CNBC Video: How do Activist Investors Help Companies?

My CNBC appearance from earlier this afternoon discussing activist investors and Yahoo!



[Long YHOO]

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Yahoo!: The Perils of Whale Watching

By Eric Jackson09/21/11 - 06:00 AM EDT


NEW YORK (TheStreet) -- Earlier this spring, when Yahoo!(YHOO_) was bumping along around $16 a share, David Einhorn bought the stock.

When he revealed the new holding on May 2, the stock jumped. A few days later, it closed at $18.65 a share. Investors were finally ready to buy in to the Yahoo! sum-of-the-parts story which suggested the stock was worth in the mid- to high-$20s.

According to Einhorn's first quarter letter:

"The Partnerships established a new position in Yahoo! at an average cost of $16.93 per share. The company developed an extraordinary anti-shareholder reputation in recent years, beginning with its ill-advised decision in early 2008 to turn down Microsoft's(MSFT_) equally ill-advised (and ill-timed) bid to buy the company for $31 per share.

"Now, under new management, YHOO has taken some increasingly shareholder-friendly steps. It has given up competing with Google(GOOG_) in the web search business, a move which is improving free cash flow by reducing capex and operating expenses. It is using the improved cash flow to step up share repurchases (the company bought back more than 7% of its outstanding shares in 2010). YHOO is also taking steps to unlock value from some of its Asian assets in a tax efficient manner, including its 35% stake in publicly-traded Yahoo Japan.

"YHOO currently has $3 per share of net cash on its balance sheet and has approximately another $8 per share of value in its two minority equity stakes of publicly traded companies in Asia (Yahoo Japan and Alibaba.com). Assigning a conservative valuation (5x current year EBITDA) implies $18 per share for just the core businesses and the publicly traded securities and cash.

"We believe that Yahoo's most valuable asset is its 40% stake in Alibaba Group's still-private holdings, which are separate and distinct from its ownership in the publicly-traded Alibaba.com, which we are essentially getting for free. Among Alibaba Group's privately held Chinese internet assets is a company called Taobao, which is the leading eCommerce website in China. More merchandise was sold on Taobao last year than on eBay, and Taobao's merchandise sales are growing 100% annually. We would not be surprised if YHOO's 40% stake in Alibaba Group alone was ultimately worth YHOO's entire current market value. YHOO stock ended the quarter at $16.68 per share."

Of course, shortly after that euphoria came over the stock, Yahoo! disclosed that it had lost control of its ownership stake in Alipay through a footnote in a 10-Q at least 45 days after it first knew about it. (Fantastic governance, guys.)

That set off a three-month decline in the stock. By July 7, Einhorn had had enough and wrote to his investors:

"Shortly after [our] purchase, the value of the Chinese assets came into doubt as the CEO of the Chinese unit hived-off a valuable subsidiary into a corporation that he personally controls. From there, the finger pointing started going in every direction. This wasn't what we signed up for. We exited with a modest loss."

The pain for Yahoo! shareholders didn't end until Aug. 8, when the stock bottomed out at $11.09 with 60 million shares trading that day.

Coincidentally, that date was the first day that Dan Loeb bought 2.5 million shares of Yahoo! for his Third Point hedge fund. He continued buying for the next month until he became the company's third largest investor owning over 5% of the company.

Dan disclosed his 5% activist stake in the company two weeks ago and wrote to the board of Yahoo! then that:

"We firmly believe that there is much to be gained from a successful and rapid transition in management, as we are convinced that Yahoo is grossly undervalued. We have followed Yahoo for many years, and our analysis suggests that at a share price of $13.61, with $2.49 per share in tax adjusted net cash, $3.10 per share and $5.24 per share of after-tax values for the Yahoo! Japan and Alibaba Group stakes respectively, core Yahoo is left at an implied value of $2.78 per share or 2.2x 2012 EBITDA.

"With more effective and focused management, one could realistically envision a re-rating to at least 7.0x 2012 EBITDA, driving a target of over $19.00 per share. When coupled with tax efficient outcomes for its Asian assets, an additional $3.00-4.00 per share stands to be realized. Continued share count reduction via buybacks and other potential capital structure optimization alternatives would further bolster the Company's stock price.

" In addition, based on our discussions with industry experts and entrepreneurs, we believe that with new management, there is significant further value in leveraging Yahoo's globally trusted franchise and platform for a range of new products and innovations.

