Looking For Hidden Value With Whitney Tilson

Few people are more qualified to discuss hedge funds and value investing than Whitney Tilson. Founder of T2 Partners, which manages three value-oriented hedge funds and two mutual funds, Tilson also co-edits Value Investor Insight, an investment newsletter, and is the co-founder and chairman of the Value Investing Congress. He's also written on value investing for the Motley Fool Web site and for TheStreet.com. Recently, we asked him to explain what differentiates a value investor, and to share some of his best investment ideas.

TheStreet.com: Who influenced your style in value investing?

Whitney Tilson: Warren Buffett has, by far, been the biggest influence on me as an investor. Beyond him, I'd cite Charlie Munger, Ben Graham, Phil Fisher, Joel Greenblatt, Seth Klarman and Bill Miller. Incidentally, one of the reasons I started the newsletter, Value Investor Insight, and the Value Investing Congress is so I could continue to learn from some of the all-time greatest money managers.

You are both a mutual fund and a hedge fund manager. That's rare. What are the advantages of doing both, and do you see this business model as a growing trend looking forward?

Few hedge fund managers have set up mutual funds, in part because of the regulatory burdens of being a registered investment adviser, but now that most hedge funds have to register anyway, I expect that more of them will choose to open mutual funds. We decided to launch mutual funds after years of frustration from turning away hundreds of people who wanted to invest with us [by law, only accredited investors can invest in hedge funds]. We launched the Tilson Focus Fund and Tilson Dividend Fund just over a year ago, and both are off to strong starts.

Your funds have a heavy exposure to large-cap stocks. Does it make sense for you, considering that you've made money on relatively obscure names?

Such a heavy exposure to large-cap stocks is indeed an unusual situation for us, but we are flexible and opportunistic investors. Our job is to scour the entire investment universe and find a handful of cheap stocks to buy, and the occasional overvalued stock to short, regardless of the size of the company, how many analysts follow it, or what industry it's in (as long as we can understand it well). While it is certainly true that bargains are more likely to be found in the obscure corners of the market, on rare occasions, such as right now, we believe, many of the best bargains are lying in plain sight.