Peter Thiel: From Frankfurt to the World of Global Markets.
If one believes in luck, fate, karma, or even the Universal Law of Attraction, the story of money manager extraordinaire, Peter Thiel, will only reinforce one’s beliefs. Of equal importance, the traits of courage, belief in one’s self, commitment to one’s opinion, and gut feeling, also play a major role in the story. How else can one explain an almost chance meeting at Hobee’s Coffee Shop, near Stanford University, one early morning in 1998 that eventually resulted, only 3 years later, in a $1.5 Billion payoff?
No one but Peter Thiel knows when he first decided he could out think, out risk and out play the market, but he has been consistent in his philosophy for years. Born in Frankfurt, Germany in 1967, Peter Thiel spent time in no less than seven elementary schools in places from California and Ohio to Namibia and South Africa. A chemical engineer, his father Klaus, had work assignments around the globe. Eventually, some might say mercifully, the family, including mother Susanne, younger brother, Patrick, and Peter, made a home in Foster City, California, just north of Silicon Valley.
While a student at San Mateo High School, Peter developed into both a math genius and a chess prodigy, eventually finishing first in his class. He achieved and has maintained his U.S. Chess Master rating up to the present. After his many travels as a child, he decided to stay close to home when college beckoned. He picked nearby Stanford, deciding to major in philosophy. During his tenure, he became a free-market libertarian, believing that people should be permitted to do as they wished, assuming they did not impinge on the freedoms of others.
French literary critic, Rene Girard, shaped Thiel’s prospective of the behavior of both humans and the financial markets. Girard’s theories maintain that people “borrow” their desires from other people. He believes that one’s desire for a certain object is motivated by the desire of another for an identical object. Girard coined a term for this trait: “mimetic desire.” Girard, professor emeritus at Stanford, believes this propensity also drives financial markets as well. Simply put, “Some people want to buy a stock simply because they see everyone else buying it.” Girard states, “The market is a quintessential mimetic phenomenon.”
How does this all relate to Peter Thiel’s coffee shop meeting and subsequent good fortune? A little more background will bring things into better focus.
One warm summer day, as Peter Thiel conducted a finance lecture at Stanford, a young software engineer dreaming about an Internet startup, Max Levchin, walked into his class by chance. What followed would change both men's lives forever. After a pleasant chat, the two men decided to meet for breakfast at Hobee's, in Palo Alto.
During their breakfast, Levchin asked if Thiel would invest in his idea to offer a secure method of allowing handheld computers to communicate. Peter liked the idea and presentation, deciding to buy into the concept and the company. Originally believing he would have a short-term relationship, Thiel eventually froze his fledging hedge fund career, dedicating the next four years to the new company – which eventually grew into PayPal! Peter even joined the new venture as its CEO in December 1998. The rest, as many are wont to say, is history.
However, the amazing success of PayPal was not without problems and serious issues. Shortly after PayPal began fulfilling his dream of its becoming the “new currency for the world economy,” Thiel had to face a number of challenges. Russian hackers managed to pirate millions of dollars from the new venture and credit card processing companies cried foul, claiming that PayPal was in violation of their regulations. At one point, PayPal had enough funding to survive only another two months while still losing around $10 Million a month. Shortly after, because of what was then the dot-com zenith, Thiel tried to raise money for PayPal, then valued at around $500 Million by VC’s even though losing money at a rapid rate. Nasdaq had just broken its own record, hitting 5,048, and the majority of investors thought the dot-com phenomenon would last forever.
Peter, however, privately disagreed, believing that the dot-com era was going to crash spectacularly very soon. He already realized what the market came to know shortly thereafter: There was very little substance to the majority of dot-com “superstars.” Nonetheless, he capitalized on the opportunity presented to him, raising $100 Million to fund these hard times for PayPal, closing this large deal in only three weeks. The closing was March 31, 2000. This was critical as the very next day, the Nasdaq began its famous freefall, crumbling by 67% in less than 18 months! Had he not worked feverishly to locate an interested VC and jumped through numerous obstacles to close the deal so quickly, PayPal would most certainly not exist today. Thiel had, once again, worked his “magic.”
Peter Thiel worked diligently to establish PayPal as the leading company to handle purchase payments over the ‘Net and he was successful at branding his company as the expert in this area. As a result, he began positioning the company for an IPO, which he registered only weeks after the World Trade Center tragedy. As usual, his strategy was successful.
