepper for his success. In August 2003, The Wall Street Journal reported: "David Tepper may be the hottest investor on Wall Street." This past summer, Institutional Investor magazine listed Tepper as the second "best paid" hedge fund manager in the world for 2003. (George Soros came in first.)
Yet in his hometown of Pittsburgh and at Carnegie Mellon University, David Tepper is known as the man who has extraordinarily and generously invested in his alma mater. He and his wife, Marlene, gave the $55 million gift that has changed the Graduate School of Industrial Administration to the Tepper School of Business at Carnegie Mellon.
The school is where Tepper earned his MBA from 1980 to 1982 and where he learned to think about business in analytical terms. It's where he was challenged to learn how to solve problems by looking at them in new ways. And, it's where, according to Tepper himself, he was taught finance theories that he uses everyday.
But before Appaloosa, Wall Street and Carnegie Mellon, David Tepper was an average city kid who cut class and loved baseball. But there was something about him that made people notice. And those who know him didn't blink an eye when he changed Carnegie Mellon's business school forever.
Numbers, Baseball and Free Pancakes
It's clear that Tepper values his family and his early years. At the press conference announcing his gift on March 19, Tepper began his remarks by saying, "Not bad for a kid from Peabody High School." The B-school's new logo bearing his name was displayed all around him on banners, posters, t-shirts and lampposts on campus.
Marlene Tepper and their three children, Brian, Randi and Casey, were in the audience, as were several members of Tepper's extended family including his parents, his sister and his nephew, Aaron Tepper, who just earned his bachelor's degree in business administration at the Tepper School this May.
Tepper grew up in Stanton Heights, a tough neighborhood in Pittsburgh's East End. The second of three children, David was close to his family. His father, Harry, worked as an accountant with a small firm in town, and his mother, Roberta, was a homemaker turned elementary school teacher who taught at public schools throughout the city.
The street on which his family once lived stands as a symbol of his personal journey and professional success. Tepper's former home is a plain, red brick four-bedroom, which, like others on the quiet street, sits extremely close to neighboring houses. There is a small grass area out front, a concrete patio and an enormous tree in the back dumping berries on the ground. With its large veteran community, American flags decorate cars and homes in the neighborhood. Like much of Pittsburgh, uneven pavement leading up to the street is flanked with wild flowers, huge trees and long, wild grass.
Phyllis Myers was a math teacher at Peabody High School. She is in her 70s now, retired for 15 years and still living across the street from Tepper's childhood home. She never taught Tepper in the classroom, but he and her sons played together. She said the families in the neighborhood were thoughtful, ambitious and education focused. The same was true for the Teppers.
"We grew up in Pittsburgh. People struggled to get by," Tepper said. "We were, or at least we wanted to be, middle class kids."
Like many boys in his generation, Tepper collected coins and baseball cards, played football and little league and did the "normal kid stuff." He spent a lot of time with his maternal grandfather, Benjamin Tauberg, with whom Tepper shares a birthday (Sept. 11).
The two would sit on the front porch in the summertime and listen to Pittsburgh Pirates baseball on the radio and sometimes go see the games at the legendary Forbes Field in the Oakland section of the city. "I loved baseball," Tepper said. "I lived and died for Roberto Clemente. I knew every player in the major league. You could pull a player's card, and I could tell you the statistics."
Memorizing baseball stats was a sign of Tepper's comfort with numbers and his intelligence but not an indication of academic performance. "I was an average student," Tepper said. "I never got an A in high school. The teachers knew that I was a kid who asked a lot of questions, but I didn't study too much."
Tepper admitted that he often skipped class. "I would cut class and go to the [Pittsburgh Theological] Seminary across the street to have pancakes. I don't know what they were thinking by giving out free pancakes across the street from the high school."
Though he may not have gotten As, Tepper did take advanced placement (AP) courses. He liked the sciences and history and even earned the highest score in his class on the AP test for history. Math was easy for him, but he was lazy when it came to studying it.
That David Tepper could excel in whatever he chose was evident. His love for learning was the main signal, said former neighbor Phyllis Myers. But he was also great with people and especially kind. When she first heard about the naming gift at a Peabody High School reunion last month, she wasn't one bit surprised.
