I have found the story of Allan Mecham to be fairly typical. You have probably never heard of Mecham because his fund is structured as a hedge fund, and so SEC rules prevent him from advertising and state that he must limit the number of his investors to a few hundred who must be wealthy.

The companies he buys trade at a discount to their intrinsic value because the “smart money” will not buy them, usually (but not always) because the company is too small to attract the attention of large investors. If the smart money does buy them, they usually do not stay with the investment for very long; the typical non-index mutual fund turnover rate is over 100%. In many ways the story of investment in these companies parallels the predicament of Mecham’s fund. The smart money that will not invest in the companies that Mecham buys shares a philosophy with the smart money that will not invest in small, concentrated, contrarian funds.

The following are the typical characteristics of the philosophy and processes used by small, value investors such as Mecham. They:

• Make investment decisions alone because groupthink generally leads to poor investing results. As Mohnish Pabrai once said, it is doubtful that Warren Buffett would have made one of the most successful investments of his career–taking a stake in American Express that amounted to 40% of his fund’s assets–if he had to answer to an investment committee or justify the investment to a pension fund consultant;
• Are usually somewhat quirky and do not have the pedigree or use processes that Wall Street understands, at least not before they have $1 billion in assets under management (AUM). After a billion dollars in AUM, Wall Street understands even gibberish. To Wall Street, Buffett was just some quirky guy in Omaha before he had a few billion in AUM. And, by Wall Street, I mean every potential investor in Meacham’s fund–seeders, incubators, funds of funds, pension funds, family offices, and other high net worth investors. At a recent family office (FO) conference that I attended, every speaker said that FOs–once the mainstay investor in small, quirky, value-investing startups–have gone the way of big institutions seeking to invest only in large, well known managers who have the infrastructure to gather assets;
• Because of the “institutionalization” since 2000 of the processes used by FOs and other high net worth investors, it is nearly impossible to find funds like Arlington that launched after 2000. We now know of the huge success stories such as Arlington, Klarman’s Baupost; Einhorn’s Greenlight; Pabrai’s Pabrai Funds; and Tilson’s T2 partners. These once-tiny value funds all launched before 2000–almost all with less than $1 million AUM–and grew through word of mouth. Can you name one that launched after 2000? Those that launched after 2000 have had little chance to raise capital in the new institutional environment;
• Are contrarian–buying when others sell, and selling when others buy
• Are structured as hedge funds because 1. SEC rules severely restrict the way mutual fund managers operate (e.g. SEC rules force diversification–”di-Worsification” as Peter Lynch liked to say–limit the ability to manage risk by hedging and selling short; and limit the ability to use leverage to exploit extraordinary contrarian opportunities and special situations); 2. mutual funds must be able to meet redemptions every day and so are not conducive to long-term thinking; and 3. mutual funds have higher startup costs;
• Do not try to predict where the market is heading but hedge market risks when the costs of hedges are cheap such as when everyone thinks the market can only go higher. In fact, they usually do not make explicit predictions for the companies in which they invest because they know that those predictions are rarely accurate (See the evidence for this in any of about one hundred sources such as Dreman’s Contrarian Strategies (Just added the latest edition to the bookstore above))
• Do not take in a lot of money because they know that true value opportunities are few and that sitting on a lot of unused cash would only hurt their investors’ returns. Even if the smart money suddenly realized that funds like Mecham’s were safe investments that delivered excellent long-term results, Mecham would not likely take in much more than he is managing now;
• Know that senior managers rise to the top of their organizations because of their inordinate salesmanship abilities and so meetings with companies are likely to lead to biased analyses. Meetings with management should therefore be avoided, or kept short and limited to extracting a vital piece of information that could not be obtained any other way;

I have a personal story. I write this blog anonymously because I do not want to run afoul of SEC rules regarding solicitation. A high net worth investor–a doctor from North Carolina–managed to track me down because he liked what he read here and wanted more information in order to invest in my fund. My law firm said he had to fill out a questionnaire before I sent him any information.