PayPal stock began trading on February 15, 2002, increasing 55% on the very first day. Meanwhile, out in the office parking lot, Peter and his management team celebrated with a free flowing keg party, while Thiel, in between keg visits, played speed chess against ten opponents at once, losing only one match (which still aggravated him to no end). In fact, he exploded at the defeat, smashing all of the chess pieces on that board. Borrowing a famous sports phrase, Thiel told all in range, “Show me a good loser and I’ll show you a loser!”
As all investors and eBay participants know, it was only eight months later that an agreement was in place to sell PayPal to the giant auction site for $1.65 Billion. Thiel had invested $240,000 in the new company after his meeting with Levchin and realized a very attractive payout. Only 34, he rode off into the sunset with $60 Million, thank you. After purchasing a Ferrari Spyder, Peter purchased a lavish condo in the Four Seasons Hotel in San Francisco. The real good life had now begun.
But – it should not be assumed Peter Thiel’s career had been less than successful prior to the PayPal endeavor. When he started his Stanford experience, the era of U.S. “culture wars” was exploding on this campus and many others. Students were spewing venom on many issues, including curriculum items. The age of political correctness was dawning as Stanford students complained that its curriculum shortchanged non-Western cultures, women and minorities of all kinds. Student groups even contemplated the creation of a “speech code” which would prohibit all sexist, racial, religious, and homophobic comments.
Peter Thiel was not amused. This trend toward PC gave him great discomfort. He believed that, in addition to criticizing Shakespeare, Chaucer and Aristotle, these protests were geared to restricting freedom of speech and expression, long treasured in the U.S. As a more consistent response to this atmosphere, Thiel founded the Stanford Review in 1987. Its motto: Fiat Lux (Latin for “Let there be light.”) A number of the Review’s crew ended up at PayPal with Thiel prior to the IPO. The Review not only still exists but is currently the main conservative newspaper on campus.
One of the former editors, David Sacks, proudly states that, “The Stanford Review stood for free speech, no speech code and the keeping of the great scholarly works in the curriculum. Sacks eventually joined Thiel at PayPal and helped bring it to preeminence. Another Stanford student, Rachel Maddow, now a radio show host, describes the Review as “mean spirited with a juvenile approach toward the consequences of their words and actions.” But, she concedes, “They were very good at generating an uproar,” which is exactly what Thiel wanted to do.
After graduating in 1989, Peter decided on law school at his alma mater. Still hanging out with his pal, Sacks, they became fans of Leo Strauss, the philosopher considered to be the father of neo-conservatism. Still annoyed with the changing Stanford curriculum, Thiel and Sacks authored a scalding essay in 1995, published in the Wall Street Journal, ridiculing Stanford’s policies. Stanford President Gerhard Casper and then-provost Condoleezza Rice were not amused. They wrote an angry response to the WSJ calling the piece a “cartoon, not a description, of our freshman curriculum.” Later that same year, the duo made headlines again with the publishing of “The Diversity Myth: Multiculturalism and the Political Intolerance on Campus.”
After earning his JD, Thiel clerked for U.S. Federal Circuit Judge Larry Edmondson in the Atlanta jurisdiction, eventually joining the firm of Sullivan & Cromwell, LLP, in New York City. He lasted all of seven months and three days, at which time he resigned because of total boredom. Thiel needed the excitement and thrill of “the deal” to keep his considerable professional juices flowing.
He decided to polish his, until now, totally theoretical investment skills by joining the firm of CS Financial Products, now part of the Credit Suisse Group. Thiel spent his working hours trading derivatives and currency options for the next year. He quickly decided it was time to follow his own map, not someone else’s. Returning to California, he somehow raised $1 Million from friends and family, beginning his first macro fund, Thiel Capital Management. With no experience, Peter faced daily struggles to raise funds and investors, but by 1998, he did have more than $4 Million in his management portfolio. He also took another major step: He hired his first employee, Ken Howery, who had been managing editor at his beloved Review.
With Internet stocks breaking new records, Peter Thiel convinced real estate developer, Tom Ford, to rent he and Howery an over-sized closet in his office, which, not coincidently, was in the heart of the venture capital community. Because they were really in a closet with no windows, just a couple of desks, Thiel brought in wall hangings of outdoor scenes to “improve the view.” This was about the time Peter Thiel had his fateful meeting with Max Levchin.
