David Einhorn appeared on the Charlie Rose Show on December 6, 2010. I think Einhorn is a brilliant securities analyst. He has done a remarkable job providing high risk-adjusted returns for over a decade for the limited partners in his hedge fund, Greenlight Capital. He is a value investor like Buffett, Klarman, and many other successful investors, and he buys securities and sells others short in order to earn a return and manage risk. He is especially enlightening—and has been very accurate—as a short seller.
For example, he sold Allied Capital short and publicly spoke about it, which landed him in hot water with employees of the SEC and the Small Business Administration. Many were employees who were moving through the revolving door between the regulators and the regulated, which typically happens with highly regulated businesses. These were employees who did not want anyone to kill their Golden Goose.
Einhorn detailed the story in his book Fooling Some of the People All of the Time, which can be found in the Value Investing Bookstore (Amazon) tab on this blog. The details include the sad attacks that he had to endure from the regulators who attempted to kill the messenger rather than kill the Goose. Allied eventually went bankrupt and the investigation of Einhorn was dropped.
Einhorn also was the first well known investor who loudly proclaimed that Lehman Brothers was in serious trouble. He began shorting Lehman in 2007 and first announced the short position in a speech that he delivered in April of 2008 when Lehman was still trading for $50 to $60. He was publicly ridiculed at the time by senior management at Lehman and also many experts on Wall Street, but we all know the ending to that story.
Einhorn’s past success can be largely attributed to the fact that he finds undervalued businesses to buy and overvalued businesses to short, regardless of market or economic conditions. In other words, he was an outstanding bottom-up investor. But, something has changed in the past two- to three-years, as even Einhorn has stated publicly in his Value Investors Congress speech in October of 2009. Einhorn’s VIC_2009_Speech. The impetus of the speech was that he was burned by a 2005 investment in a homebuilder that he believes he could have avoided if he had approached the investment with a macroeconomic perspective as Druckenmiller did. Druckenmiller gave a speech in 2005 and predicted pain for the housing market.
Einhorn has said that he no longer ignores economic conditions and instead attempts to incorporate them in his analyses. I think he is moving away from his core competencies as a securities analyst and moving to an area occupied and crowded by many other large institutional investors who believe they can forecast economic conditions better than most. Considering that a good bottom-up analyst does not need to forecast to be successful, I think Greenlight Capital is heading into riskier territory.
Why would Einhorn make this shift? Perhaps it is because his success as a stock picker has ballooned his assets under management to the point where he can no longer find bargains that are big enough to move the return needle. We shall see. Until then, enjoy this interview (hat tip: GrahamandDoddsville.com):