The doctor filled out the paperwork, but I could only send him the PPM after I received his information and determined that the fund was a suitable investment for him. The PPM is boilerplate but I told him that I could not take any investment from him until he had taken a little over a month to digest it. He still has not seen the results that the fund delivered, but he did ask general questions about the fund, which I launched in 2010. The information I gave him demonstrated that my fund started with ten times the assets and ten times the number of partners as Mecham’s fund, and from what I gathered in the article, twice the number of fund employees as Mecham.

Doctors like the one who contacted me were once the angels of startup funds like mine and they reaped the rewards; yet, it has been almost three months since I heard from him. As of today, I have nine investors in my fund made up of one family member, one former fund employee, six former colleagues from prior firms in which I worked, and one former client from a firm in which I last worked in 1997; no one that I have known for fewer than fifteen years.

The traditional investors who invested in funds like mine no longer invest in funds like mine. It is sad, and not just for entrepreneurial fund managers. Maybe it is the Madoff effect or severe risk-avoidance after two bubbles burst last decade, but it is especially sad for anyone who needs to fund a future liability–i.e. everyone. The story about Mecham opens with him in a conference room in New York City surrounded by potential investors who are peppering him with questions, trying to gauge his ”sophistication.” It would be funny, if it weren’t so sad.

http://www.smartmoney.com/invest/strategies/the-400-man-1328818316857/#tabs

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Tebow is not the only quarterback who comes to mind. Ever hear of a guy named Joe Montana? Montana played at a little known football college called Notre Dame. He was recruited by ND, but in 1977 at the beginning of his fourth year in the program (an injury gave him five years of eligibility) Montana was still listed third on the depth chart behind Rusty Lisch and Gary Forystek.

ND started the season 1-1 in 1977 and Montana did not play until there were eleven minutes left in the third game of the season with ND trailing by more than a touchdown. He rallied ND to a victory (Data provided by Wikipedia) and never lost his starting job after that. In fact, ND did not lose another game that year after he got the chance to play.

ND finished 1977 with a win in the Cotton Bowl over then-number-one ranked University of Texas and ND was voted the National Champions. All Montana did in college was win, usually late as he led his team in one comeback after another.

You would think that such a clutch performer who led his team to a National Championship would be viewed favorably by the experts in the NFL, but the scouts did not think very highly of Montana. They ranked his arm strength as particularly weak. So, the following quarterbacks were drafted ahead of Montana:

First Round: Jack Thomson, Phil Simms, Steve Fuller 

No other quarterbacks were chosen in that draft until Montana was taken with the last pick in the third round, number 82 overall. All Montana did in the NFL was win four Super Bowls, win three Super Bowl MVP awards, get selected for eight Pro Bowls, and get elected to the NFL Hall of Fame. He is widely considered to be the greatest quarterback of all time.

Okay, so maybe you heard of Montana, but have you ever heard of a guy named Tom Brady? I will admit I did not like the guy until this year when I saw an ESPN film called “The Brady 6.”  It is the story of Brady and the six quarterbacks who were drafted ahead of Brady in the 2000 NFL draft.

You can and should watch “The Brady 6″ on YouTube (I embedded part I below), so I will not bore you with Brady’s story here. But, I found one thing especially noteworthy: the experts at the NFL combine had ranked 576 college quarterbacks in the speed and agility categories in the multi-decade history of the NFL Combine. Brady’s overall ranking in the history of the combine was 576.

The football experts rely on these combine numbers the way baseball scouts heavily rely on batting average for hitters and velocity for pitchers; the way fund analysts rely on pedigree for performance prospects and beta for risk measurement. Oh, and the experts all felt that Brady had poor arm strength.

The two quarterbacks who earned 100 wins in their careers in the fewest number of starts were Joe Montana and Tom Brady. Watch the Brady 6; it may forever change the way you think of experts in sports and elsewhere.

Today, we have Tebow, who is being criticized for a supposed lack of NFL-caliber skill, and the criticism is often nasty. The silence from Denver’s front office, scouts, and coaching staff has been deafening. It should be noted that Tebow was drafted by a different front office and coaching staff from the current one in Denver.