Only weeks after the PayPal sale, Thiel decided to see if the magic still existed, founding a hedge fund firm, Clarium Capital Management, LLC, in his Four Seasons apartment. The magic had stayed with him as he has become one of the most honored and successful hedge fund managers in America. How successful? Using the original $10 Million invested to start the firm, Clarium now manages over $2.1 Billion in assets, while having tripled clients’ investments funds. Moving out of his apartment, Clarium now enjoys exquisite all glass walled office space right near the Golden Gate Bridge. More importantly, Thiel and his fund have returned an incredible 230.4%!
Meanwhile, many of his PayPal buddies were also mining new territory. Chad Hurley, Steve Chen and Jawed Karim founded the ever more successful video sharing Web site YouTube, Inc, finally selling it to Google for $1.65 Billion. The now-famous Max Levchin founded Slide, a popular photo sharing website. Reid Hoffman, EVP, started the successful Linked-In Corp. for business networkers, while VP, Jeremy Stoppelman began Yelp, helping people find restaurants, businesses and shops in their local area. A diverse and creative group to say the least.
Peter Thiel has stayed more to his investment expertise, patterning Clarium after the former Quantum Fund, formerly managed by investment guru, George Soros, who had a great run with his macro hedge fund. Using macroeconomic theorems to uncover winning trades, macro funds trade Eurodollars, Asian bonds, crude oil, commodity futures and just about anything else for which there is an viable market.
The hedge fund arena was formerly dominated by super macro managers like Soros and Julian Robertson. In the early 1990’s, over 70% of the $39 Billion in the industry were managed in macro funds. But first the dot-com frenzy, then the high tech bull market caused many investors to forsake hedge funds and move their money to the more glamorous Nasdaq exchange. However, Thiel is still committed to many of the principles that made Soros into a billionaire.
For instance, Soros made millions betting that the British government would devalue the pound back in 1992. Using similar techniques, Thiel buys U.S. Treasury bonds and energy stocks, also betting on deflation accompanied by higher oil prices. With recent annualized returns in the 26% range, Clarium is considered one of the world’s best macro funds as rated by Hedge Fund Research, Inc. in Chicago.
It is ironic that the high tech arena made Thiel rich and did serious damage to the hedge fund industry. For example, Soros lost major dollars when Nasdaq bottomed out, while Robertson lost billions and just stopped managing other people’s money altogether believing he simply didn’t understand market tendencies any longer. Yet, Thiel still believed in the viability and success opportunities in the hedge fund industry, a commitment that has proven to be well founded.
No one knows whether Thiel foresaw the dramatic changes that took place in the hedge fund industry or whether it was just another example of him following his famous hunches. Currently, Wall Street companies and fund managers administrate much more hedge fund money that the giants Soros or Robertson ever imagined. The top 20 manage over $320 Billion, almost 25% of the entire industry. While, macro-style funds now control less than 12% of industry assets.
The hedge fund client base has also shifted rather dramatically. Once the purview of rich individuals, with or without ownership in closely held companies, now pension funds, insurance conglomerates, and private/university endowments are also major players. They apparently believe that a well-managed hedge fund will provide the consistent returns, in both good and bad markets, to allow them to keep the sacred promises they have made to their benefactors. The common denominator always remains consistent: Large institutional investors would rather make a smaller profit while being subject to smaller risk than possibly making a lot along with the inherent higher risk.
But Thiel still believes, as Soros and Robertson did, that vast fortunes can me made if you’re willing to gamble big stakes on your educated view of the world economy and the techniques you have developed to win large in this arena. For instance, Thiel literally wagered all of his client’s assets that the fallout from the boom of the 1990’s would hurt the U.S. and provide new opportunities. He assumed the housing apex would collapse with rising interest rates while the price of crude oil would skyrocket. To date, his view has been correct.
Thiel believes that not many of the current hedge fund managers are ready for these events but he thinks he has positioned Clarium to maximize returns during these turbulent times. As he so eloquently states, “The hedge fund’s mission is to make sense of an extraordinary moment in time in the world – a time of retail sanity amid wholesale madness.” Time will validate or disprove the accuracy of his assessment.
