FEATURE

Even Wall Street Pros Have a Tough Time Getting Into This Club

By Daren Fonda • Aug. 24, 2018 4:44 p.m. ET

Photo: Jim Stoten

Daniel Sundheim built a reputation as savvy stockpicker at Viking Global Investors, a hedge fund where he helped oversee $32 billion in assets. That helped him raise more than $4 billion in seed money when he launched his own fund in July.

Yet while Sundheim, 41, is now a big name in the hedge fund world, he might not have broken in without an obscure website called Value Investors Club. Writing anonymously on the site in 2002, Sundheim posted a 3,700-word takedown of a dental company, Orthodontic Centers of America, assailing its business model and financial results. The post caught the attention of a few hedge funds that shorted the stock, profiting as the shares slid. (The company filed for bankruptcy protection in 2006 and emerged under the name OrthoSynetics in 2007.)

Sundheim, then a little-known analyst at Bear Stearns, brought the write-up on job interviews to show his track record and analytical work. That piqued the interest of Viking, which offered him a job as an analyst. “It was a springboard for my career,” says Sundheim.

Social-media sites for stockpickers range from Yahoo! Finance’s message boards to the free-for-all world of StockTwits. But Value Investors Club is the rare medium where partners at hedge funds will anonymously discuss stocks with investors they know nothing about. It’s a place where anyone with good ideas can establish a reputation as an ace investor—and make a name for themselves in the world of big money managers.  

“The beauty of VIC is that it offers anonymity in a carefully monitored environment,” says Whitney Tilson, a former hedge fund manager who has been a member since the site was started in 1999. “You can talk to people who would never speak publicly. It’s the smartest collection of investors I’ve ever seen.”

The site has about 500 handpicked members, from big-name fund partners to independent investors. The site is free and open to the public on a limited basis—guests can see ideas and message threads after a 90-day delay, or 45 days if they give an email address. Anyone can join. About 60% of VIC members work on the “buy side” at hedge funds, endowment plans, family offices (managing private accounts), and other investment firms. The rest are financial professionals in other fields, such as bankers, consultants, and business owners, along with investors in other careers. One of the earliest VIC members was a meteorologist; another worked in a delicatessen before retiring several years ago.

VIC accepts just one in 15 applicants. Whether you went to Harvard University or manage a $10 billion fund makes no difference. The only thing that matters is whether you have a good value-investing idea, as judged by two of the site’s founders, hedge fund managers John Petry and Joel Greenblatt, an adjunct professor of finance at Columbia Business School and founder of Gotham Capital, now called Gotham Asset Management.

“No matter how talented you are, if you can’t explain an idea in a way that makes sense to the community, you won’t get in—even if you’re Warren Buffett” (who isn’t part of the club), says Petry.

For many members, the site’s appeal is its mix of exclusivity and anonymity. Message boards that are open to the public may have nuggets of useful information, interspersed with reams of off-topic posts and personal insults. VIC’s exclusive membership keeps the site focused on high-quality ideas and analysis.  

Anonymity puts everyone on the same footing. There are no career repercussions for criticizing a company—no banking relationships or access to a management team that could be jeopardized. Activist investors might run ideas by the community before going public with a campaign. Partners at hedge funds or other regulated entities don’t have to worry about violating compliance rules that would prevent them from mentioning a stock publicly.

Investors also use the site to get valuable criticism. “If you’re a billionaire fund manager, worried your analysts won’t stand up to you, you can pitch an idea on VIC and people at opposite ends of the spectrum will shoot holes in it,” says Tilson.

One hedge fund manager who runs a $3 billion fund says he can debate stocks with investors who never set foot on Wall Street. “I’m a big believer in the meritocracy of ideas,” says the manager, who requested anonymity. One of his favorite VIC members is the former deli worker who would post ideas and converse with him extensively. “I messaged him like 100 times. He had amazing ideas,” the manager says.

The site features discussion threads on hundreds of stocks and a database of more than 10,000 companies scrutinized by members over the site’s 19-year history. About three new ideas are posted a day, and the site hums with message threads about all sorts of companies. Members recently exchanged dozens of messages about Tesla(ticker: TSLA), discussed the impact of Chinese competition on the NAND flash memory business of Western Digital(WDC), and tried to make sense of Fiat Chrysler Automobiles’ (FCAU) many moving parts, including plans to spin off its auto-parts business.

The heart of the site is research on value stocks that aren’t widely covered, typically with a market cap well below $10 billion. Many discussions focus on special situations or catalysts—companies involved in a spinoff, change of management, or other one-time event. Investors also pitch stocks largely ignored by brokers and banks. An author named Hbomb5 recommended National Energy Services Reunited(NESR), describing it as an “under-the-radar energy service stock that has the fastest growth rate in the sector and the lowest valuation.”

Gary Claar, a founding partner of the activist fund Jana Partners, used the site to help evaluate a European online gambling company, JPJ Group(JPJ.UK). It wasn’t covered by brokers in the U.S. and had gone through a major refinancing. The posting on VIC provided insights that he couldn’t find elsewhere. “It’s invaluable to see a write-up from knowledgeable investors addressing things you’re wrestling with,” says Claar, now a partner at Arex Capital Management, a hedge fund that bought shares of JPJ.

Theoretically, VIC could be an outlet for stock manipulation or “pump and dump” schemes (making a quick buck as other investors pile into a trade). But as a members-only site with a limited audience, Petry says, it would be the worst place to engage in such behavior. “If you want to tout something, you do it to a wide, unsophisticated audience,” he says. Members would quickly seize on someone trying to game the system.