Yet, today I found out that Tebow is 4 -3 5 – 2 (5-3 6 – 2 after the win against the Jets) in his first seven starts in Denver compared with Hall-of-Famer John Elway’s 1 – 6 record in his first seven. Tebow is now 4-1 this year after Denver started 1-4 without him and he has Denver in the playoff hunt. Tebow has something like eight touchdowns to one interception in that seven game span and Elway had those numbers reversed. The knock on Tebow has been that he does not have the arm strength to be an NFL quarterback. It sounds familiar.

Maybe the experts will have gotten this one right in the end. After all, Tebow did have more success in college than Montana and Brady; he did win two National Championships at The University of Florida and a Heisman Trophy. And, unlike Montana and Brady, Tebow was taken in the first round of the NFL draft.

I am choosing NFL quarterbacks for this criticism of experts, but you could pick any position in the NFL, or any position in any other sport, and you will find that experts often get it wrong. Or, you could choose experts in any field from finance to climate science. Many are not just proven wrong, but fantastically wrong. Perhaps it is because those who are deemed experts are usually the ones who are the most sure of themselves; they make the best media, board room, or draft room presentations, but perhaps they are not necessarily the best at understanding talent or analyzing complex phenomena. Often times, the one who is the most aggressive and talks the loudest wins the day.

Michael Lewis’s great book Moneyball is all about experts who get it wrong, leaving cheap bargains available for savvy analysts who can see through the nonsense. Here are some reasons that experts make mistakes in evaluating baseball talent: evaluating a player based on whether or not he has a square jaw (“a baseball face”); whether he looks good in jeans; or whether he has a pretty girlfriend. That is the kind of analysis that experts provided before Moneyball, and many still have similar biases.

One such bias in baseball that has not disappeared is a bias against “soft tossers;” i.e. pitchers who cannot consistently break 90-miles per hour on the radar gun. Remind you of the supposedly weak arms of Montana, Brady, and Tebow? Baseball pitching experts are enamored with velocity and are blind to practically every flaw in a pitcher who can throw hard. But, if a pitcher does not throw hard they will ignore him even if he has few flaws, even if he can knock a fly off a catcher’s mitt, make the ball move, change speeds, and collect wins. Never mind that the greatest pitcher in the last thirty years rarely used velocity to get hitters out, but could hit practically every spot he wanted to within an inch or two, move the ball, and change speeds: five-time Cy Young winner Greg Maddux.

So, should we rely on experts to the degree that we do? Warren Buffett points out that  experts concluded that his and other value investors’  accomplishments were either lucky–like a coin flipper who gets heads twenty times in a row–or that there is just not enough data to evaluate their success. His now-famous story is of 225 million orangutans spread evenly throughout the country who mindlessly flips coins; by sheer luck 215 of them will get heads twenty times in a row. But, he says that if forty of those 215 orangutans are from the same zoo, maybe they are on to something.

Were the experts right, but the outlier successes of the Montanas, Bradys, Madduxes, Buffetts, Klarmans, and Einhorns to be expected as merely the lucky random ones who fell under the far reaches of the bell curve?

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Mets will pay 3 percent interest to investors
http://www.nypost.com/p/news/business/mets_next_pitch_WTbeypwaj93Lp1Mb58gOQN#ixzz1cr5G1BU4

Mets lay off 10 percent of staff

http://www.nypost.com/p/news/local/queens/front_office_met_ax_uFsH3565WnN4JOaARQlTvJ

If Reyes waits, he’ll get big bucks — but not from Mets

http://www.nypost.com/p/sports/mets/trickle_down_economics_G5wFhNifw09CEk4T1NzDSP#ixzz1cr6V5yAp

When David Einhorn offered to save the Wilpons by buying a minority stake in the team, I thought Einhorn had lost his mind. What value investor would offer up so much for so little in return, even one who loved the Mets? But, I was obviously not privy to the negotiations. Einhorn wisely sought a return of his capital in a set time frame or it would spring a majority ownership position in the team. And, even after the Wilpons returned Einhorn’s capital, Einhorn would keep his minority ownership position. Now THAT is a proper value investment.