"Focusing specifically on the Alibaba Group, the mid-term value potential for this stake alone could represent another $5.00 per share of upside. The e-commerce interests housed under the Alibaba Group umbrella hold the dominant positions in the "B2B" (63% of 2010 market share according to Marbridge Consulting), "C2C" (85% share) and "B2C" (51% share) Chinese e-commerce markets. Alibaba Group's Taobao business is essentially Ebay and Amazon on steroids in terms of market share and revenue growth.

"According to Goldman Sachs, the Chinese e-commerce market was $75 billion in 2010, with a 3-year forward compound annual growth rate of 43% compared to the $193 billion U.S. market with compound annual growth of 14% over the same period. We currently estimate a pre-tax value for Alibaba Group of $25 billion. Given Alibaba Group's growth potential and market share, it is entirely conceivable that Yahoo's 40% fully diluted stake in Alibaba Group could double in value over the next 2-3 years, highlighting its tremendous value."

With certain value-enhancing steps, in other words, Loeb sees a company worth $28 a share. And I think he's being conservative when he says Alibaba Group would be worth $25 billion today. More realistically, it would be worth between $40 billion to $60 billion today -- depending how frothy the market was at the time.

So how can you have two equally smart and capable hedge fund managers come to such different conclusions about the same company?

You can see both have the same basic assumptions for the tangible part of the business. It's just that Einhorn assumed Alibaba Group was worth zero after the Alipay fiasco (or at least the risk attached to that asset was too high for him to keep holding). On the other hand, Loeb saw Alibaba Group as worth $25 billion. He also indicated that the relationship between Yahoo! and Alibaba Group could be saved (after getting rid of most of the Yahoo! board).

In fact, at a conference last week in New York in response to a question from Lee Cooperman (who also owned Yahoo! earlier this year), Loeb hinted that he'd personally been in touch with Jack Ma and something was in the works with him making a play for Yahoo! or its Alibaba Group stake.

I think the bottom line here -- and it's my educated guess -- is that Einhorn had done less research on Yahoo! than Loeb and just could handle the idea of looking like a fool in front of his investors if Ma did something crazy or Yahoo!'s board did something dumb.

Einhorn isn't alone in that view. On Aug. 8 -- the same day Loeb was jumping on Yahoo!'s stock at 52 week lows -- I met with 3 large investors in New York who were looking at Yahoo! All three wouldn't touch the stock, despite my strong urgings to the contrary.

They all talked about Ma as a loose cannon and how they'd look terrible in front of their investors if he screwed things up.

When I argued why I believed he wouldn't, one investor barked back: "Yeah but that's just your opinion. I need assurances. We can't put a billion to work on this with an opinion backing it up."

Loeb did.

Look, I don't begrudge Einhorn or others who passed on Yahoo! because of either strong risk management hurdles or insufficient comfort based on their research to date. Every firm has to know when they'll take a pass on something.

However, it was that hesitation on the part of others which was Loeb's (and other longs') opportunity. The difference between the potential return and the potential risk was -- in his view -- much more highly skewed to the upside than the downside.

The bottom line is that you cannot just follow so-called "whales" and how they trade a stock. Do your own due diligence. Form your own opinions. Invest accordingly.

[Jackson was long YHOO at time of publication]

Read the full post on TheStreet

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What Does Microsoft Have Up its Sleeve?

By Eric Jackson06/29/11 - 07:00 AM EDT

NEW YORK (TheStreet) -- The price action in Microsoft(MSFT_) this week has been unusual to say the least.

The stock jumped 4.5% on Monday. That would be equivalent to Sina(SINA_) jumping 45% in one day. That just doesn't happen for Microsoft.

The stock also followed through nicely yesterday moving up another 1%. There wasn't any real news to explain the move in Microsoft, although some pointed to a Tuesday cloud-computing conference Microsoft was hosting or a report that they would move up the release date of Windows 8.

That leads me to speculate on the real story behind the move which probably a few insiders are only privy to at the moment.

It could be that Steve Ballmer has said something to some close confidantes about leaving the CEO position. (And maybe he doesn't know them as well as he thinks he does, because they've now blabbed about it to some trader friends who are jumping on the news to buy anticipating a big relief rally.)

David Einhorn has said previously that he hopes to see Ballmer gone as CEO, as he thinks he's a weight on the stock. I don't disagree that there would be a rally on the news but I just don't believe Ballmer is ready to leave.