Dabbling in the Markets, Acting and College
While Tepper didn't like studying math, he did like hearing about the numbers associated with his father's investments. The elder Tepper dabbled in the markets as a hobby and would talk about investing over dinner. His dad gave Tepper a small number of shares when he was a teenager, and the young Tepper discovered he liked playing the market. "I was interested in numbers and averages, like the baseball cards. I had a few hundred shares. Some with Pennsylvania Engineering Co., and some with Career Academies, a company that went bankrupt right after I bought the shares."
Tepper played intramural football when he was in high school but didn't try out for the varsity because the field conditions were awful. "The goal post on one side of the field was right up against a wall of the school. At the other end, the goal post was up against the fence. You couldn't run fast into the end zone."
So Tepper tried acting instead. As a senior he played the father in "Bye-Bye Birdie." "I was supposed to be the mayor," he said. "But I was the understudy for the father. The kid who had that role went to Florida, and I stole his part. But I still had to be the mayor, too. I just used different voices."
Tepper won the "Best Actor" award that year. When the award was announced, Tepper's classmates gave him a standing ovation. He enjoyed the limelight of the stage and considered studying acting in college but decided against it because "other people wanted it more."
After high school Tepper matured academically. At the University of Pittsburgh, he paid his way through school by working at the university's fine arts library. "I really didn't study too much until I got to Pitt," he said. "Having screwed up in high school, I was kind of nervous about college, but it turned out that my habits of not studying and then cramming for a test gave me an advantage in college because classes were so much shorter in a semester. I ended up doing really well. I didn't skip any classes for pancakes."
He also followed his father's ways and tried his hand in the markets. When he started earning money in college, he would take some of his earnings, invest them and hope he wouldn't lose it before the next tuition payment was due.
In 1978, Tepper completed his bachelor's of arts degree with honors in economics. Proctor and Gamble offered Tepper a job, but he remembers his father telling him he didn't want him to end up being a soap salesman. Tepper opted for another industry.
For two years, he worked at Equibank in Pittsburgh as a credit analyst in the treasury department. He enjoyed the work but was torn between a future in law or in business.
His love for numbers prevailed, and he eventually opted for a graduate degree in business from Carnegie Mellon. In 1980, MBA degrees were not as popular as they are today. Of his friends from Pitt, Tepper thinks he may have been the only one to pursue a business degree.
Big Man on Campus
At Carnegie Mellon, Tepper was known for his straight-A performance during his first year. Dean Kenneth B. Dunn had Tepper in a few of his classes when he was teaching finance in the early 1980s and said he always came across as a bright and intelligent student who would ask "amazing" questions. "I remember that after a while, I would think, uh-oh this is going to be a tough one," said Dunn. On more than one occasion, Dunn responded to Tepper's queries by answering, "That's a really good question. Let me get back to you next class." Dunn added, "He was one student that always kept me on my toes."
Tepper's personality made him shine outside the classroom as well. Rich Goldberg, senior vice president of business development at Misys Healthcare Systems in Pittsburgh, is one of Tepper's closest friends from Carnegie Mellon. Goldberg and Tepper were on the same Management Game team. (Their team managed a company that manufactured soap. Tepper was the head of marketing.) Goldberg describes his friend back then as a character with unruly curly hair and a "substantial" moustache. He remembers Tepper being unafraid to stand out.
Tepper himself likes to tell the story about a foot-in-mouth misstep during the first round of presentations his class had to make. In the first mini-semester, Tepper was among the first group of presenters in a course attended by all of the 115 students in his class.
"For first-years, when you come here, you're kind of nervous. You're kind of stiff; you don't know what to expect," recalled Tepper. "I was in charge of the sensitivity analysis for the project. There was an equation on the board, and I was trying to explain what would happen if you put different numbers into the model. Instead of saying, 'I don't care what number you put in here,' I said, 'I don't give a s--t what you put in here, you're going to get the same answer.'"
The professor, who happened to be the dean at the time, Robert S. Kaplan, PhD, responded by saying, 'That's a really interesting way to phrase that,' and the class erupted in laughter. "That really broke the ice for the whole class. After that, we gelled," Tepper said. "I think people felt better because they thought, 'Hey, at least there's a bigger schmuck out there than me.'"