I suspect that once Major League Baseball is finished cleaning up the mess in Los Angeles, they will focus on cleaning up the mess in Queens. The Mets owe many people a lot money, and it is money the Wilpons have little hope of acquiring after rejecting Einhorn. Einhorn may wind up as the managing partner in the Mets soon enough.

The Wilpons were dumb for rejecting Einhorn’s offer. One-hundred percent of nothing is less than a lesser percentage (greater than zero) of something. But, dumb has been their M.O.: One championship in thirty-one years for a major market team with a team-related cable channel and no salary cap restrictions is a major failure. How bad are the Wilpons in running a baseball team?

Some accounts said former Mets joint owner Nelson Doubleday had to overcome a Wilpon veto of the Mike Piazza trade in 1998 because Wilpon did not want to pay Piazza’s salary. Piazza is largely credited for the Mets perennial playoff runs from 1998 to 2003 and those runs were instrumental in bringing in a lot of cash. But, the epitome of the Wilpons’ failure came when they traded Mike Cameron before the 2006 season.

Cameron was a Gold Glove centerfielder who could hit and hit with power. They got rid of him in order to save $8 million in salary, which they had in spades at the time because–thanks largely to Piazza in the years before–the Mets were competitive. They were built to win a championship in 2006 except for the fact that they had no one to play a decent rightfield. While it is true that value investors would rather hold on to their cash than spend it unnecessarily, the good ones usually do a great job of separating necessary expenditures from unnecessary ones.

Halfway through the 2006 season the Wilpons scrambled to find someone who could play rightfield who could hit. They settled on Shawn Green–a long-swing, ageing hitter who played a clumsy outfield–and paid him Mike Cameron money. So much for saving a few bucks. The Mets reached the NL Championship Series in 2006 against the Cardinals–one step from the World Series–and had home field advantage. They lost to the Cardinals in seven games and the Cards went on to win the World Series. A big part of the reason that they did not dispatch the Cardinals in five games was the poor outfield play of Shawn Green. Meanwhile, Mike Cameron won his third Gold Glove in 2006 while playing outfield for the Padres.

The Wilpons tried to save a few pennies in 2006 relative to the dollars of salary they were paying for a championship-caliber team and blew it. They failed to see that the return on Cameron’s $8 million would have exceeded the cost by multiples with a World Series title. They failed to see that paying Cameron’s salary was a necessary expense. The Cameron episode was typical of their operation. The Wilpons tried to save a few pennies in their negotiations with potential minority partners in 2011 and are blowing it again, but this time it is a good thing for Mets’ fans.

Update 11/6: Today’s headlines indicate they are open to trade offers for David Wright, and some Mets executive was quoted anonymously saying they hope to have a winning team again by 2014.

The Mets did one thing correctly, but I am not sure how much of the credit should go to the Wilpons and how much to Major League Baseball, which cannot afford another mismanaged debacle in a major league team. The Mets hired three front office leaders who were instrumental in bringing Moneyball to the majors and were highlighted in Michael Lewis’s book: They are Sandy Alderson, the General Manager who was previously an executive with Major league Baseball in Manhattan and who hired Billy Beane for the A’s front office and taught him how to be a GM; JP Ricciardi, former Blue Jays General Manager; and Paul DePodesta VP in charge of Mets player development. The Mets finally have a philosophy; a roadmap. That is a good thing even if they will not be competitive for several years.

Moneyball is value investing.

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I liberally copied from the business models used by Ben Graham, Warren Buffett, David Einhorn, Seth Klarman, and Mohnish Pabrai. Those investors started small with family-and-friends capital; employed a value-investing philosophy; invested through a private partnership structure (i.e. a hedge fund); recruited smart investors; and were willing to return capital in order to protect returns when there were few opportunities. So, it is comforting to know that my partnership’s returns are virtually identical to Greenlight’s (Okay, we are doing better than Greenlight YTD). We, like Einhorn, do not believe it is time to go all-in, to understate the issue, but that day may come soon, to the market bulls’ chagrin. We can only hope that investors reward our caution with a flood of capital when the appropriate time arrives.