He has maintained his individualism during his sometimes meteoric rise to success. For instance, he moved Clarium’s offices from San Francisco’s financial district to the Presidio, the former Army fort on the Bay. One important reason: George Lucas constructed his beautiful new headquarters there, complete with a dramatic statue of Yoda, the Jedi Master. He refuses to admit that Yoda had any influence on the move (although he readily states that Star Wars is his favorite movie series), saying that his reasons were really based on his belief that investors, even outwardly savvy ones, still “follow the herd” when making decisions. Their reality becomes that which all others are doing, not on true projected market trends. He freely says that he wanted to keep his investment team away from the other money managers surrounding them at his former Bank of America Center location. Always the contrarian, Thiel is attempting to duplicate the successes George Soros enjoyed in the 1990’s.
Yet Peter Thiel disputes the contrarian and maverick nomenclature. His totally contemporary headquarters (around 22,000 square feet) also include a magnificent library housing an impressive collection of leather-bound books from many of the masters, including Guy de Maupassant, Leo Strauss, and Charles Darwin. Maintaining he is a classicist, he also invites some of the world’s most respected scholars from a wide diversity of disciplines to address his team on a quarterly basis.
The stated goals of Thiel and Clarium are relatively modest on paper. He doesn’t want Clarium to become bloated and risk becoming unmanageable and too stratified. The fund has been temporarily closed to new investors although Chief Operating Officer, Ralph Ho, states that Clarium may at some point manage as much as $10 Billion in the future. So much for modest objectives.
Eschewing normal working hours, Thiel’s team normally arrive at the office between 5:00 and 6:00 a.m., workout or run in late afternoon, then return to their desks around 5:00 pm to put in another 2-3 hours of work. Interestingly, their “work” is almost exclusively involved in research instead of trading client assets. Using small test accounts, they validate the trades and courses of action recommended by the results of their research. While a bit unusual, this regimen follows the lead of Thiel, whose typical business attire involves polo shirts, jeans and sneakers, and who prefers atypical odd hours himself, including answering many e-mails in the middle of the night.
Although his outward professional persona is a bit eccentric, his money management objectives are rather simple and straightforward. Unlike many hedge fund managers, who are constantly moving in and out of markets to hopefully maximize every opportunity while minimizing all expected downturns, Thiel has wagered all on three assumptions and believes his theories will generate positive returns. His theorems:
The price of 30-year U.S. Treasury Bonds will increase as the U.S. economy retreats after the housing boom crashes;
The U.S. dollar will strengthen versus the Euro as many investors reduce investments in riskier emerging markets which are funded by debt;
Energy stocks will not only remain strong, but increase along with crude oil prices as world production maxes out.
An additional idiosyncrasy is explained by head trader, Matthew Kratter, who boasts a Ph.D. in English from the University of California, not a business degree, who states, “We only make one big trade per week.” Using the massive amount of research done by the whole team and after discussing all available options and considering various risk/reward strategies, Clarium then makes its play. Clients must be ready to handle this level of risk as Thiel has literally put all their “eggs in one basket.” In recent history, the strategy has worked. In 2003, for example, Clarium got the investment world’s attention by logging a 65.5% return based, primarily on the theory that the U.S. dollar would weaken. Big risk followed by big reward.
The obvious question: Is Peter Thiel lucky or good? Steven Drobny, a partner in Drobny Global Advisors, which advises macro funds on world markets, has admitted he’s received numerous calls from investors asking this question. He also states, “Whenever you have someone who puts up sensational returns out of the gate, people wonder if he’s rolling the dice or if there is real thought behind it.” 2004 proved that neither Thiel nor Clarium was perfect as the fund delivered a return of only 5.6%. But Thiel’s big bet that the price of crude oil would jump proved correct in 2005 and the fund got back on track, producing a 57.1% gain. “Peak Oil”, a geologic theory that maintains that world oil production is currently at or close to its maximum has held Theil’s attention and support for some time. Regardless of the accuracy of the theory, crude oil prices over the past two years have been the highest in history, helping Clarium’s earnings to be quite impressive.