Ballmer has only been there 10 years but, more importantly, he owns 5% of the company. He's essentially a co-founder with Gates and Allen. That means he gets to leave when he wants and I just don't think he's ready to go out when some New York hedge fund manager tells him to.

The other possibility is that the U.S. government will let Microsoft and other big corporations repatriate all their offshore cash back home. Many people seem to believe this will be a boon for the domestic economy as corporations will be able to invest more back home.

Maybe that will happen. And maybe it will be good for the economy. And maybe that's why all stocks have been up this week. But if that is the reason behind Microsoft's jump in its stock price, why haven't we seen a similar move in Cisco(CSCO_) which also has a big cash hoard outside the U.S. There has to be something else.

......

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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CNBC: Ballmer vs. Einhorn

My thoughts on Ballmer vs. Einhorn:

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Lighting a Fire Under Microsoft

By Eric Jackson
RealMoney Contributor
5/26/2011 1:45 PM EDT
Click here for more stories by Eric Jackson

I was surprised that David Einhorn spoke out so strongly against Steve Ballmer's leadership of Microsoft (MSFT - commentary - Trade Now) yesterday during his presentation at the Ira Sohn Conference.

Einhorn certainly doesn't mind taking poor management to task -- he famously did so with Lehman Brothers and The St. Joe Company(JOE - commentary - Trade Now) -- but he doesn't usually do it for his long investments. He's not an activist investor in the spirit of Carl Icahn or even his friend Bill Ackman.

Maybe it's because he's been a fan of Microsoft for more than five years -- he once famously compared it to Alex Rodriguez of the Yankees, a comparison he'll likely want to update after buying part of the Mets today -- and he's frustrated that the stock is flat over that period (not including dividends).

But he certainly came out swinging yesterday, saying that 10 years had been long enough for Ballmer to show his stuff to investors. He also called the senior team at Microsoft "Charlie Brown management."

But I don't believe this is the start of a long activist battle between Einhorn and Ballmer. I don't believe he's considering a proxy fight. Why? Steve Ballmer is not going anywhere until Steve Ballmer is good and ready. This is a guy who owns 4.75% of the entire company. (For comparison's sake, Bill Gates himself owns 7.2% of Microsoft.)

Ballmer is effectively a co-founder. Just as with Jim Balsillie and Mike Lazaridis at Research In Motion (RIMM - commentary - Trade Now), Ballmer has assembled his board. He's sold them on his strategy, and he has their backing.

...

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

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Pulling Back the Curtain on Taobao -- And Yahoo!'s Hidden Value

Taobao is the crown jewel within Yahoo!'s list of assets. It is a big reason why Yahoo!'s stock should be trading at $31 a share today - and much higher in the future.

Read the full post in Forbes here.

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Soros' Opinions Given Too Much Weight

By Eric Jackson, Senior Contributor11/17/10 - 06:00 AM EST

George Soros is arguably the most famous first generation hedge fund manager in the world.

A quick search of the 80-year-old's name yields 2.5 million hits on Google. Julian Robertson, 78, yields 740,000 hits. Carl Icahn, 74, generates 400,000 hits. (If you want to characterize Warren Buffett as also a first- generation hedge fund manager, the 80-year-old wins the popularity contest with 3.6 million Google hits.)

Of the current set of modern hedge fund managers, only John Paulson yields more Google hits than Soros, with 2.6 million hits. Soros has about 10 times the number of hits as the man David Rosenberg calls the best money manager in the world: Paul Tudor Jones. David Einhorn has only 225,000 hits and Bill Ackman generates only 84,000 hits. Eddie Lampert, who was once declared the next Warren Buffett, has only 32,000 hits.

Of course, past performance -- and hits on Google -- by no means indicate future performance. Yet, these hits indicate how often the broader media pay attention to the views of these managers as a part of the public discourse on our financial markets.

Popularity of these managers is why CNBC and other media outlets pay so much attention to their 13-F filings, which disclose how their portfolios change each quarter. For example, earlier this week, we found out that John Paulson trimmed his Bank of America(BAC_) stake last quarter and sold his entireGoldman Sachs(GS_) stake. David Einhorn bought more Apple(AAPL_).

In a Wall Street Journal story yesterday, we also learned that Soros "reduced his direct ownership stake in the SPDR Gold Trust(GLD_)" and he "reported no stake in Best Buy(BBY_)."