The Money quote in Einhorn’s second quarter letter:

On the losing side, the consumer cyclical short that hurt us most in the first quarter hurt us again in the second quarter. In this bifurcated market, there are a small number of stocks that seem to be going up simply because they are going up. Stock price momentum investing is not a new strategy; we saw how it worked in the extreme during the internet bubble. One difference between then and now is that during the internet bubble, the market categorized stocks into “new economy” and “old economy.” It was relatively easy to pick out the dangerous stocks. This time the distinction is less clear. A number of the momentum stocks have good stories, but many others really have very little going for them, except for a rising stock price. Earnings disappointments, dilutive acquisitions, slowing growth rates, regulatory problems, heavy insider sales, rising competition and even SEC investigations seem to have no impact on the handful of momentum stocks leading the market at this time. Despite trying to carefully pick our spots and to size the positions appropriately, we continue to have exposure on the short-side to a couple of these freight trains. Though we don’t know when the turn will come, we believe that there is substantial downside to the prices of these short positions.

Amen, brother.

Enjoy: http://cache.dealbreaker.com/uploads/2011/07/Greenlight-Capital-Q2-Letter.pdf

H/T: Santangel’s Review (Link can be found on the right)

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http://online.wsj.com/article/SB10001424052748704425804576220983131318962.html?mod=WSJ_Opinion_LEADTop

Two disparate views of markets represent well the range of opinion among U.S. stock market participants today. One is a devout faith in market efficiency and the supremacy of market pricing as a reflection and forecast of fundamental value. The other expects errors and biases in market pricing. The first should be recognizable as belonging to Ben Bernanke (easily the biggest trader and most significant market manipulator in history); the other to Ben Graham, the father of value investing. With which Benjamin do you agree?

…Imagine a world where the stock market is open for trading only one hour of every year…

…If this would change how you invest, then apparently a steady stream of market quotations is a sine qua non of your investment process; a trade makes sense to you when validated and quickly rewarded by the constant transactional opinions of your friends in the marketplace. You are a Benjamin Bernanke trader.

However, if you would maintain the same investment approach as always, then your investment decisions must be based on your expectation of the cash flows to be received from those investments, irrespective of what subsequent market quotations have to say about them. You don’t care what your friends think (and you probably don’t have many of them anyway) [This hurts, but it's true]. You are a Benjamin Graham investor.

To the Bernanke trader, market prices are the most information-laden depiction and forecast of the state of the world. They are neither dear nor cheap—they just are. Thus statements such as “price increases largely reflect strong economic fundamentals” (Mr. Bernanke’s take on house prices in 2005).

But the wisdom of the crowd turns tragically biased when opinions are interdependent. And amplification and contagion of opinion is what markets do so well through continuous Bernanke trader herding. The Graham investors recognize this, as well as the difficulty for anyone—especially economists and analysts—to accurately predict changes in macro variables or returns on corporate investment. They treat the implicit forecasts embedded in market valuations as folly. Markets get dear and cheap, and it’s pretty obvious when they do.

So, true. The markets are dear right now given much of the evidence presented here: http://amarginofsafety.com/2011/03/08/tobins-q-ratio-and-shillers-price-to-trailing-10-year-earnings-ratio/ I find it interesting that in the remainder of the OpEd Spitznagle points to one of the metrics that I did in the latter blogpost to demonstrate the current dearness of the market.

The problem for nascent fund managers who stay true to their value-investing philosophy and maintain discipline is discussed here:

Ben Bernanke traders do often rule the roost–and for years…Today’s stock market is a case in point. Bernanke and his traders are stampeding…Graham investors have stoically stepped aside.

Or, to paraphrase John Maynard Keynes, “The market can remain irrational longer than a disciplined fund manager can stay in business.”

A nascent manager is given little time to prove himself. As discussed here http://amarginofsafety.com/2011/03/08/santangels-review/ David Einhorn can thank a fast start out of the gate for his ability to attract capital. A fund manager who does those things necessary to protect his investors’ capital while the market flies unsustainably into the stratosphere–and stays there for years–has little chance to attract capital. Despite doing the right thing, he will not remain in business.