Everyone’s picks get ranked by the community, creating a performance record for all to see. That can be valuable for building a reputation within the fund world or broader buy-side community. Members also get to know one another through word-of-mouth at conferences and industry dinners, making contacts that can lead to a job or capital investment in a fund.

VIC runs an invitation-only program that connects members to “capital allocators” such as endowment funds, family offices, and others looking to invest in small, midsize, and start-up managers. The way into the program is to win one of VIC’s stock-picking contests. Everyone who posts an original stock idea is automatically entered, getting a shot at a $5,000 prize every two weeks, paid by Petry and Greenblatt.

The bigger reward is access to endowment managers and others, including “some of the most respected allocators in the investment community,” according to an email that Petry sends out to site members. Members find out if they won in emails sent periodically to the entire VIC community, and can see a list of contest winners on the site. And investors who rack up wins are likely to get noticed by capital allocators (who aren’t disclosed), leading to an asset-management job or infusion of capital into their funds. Indeed, many members pad their résumés with VIC to help them land jobs with hedge funds or other asset managers, according to Petry.

VIC competes against other social networks for professional stockpickers, which has become a thriving business. SumZero, launched in 2008 by social-media pioneer Divya Narendra, is a commercial version on a much bigger scale. The site has more than 15,000 members who post their own ideas, compete in stock-picking contests, and network for jobs and capital. SumZero offers recruiting services for asset managers, and it ranks analysts’ performance. Anyone on the buy side can join or buy a license to access the firm’s services.

VIC is smaller, homier, and decidedly noncommercial. The site has no advertising or other revenue streams. Petry and Greenblatt run it like a nonprofit organization, taking no salary. The site looks old-school, lacking graphics, extensive filtering tools, and social-networking features. “We want all discussions to occur publicly for the benefit of the community,” Petry says. VIC’s logo is an old man in reading glasses poring over a paper.

Unlike some other social-media sites, VIC enforces a few obligations on its members to stay in good standing. They must submit at least two original investment recommendations and should rate at least 20 write-ups every year. The requirements keep the site humming with fresh ideas and discussions, says Petry. Investors can’t freeload off others’ ideas for long, and get kicked out if they don’t stay active.

VIC came to life in the early days of the internet, when Yahoo’s message boards and a few other sites were the only places to dish about stocks. Greenblatt, who was grading papers at Columbia, set the admissions bar at the equivalent of an A+ paper by an M.B.A. student. He also wanted an online club where fund managers could converse freely under a cloak of anonymity and unheralded stockpickers could build a reputation, potentially getting noticed by hedge funds. “You need real investing talent to get in,” says Greenblatt. “But it’s based on what you’re able to produce, not on who you are.”

Stock-picking merit may be subjective, but it’s at the heart of VIC’s application process. Academic credentials, industry connections, or a job on Wall Street make no difference. “We’ve had offers from people who want to pay for access, but that’s not the model we have,” Greenblatt says.

Petry says he gets 20 to 30 applications a week. His office in New York includes a three-foot tower of printed applications, and he goes through them all with a few colleagues, sometimes discussing them on calls with Greenblatt. They accept one or two a week, on average.

Making it into the club takes a top-notch value idea. A stock doesn’t have to trade at a low price/earnings or price/book ratio. But the write-up should illustrate why the stock trades below its intrinsic value, “as Buffett would articulate it.” (Short-sale ideas would be the opposite.)

Applicants should identify a catalyst—such as a spinoff or restructuring—that will cause the market to “recognize the value discrepancy.”

Applying with a well-known stock pick like Apple(AAPL) would be a tall hurdle. Pitches that resemble brokerage-firm treatises won’t make the cut, either. “We’re not looking for book reports, industry analysis, or initiation pieces,” Petry says. “We want people who can communicate good investment ideas in a clear and concise way.” More than half of the applications he received in a recent week were from Wall Street professionals and others in the investment industry. None made the cut: Some ideas weren’t original or differentiated from consensus views; others fell short because the write-ups weren’t concise or effectively written.

Greenblatt says he has kept the site open, on a limited basis, to be an educational tool for anyone who wants to learn value investing (a subject of his books and Columbia courses). “These are good thinkers, and it’s valuable to see how they think,” he says. Sundheim says the site helped him learn the business. “Reading the write-ups taught me how to invest as much as any text book, class, or mentor at Wharton,” he says.

Berna Barshay, a hedge fund manager, didn’t make it in with her first pitch of apparel company Tommy Hilfiger. The stock wasn’t cheap enough to be a good value, she was told in her rejection letter. But she appealed the decision, sending in a follow-up analysis with a detailed rebuttal. “Eventually, they relented and said, ‘We still don’t think it’s a good value, but you argued your case so well that we’ll let you in.’ ” The stock ended up being acquired a few months later, in 2005, at a steep premium.

Barshay, who recently launched a new fund, Viola Capital Management, says VIC is one of the few places on Wall Street where gender bias isn’t an issue. The industry remains a boys club where women aren’t always invited to meetings or events where deal-making happens, she says. On VIC, no one knows if they are talking to a male or female. That focuses conversations solely on the investment idea.

“When people don’t know if you’re a man or a woman, if you’re young or old, you stand on the quality of your idea,” Barshay says. “I’ve never had trouble being taken seriously once I have a seat at the table with other investors. The problem is getting a seat in the first place.”

Write to Daren Fonda at daren.fonda@barrons.com