While the superb gains make investor headlines, Clarium has had some rocky times as well. On at least three occasions, Thiel’s trades have resulted in losses of around 11% in just one month! Recently, as the Dow was again approaching a new all-time high, Thiel believed that the sharp decline in home sales was evidence that his prediction of an equally robust decline in the U.S. economy was imminent. He laid his “bets” on his projection that the Russell 2000 Index would also downturn. He was wrong as the Russell continued to rise. At that point, Clarium was down a disturbing 5.2% for the whole year! As David Philipp, an investor in Clarium and a managing partner of Gyre Capital Management, willingly says, “Thiel can be a scary guy if he’s the only one in your portfolio.”
At the same time,Peter Thiel continues to prove that he is committed to his theories and does not settle for giving mere lip service to his projections, as he has invested his entire liquid net worth in the Clarium fund, putting him at much greater risk than any single investor. He also continues to bet on his ability to generate excellent returns as, unlike most fund managers, he charges his clients no annual management fee. His only income comes from keeping 25% of Clarium’s gains, requiring him to perform better than his competitors in order to generate income.
Along with high-level intestinal fortitude, Thiel exhibits a strong sense of loyalty and investment adventurism. He has invested in a number of his former PayPal team’s start up companies through the Founders Fund, a venture capital firm. While he missed the opportunity to invest in the highly successful YouTube, bought by Google for $1.65 Billion, (Thiel says, “It just kind of fell through the cracks.”), he is very high on Facebook, founded by Mark Zuckerberg in 2004. Thiel backed the start up and advised Zuckerberg to relocate to Silicon Valley. Calling Thiel his mentor, Zuckerberg did just that. He said goodbye to Harvard University, where he was a student, and headed west. Should Facebook, a more sophisticated version of MySpace.com, encounter a deal similar to YouTube, Thiel would add around $100 Million to his bank account.
Both critics and supporters say Thiel runs Clarium as if it were a dot-com entity. Employing 42 people now, he plans to continue his rapid expansion. His recruiting policy is to ask his team to think of the three smartest people they know and ask them if they might be interested in working for him. Ever direct, Thiel says, “They only need to have one good idea a year to more than pay for themselves.” COO, Peter Ho, has his own perspective, saying, “The company is an extension of Peter. It’s a combination of start up, think tank and hedge fund.”
Kevin Harrington, a physicist who formally conducted mathematical research for the Department of Defense, is a close associate of Thiel at Clarium. He agrees with Thiel that the U.S. economy and the stock market are headed for problems. They have collectively termed this coming downturn as the “Petrodollar Illusion.” They believe the record prices for crude oil have permitted OPEC countries to invest huge volumes of dollars in the U.S. economy, which has resulted in an overvaluation of both the stock and housing markets in the United States. In the short term future, they believe that the Petrodollar Illusion will abruptly disappear, which will drive the U.S. economy into a deflationary position. They continue to focus on strategies that might allow Clarium and its clients to profit from this downturn. The future performance of Clarium will greatly depend on the accuracy of their predictions.
While Peter Thiel remains open and accommodating to all questions about his investment and professional life, he has consistently kept his personal life a mystery. Levchin, his cofounder at PayPal who has known him for years, is unable to recall even one instance when Thiel has mentioned his personal life. Although the world is aware of his penchant for having regular dinner parties at one of his homes, his invitees, a wide diversity of prominent business persons, scholars and well known professionals, these gatherings are really business and not personally oriented.
As he enters his forties, Thiel still finds his success, at times, a burden. He has often been asked why he remains single and responds in much the way other very successful people have answered this question in the past. “There is this weird downside to the money thing,” he states, “ the degree to which people will push to meet you is on one hand flattering but it often becomes utterly exhausting and frustrating.” It appears the rest of the world will have to be content with learning more about his professional persona only.
For now his only public display of a life away from the office comes with his monthly dinners at his apartment in New York City or his digs in the Marina district in San Francisco. In a further display of his commitment to the belief that the housing market will crash, he sold his apartment at the Four Seasons and now rents both of these homes. To further the mystery of his apparent detachment from the world of the personal, dinner attendee’s report that, while exquisitely decorated, these homes appear to be “stage sets“ and appear that no one really lives in them. Both homes are totally devoid of any family or friend photos, collectibles or any other personal items whatsoever.
But Clarium’ investors appear unconcerned with his rather eccentric lifestyle. They continue to have faith in this committed libertarian, who has a deep fondness for the classics, and his financial theories, which have earned him millions of dollars and made his clients equally happy over time. Only the future events that transpire in the global financial world will verify the accuracy or disprove the investment theories of one, Peter Thiel.