To the Journal's credit, it also referenced that it was Soros' hedge fund -- Soros Fund Management -- which made other moves. In one paragraph, the Journal uses Soros and his fund interchangeably: "The value of Mr. Soros's stockholdings was $6.7 billion at the end of the third quarter. The fund reported stockholdings worth $5.1 billion at the end of the second quarter."

However, in an hour long discussion with Reuters' Chrystia Freeland in September, where he discussed his macro views on gold, the U.S. deficit, and Europe's debt problems, Soros admitted during a Q&A session afterwards when asked about one of his fund's stock positions that he wasn't involved in the day-to-day decisions of the fund. Therefore, he couldn't discuss a specific stock.

........

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Latest Ideas From Some Heavy Hitters

By Eric Jackson
RealMoney Contributor
5/27/2010 5:00 PM EDT
Click here for more stories by Eric Jackson

Yesterday was the 15th annual Ira Sohn Research Conference in New York. The event brings together the best hedge-fund managers in the world to present their top ideas for the coming year. All proceeds from the event go to charity, supporting pediatric cancer and other childhood diseases.

The event has a stellar reputation, partly because of its track record of managers presenting ideas here for the first time publicly that go on to pan out exactly as they argue. In 2008, David Einhorn made a splash at this conference by pointing out some of the problems with Lehman Brothers -- four months prior to that firm's bankruptcy. At the 2007 conference, Bill Ackman called for the demise of Ambac (ABK - commentary - Trade Now) and MBIA (MBI - commentary - Trade Now), and last year he touted General Growth Properties (GGP - commentary - Trade Now) when the stock was under $4 -- it's now over $13. Some have called this conference the Learning Annex for hedge-fund managers.

Just an idea for the event organizers: There's such interest in the ideas from the event that they should consider live streaming the event on the Web. They could charge for it and likely still get a large audience that would further support their worthy cause.

Yesterday's roster of speakers was stellar as usual, including Ackman of Pershing Square, Einhorn from Greenlight, Sam Zell, David Tepper of Appaloosa and Seth Klarman of Baupost.

Many speakers, including Einhorn and Ackman, reiterated arguments they've made publicly, for example shorting the ratings agencies likeMoody's (MCO - commentary - Trade Now) andMcGraw-Hill (MHP - commentary - Trade Now) and going long General Growth. Other speakers, such as Niall Ferguson of Harvard and former auto-czar Steve Rattner, chose to stick to macroeconomic predictions.

David Tepper, who was bullish in 2008 and lost money, then stayed bullish in 2009 and made $4 billion, was still bullish yesterday. He pointed to the bleachers, a la Babe Ruth, and said that Bank of America (BAC -commentary - Trade Now) is going to $27. Tepper also likes AIG (AIG - commentary - Trade Now) and the beaten-down Spanish bank Banco Santander (STD - commentary - Trade Now).

....

[This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required.]

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Why Take a Chance on Moody's?

By Eric Jackson
RealMoney Contributor
4/29/2010 1:15 PM EDT
Click here for more stories by Eric Jackson

Investors have been lulled into a sense of complacency about the prospects for Moody's (MCO -commentary - Trade Now) since its recovery off the March 2009 lows. Even though the stock has dropped since the SEC leveled charges against Goldman Sachs (GS - commentary - Trade Now) a couple of weeks ago, investors seem to have looked past all the market turmoil over the last two years and assumed that life is going to go back to normal for Moody's.

That is a false assumption. There are many reasons to avoid holding Moody's long at the moment.

The case in favor of owning Moody's is that the government is going to take a hands-off approach to regulating the ratings agencies that control anoligopoly (including S&P, which is owned byMcGraw-Hill (MHP - commentary - Trade Now), and Fitch). If this is the case, and if you have a recovering economy, then companies will need to issue debt as part of the lifeblood for growing their businesses, and they will need Moody's (and others) to sign off on that debt.

Moody's has historically printed money from this business. Gross margins for Moody's in 2007 were 74%. As a friend of mine who used to work for Moody's said to me, "The only people who get margins like that are gun-runners and drug cartels."

Up until the SEC's case against Goldman, I might have had to buy the status-quo argument -- as much as it sickened me. After all, how can you not say that Moody's and the other ratings agencies don't deserve to be further regulated after the Lehman market meltdown? Yes, there were many actors who deserved blame (including politicians and consumers, not just Wall Street banks). Yet the ratings agencies' remarkably blissful ignorance and failure to warn investors of possible risks to the housing market are shocking even now.