Tepper is charismatic and makes a lasting impression on people. Four months after Tepper gave the naming gift, his classmates from 1982 held a surprise party/roast in his honor back on campus. Some put together a video of Tepper's childhood. Others dug up tapes that were recorded during the B-school years. But the theme of the evening was one of overwhelming appreciation from the folks who knew Tepper when.
How Carnegie Mellon Helped
There's no doubt that Tepper's success came from hard work, good instincts and intellect. But attending Carnegie Mellon certainly gave him an advantage. In an interview after the gift announcement Tepper said he gave the donation because he believes he "had no choice" and he "owed it to the school."
Tepper's affinity for Carnegie Mellon is multifaceted. He notes that the size of the program is conducive to quality learning. When Tepper enrolled in 1980, the class size was comparable to the current first year class of 150. With groups this size and two years to network, students get to know each other well. They also can interact frequently with faculty, Tepper said. "It was a tremendous environment. The camaraderie you can build with other students and your professors, you can't get that at big schools. That's one of the great things that Carnegie Mellon offers."
In addition, the academics, particularly Dunn's options class, were pivotal for Tepper. Because option theory was new in the early '80s, the course had no text book. The professor photocopied research papers for his class and "wrote a lot on the blackboard," Tepper recalled.
Dr. Ilker Baybars, deputy dean and professor of operations management and manufacturing, recalls hearing students grumble about Dunn's changing course materials because the professor would add new papers and material throughout the mini-semester. "But that is what was so rich about Ken's teaching," said Baybars. "He would never stop researching new ways to look at finance problems. What he uncovered the night before would be discussed in his class the next day. This is one of the advantages of a research university. We are charged with creating and disseminating new information to our students."
Tepper credits the current dean with teaching him the most about finance. "Ken was bringing this cutting-edge research right to us. When I got out [of graduate school], no one else was doing the kinds of things we had been taught. The curriculum was and still is very forward-looking."
Do What You Love
In addition to the education he received at Carnegie Mellon, Tepper's passion for his work also helped his career. He is a firm believer in doing what you love regardless of pay. "Gaining experience in a field that you're excited about is key," he said. "Of course it depends on your age and your circumstances, but money should be a secondary goal, especially at the beginning of your career."
Tepper lived this philosophy. After Carnegie Mellon, he worked for Republic Steel in Cleveland. This was his first exposure to the junk bond market. Because the struggling company was in turmoil, the organization did more financing in the two years that Tepper was with them than it had ever done before. Tepper's pay was nominal, and after six months, the entire Republic Steel staff received a 7 percent decrease in salary. The news of the pay cut was reported on the front page of The Wall Street Journal. Many of his Carnegie Mellon classmates were earning much better pay, and a few of them called Tepper to tease him.
But he wasn't fazed. Tepper was excited by the experience he was gaining. "MBAs can be impatient when it comes to job hunting. Students facing graduation should work hard at finding an experience that will lead them to things that they like. I loved the markets, and that was my focus," said Tepper. "Whenever I had any down time, I was talking to the guys who were investing the pension funds. I was so curious about what they were doing and how they were doing. Long term, the 7 percent pay cut meant nothing. But my experience at Republic? Priceless."
Two years later in 1984, Tepper was recruited to Keystone Mutual Funds (now part of Evergreen Funds) in Boston and worked as an analyst for junk bond funds. It was in Boston that Tepper met Marlene at a singles dance.
Marlene was born and raised in New Jersey. After she earned her undergraduate degree from Rutgers University, she received an MBA from Boston University. She stayed in Boston to work as a project manager for Wang Laboratories, the former computer company.
With a laugh, Tepper recalls finding a letter that Marlene's sister sent his future bride shortly after Marlene met Tepper warning her to be careful that he "wasn't after her for her money."
Less than two years later, in 1986, Goldman Sachs & Co. hired Tepper as a credit analyst, and he moved to Brooklyn Heights in New York. Marlene moved with him and the two were married and began talking about starting a family.