In the fall of 2008, post-Lehman, the agencies threw kerosene on a fire by classifying formerly AAA-rated super-senior tranches of housing-related debt as junk -- overnight. I'm not saying it wasn't junk, but how does AAA become junk in 12 hours? Clearly, the agencies should have flagged this as a concern much earlier and gradually marked the assets down. Instead, their helter-skelter move sent shockwaves of panic through the market, leading to a further decline in market prices.

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[This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required.]

Note: Jackson had a short position in MCO at time of publication.

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Rated 'R' for Resilient

By Eric Jackson
TheStreet.com Senior Contributor
12/11/2009 11:00 AM EST
Click here for more stories by Eric Jackson

When the history of the financial meltdown of 2008 is written, there will be a special chapter devoted to the large credit-ratings agencies and their culpability in slapping "AAA" on the subprime mortgages and corporate debt that turned out to be toxic assets. Yet we still don't know if that chapter will close with a regulatory overhaul of a now battered industry, or with lost political momentum that leaves us with the status quo.

For years, the Big Three ratings agencies, Moody's (MCO - commentary - Trade Now), Standard & Poor's (a unit of McGraw-Hill (MHP - commentary - Trade Now) and Fitch (a unit of French company Fimalac), had thrived on an "issuer pay" business model. The companies that brought their debt to market paid the agencies to rate the risk to investors of buying and holding those products. This business model proved far more lucrative to the ratings agencies -- Moody's and its cohorts have historically enjoyed operating margins of more than 43% -- than the one they used prior to the 1970s, when it had been the prospective investors who paid for the ratings.

They also enjoyed a regulatory advantage. The Securities and Exchange Commission certifies Moody's and other ratings firms as Nationally Recognized Statistical Ratings Organizations, an accreditation granted under strict scrutiny. Only NRSROs can rate products that certain investors are required by their internal rules to hold, which effectively gives the Big Three a steady stream of customers.

In a financial system built on investor confidence, the ratings agencies were supposed to provide the underpinning for that trust. But in the wake of last year's financial debacles, it is the agencies themselves who are struggling to explain why anyone should trust their judgment.

[This is the first third of the article. To read the entire article, click here to go to RealMoney.com]

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Paulson is About Performance

By Eric Jackson, Senior Contributor

11/25/09 - 06:02 AM EST

Stock quotes in this article: BAC , C , SHLD

There were two reactions I got to my column last week on Greg Zuckerman's new book The Greatest Trade Ever about John Paulson's $20 billion bearish housing trade in 2007: "He was lucky" and "He won't do it again."

Even though these comments are mostly sour grapes, here's the problem with overanalyzing winners -- for the financial media, potential investors and even money managers, like Paulson himself.

Our society celebrates winners (athletes, politicians and investment managers like John Paulson) and ignores losers. From 1994-2007, in the eyes of many, Paulson was a loser. His hedge fund, Paulson & Co., had mediocre returns during this period. He was defined as a merger arbitrage guy. Because of this categorization, some investors were alarmed by his ideas about betting against the housing market using credit default swaps. Yet, he did -- and we know the results.

John Paulson, hedge fund manager

Although his pre-2007 performance didn't stand out, people who knew Paulson thought highly of him, according to Zuckerman. Investors were often impressed with his understated but effective way of clearly articulating his investment theses.

Post-2007, the perception of Paulson went from career underachiever to seer. He is now celebrated, and his recent stakes in Citigroup(C Quote), Bank of America (BAC Quote) and gold are seen as green lights to other investors to buy.

If Paulson told us tomorrow that Martians were going to invade us next month, there would be a run on Martian army gear.

Yet, this reaction is equally superficial in the opposite direction. We don't care why he thinks gold is a buy or why Bank of America will double in two years. This isn't Paulson's fault. He can't help it. It is the reality that's developed around him while he's gone about his business trying to make money for his investors. It's exactly the same as the heavy attention paid to Warren Buffett's moves.

This is classic "survivorship bias." There were 20,000 hedge funds in the halcyon days of 2007. No matter what the markets did over the next 18 months, five to 10 funds would have had scored 100%-plus returns and been celebrated. If Bernanke had cut interest rates drastically in 2006, maybe New Century would have continued to be a huge moneymaker by issuing subprime mortgages.

David Einhorn would be known today as having the canny intuition to get long that stock (and join its board) in 2006, instead of for calling Lehman's implosion in early 2008. Had the housing boom continued, perhaps Greg Zuckerman's book would be about former Bear Stearns hedge fund manager, Ralph Cioffi. Of course, this didn't happen and, instead, Cioffi is fighting civil charges by the SEC, and John Paulson is the hero.

Survivorship bias leads to celebrating the winners and -- usually -- overinterpreting their moves leading up to their success and trying to apply these actions to future situations. At least no one in the mainstream media has yet called John Paulson "the next Warren Buffett."

Remember Eddie Lampert? That's what Business Week and countless other magazines called him back in 2004. Although many still defend Lampert as smart, his past five years of performance have been very disappointing, and his Sears Holdings(SHLD Quote) investment specifically has been ... early.

Although it's easy to pick on the financial media for these flubs in hindsight, they are merely reflecting our own deep-seated human desires for making sense of a seemingly senseless market. They wouldn't tell us who'll be the next Warren Buffett, unless we wanted to buy their magazine (or click on their links) to find out. We gravitate to "winners" for pearls of wisdom to help us be more winnerlike.

This is why investors "performance chase." The best performing hedge funds (and mutual funds) will always attract the most capital. After all, performance is what it's all about. Most investors will overlook lots of quirks, ethical lapses and hard-to-follow musings about the state of the markets in investor letters, if the money manager performs.

The longer and better he or she performs, the more leash we give him or her (like Madoff) or the more we celebrate him (like Peter Lynch, Lampert and now Paulson). But past performance (and a fund's ability to raise capital) is no guarantee of future success.

Investors should judge money managers on their current ideas. If you'd done so when John Paulson made his argument for why to bet against housing in 2006 and 2007 -- despite the fact that he wasn't a "housing guy" -- you made a lot of money. His pro-gold and pro-financials views now should be also judged on their merits, not because "John Paulson thinks so." Of course, you and I will probably never have the chance to place money with Paulson. So this lesson becomes even more important. How are you going to know the next John Paulson when you bump into him or her?

Finally, let's turn to the critique of "Paulson will never do it again." Most people assume that smart people will, over time, outperform their peers. This is true. Yet, we also know smart people drove Enron, WorldCom and Lehman Brothers off cliffs -- all companies that, before their collapses, had been celebrated in the financial media with books written about them "getting it" while their competitors didn't. How can this happen and how can Paulson avoid this fate?

Michael Burry, a doctor-turned-hedge fund manager also profiled in Zuckerman's book, who also profited from betting against housing despite great protestations from his investors, had a memorable line: "A money manager does not go from being a near nobody to being nearly universally applauded to being nearly universally vilified without some effect."

Paulson's gone from obscurity to being perceived by many as the top hedge fund manager in the world. With that change, Paulson has received enormous wealth, but at a cost. His every trade gets discussed and debated in the media. He's likely become more isolated for security reasons, making it harder to relate to the "real world" in which his investments operate. And he likely has more "yes men" around him than ever before.

If you're on Paulson's team, you've made huge money recently. Unwittingly, you'll start agreeing with him more on his new investment ideas. Anyone who doesn't agree will probably leave on his own accord or be asked to leave. Those remaining on the team are the most loyal and the least likely to disagree with the boss' views. Active debate helps form great investment ideas. But, as money managers get more successful, they face less and less debate.

I disagree that John Paulson was lucky in betting against housing. From Zuckerman's account, Paulson did his homework, while everyone else stayed too long at the party. I also think that he can still conceive of and execute great trades. But there's no question that it will be more difficult now than before . Ask Lampert. Paulson's continued success is not his birthright.

Any investor choosing a money manager needs to remember the story of the emperor's new clothes. Managers like to dazzle investors with technical terms and fancy charts. However, they should be able to clearly and articulately explain their basic strategy. No amount of buzz or press clippings is an adequate substitute for clear-headedness. (In fact, if they seem overly concerned with their media appearances, this signals they care more about their image than managing your money.) You shouldn't worry about asking a stupid question. If they show a whiff of arrogance in responding to your questions, run away as fast as you can.

Answering these questions will help you skate to where the puck's going, not where it's been. It will also help you ensure differentiating between "flash in the pan" money managers from those with staying power. And, just maybe, you'll find the next John Paulson.

At the time of publication, Jackson fund held no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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