According to Tepper, Goldman Sachs had a model for trading on the high yield desk that "wasn't set up right as it related to options. It didn't account for discrete movements or options in the right way." So Tepper bucked the system and traded in what he thought was a more efficient and thorough way. His gamble paid off and within six months, Tepper became the head trader on the high-yield desk focusing on bankruptcies and special risk situations.
Tepper became discontent with Goldman after being passed up for partner three times in eight years. The first time, he was too young. The second time, he thinks there were turf wars that prevented his promotion. The third time, it was politics. Tepper wanted to leave the sell side, so, in early 1993, Tepper founded Appaloosa Management.
Appaloosa invests in highly-leveraged companies and foreign governments by buying and selling high-yield bonds, bank loans to highly-leveraged companies, sovereign debt and other debt and equity securities, including securities of financially-distressed companies. To join the fund, investors need to make an initial investment of $5 million. His funds are not for the timid; but the payoff can be extremely profitable.
Tepper's funds are known for volatility. Appaloosa has experienced wildly successful years and years when fund values have finished significantly down. However, over the 11 years that the firm has been operating, the annualized performance of its main fund, Appaloosa Investment, is above 30 percent after all fees. Tepper undoubtedly has built a strong reputation for being an investor who can spot long-term value, a moniker that is uncommon in the world of hedge funds.
Learn It, Earn It, Return It
Late in 2003, Dean Dunn was beginning to meet with several members of the school's business board of advisors to devise a plan to secure a naming gift for the school. Tepper, who had sat on the board for two years, agreed to meet with his former professor to discuss membership on a search committee.
The committee was never needed because Tepper stepped up immediately indicating that he might be interested in making such a gift. Tepper wasn't sure about "the naming part" because he was concerned about how naming a school could impact his family, but later he warmed up to the idea and realized how it would benefit the school even further.
Then it came down to timing. According to Tepper, "I felt like I wasn't going to get this chance again. To be able to support something that you feel strongly about and then get to add your name to the school, that's pretty special."
His motivations for investing in the school also included the hope that his gift would trigger other alumni to give back. "Dean Dunn is making some fantastic and strategic changes to the school's curriculum and focus. He needs resources, and I wanted to be a part of it."
At the press conference on March 19, Tepper echoed a sentiment he had heard someone else say years ago as a challenge to other alumni: "We should all try to learn it, earn it and return it."
When asked about the significance of the gift, Professor Allan Meltzer who has been with the school for 48 years commented, "We have great leadership. I have seen many deans since the first, and Ken Dunn is one of the great ones. Now that he has the resources, he is going to make the school into the kind of school that he and I and the faculty want it to be."
On Tepper, Meltzer commented, "I think that a lot of our students and alumni are interested in giving back to the school, but [Tepper] is a special person. At the age of 46, to be willing and able to do what he is doing is extraordinary."
Tepper downplays the generosity. He said it was part of the culture as a Jewish family to give either to a charity or a synagogue every week. His parents led by example always making it a priority to give to the community. "They gave what they could when they could," said Tepper.
Tepper also wanted the gift to instill the commitment to philanthropy in his children that his parents impressed upon him. And it may have worked. When asked about his favorite part of the day long celebration surrounding the gift announcement in March, Tepper didn't hesitate: "Looking at the faces of my teenage kids who were actually paying attention to every word I was saying. That was pretty amazing. Plus," he added, "I don't care how old you are, you always want to please your parents."
"To come from Peabody High School and be able to do this in my life is just amazing. I'm very lucky to be able to do this. I hope that the kids from Peabody and other city schools know that they can do it, too." Tepper said he still feels a buzz, even six months after the events surrounding the public announcement.
Finishing his coffee, he looked at his watch. A phone appointment with an investor had already been pushed back.
Back in the open-floor office, Tepper's assistant offered instructions for his call while he slid into an unoccupied desk covered with books, papers and an enormous computer screen. David Tepper and Appaloosa Management get back to business, but at the Tepper School of Business at Carnegie Mellon, it's not business as usual. The buzz in the air is getting louder by the day.
"Dean Dunn is making some fantastic and strategic changes... He needs resources, and I wanted to be a part of it."