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In the comment below they wonder how many David Einhorns there are who never got the chance to succeed as Einhorn did because of a lack of capital.

David Einhorn on the Early Years of Greenlight Capital

David Einhorn of Greenlight Capital is one of the great successes of the hedge fund industry. But he is the first to admit, as he did in this speech, that he owes a lot of his success to his good early short-term track record. He would also be the first to admit that any given track record, over the short term, is largely a matter of luck. If Greenlight had launched in early 2008, for example, you may never have heard of him.

Imagine how many potential Einhorns never get a chance. The overweighting by allocators of short-term early track records is a major inefficiency of manager selection.

David Einhorn on the Early Years of Greenlight CapitalDavid Einhorn of Greenlight Capital is one of the great successes of the hedge fund industry. But he is the first to admit, as he did in this speech, that he owes a lot of his success to his good early short-term track record. He would also be the first to admit that any given track record, over the short term, is largely a matter of luck. If Greenlight had launched in early 2008, for example, you may never have heard of him.

Imagine how many potential Einhorns never get a chance. The overweighting by allocators of short-term early track records is a major inefficiency of manager selection.

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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):

http://www.charlierose.com/view/content/11333

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The third quarter letter offers David’s insights on macro conditions as well as some of his investment rationales.

Greenlight-Q3-2010-Letter

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Greenlight is one of a handful of successful investment management firms that have the following business-model characteristics in common:

• Value investors who relied on family and friends for initial funding;
• Only invest long when there is a Margin of Safety;
• Short overvalued glamour companies for alpha;
• Short overvalued glamour companies as a hedge against market risk;
• Rarely use leverage;

Only Pabrai Funds refuses to short securities. All of them started with  a small amount of capital.

Given Bruce Berkowitz’s Fairholm Fund’s large investment in JOE, it is interesting to note that great value investors do not always agree. Warren Buffett demonstrated that in his Superinvestors speech. But, I am surprised that Berkowitz is not returning Einhorn’s calls. At the least, value investors have been intellectually honest when they disagree.

 10/13 02:18PM =WSJ BLOG/Market Beat: Einhorn On St. Joe Development: ‘A Ghost Town’

(This story has been posted on The Wall Street Journal Online’s Market Beat blog at blogs.wsj.com/marketbeat.)

Posted by Tom Lauricella

Greenlight Capital’s David Einhorn took stock pickers through a tour of Florida’s panhandle as he outlined the reasons he’s shorting the stock of real estate developer St. Joe Co. (JOE).

The basic thesis: the company’s holdings of Florida real estate are worth nowhere near the $746 million the company says they are worth. Rather than the $20 to $28 dollar range St. Joe shares have been trading, Einhorn thinks that at best the company is worth $7 to $10 per share. And if the company’s management doesn’t change course, he argues it could eventually fall to zero.

Within minutes of Einhorn speaking St. Joe shares tanked. At last glance they’re down 9.3% to $22.26.

Einhorn’s bet that shares of St. Joe have been overvalued sets up a stock-pickers steel cage match against Bruce Berkowitz, the widely admired value investor whose Fairholme Capital Management held nearly 27 million shares as of June 30.

It is reminiscent of Einhorn’s wager against MBIA Inc. (MBI), where Bill Ackman, the famed manager of Pershing Capital, wrongly took the other side of the trade. (ED NOTE: This assertion by the author is wrong; Ackman was on the same side of the short of MBIA and was vociferous about it.) Einhorn, of course, is famed for shorting Lehman Brothers at $70 per share and showing no reluctance to duke it out with companies he’s betting against.

His talk to the Value Investing Congress Wednesday, which was received with rousing applause, was accompanied by a 139-slide presentation that combined not just the usual balance sheets and quotes from annual reports, but photos and videos Einhorn’s team took of St. Joe’s properties. They showed empty lots, abandoned houses and vacant retail storefronts.

Einhorn’s talk focused on St. Joe’s main development properties, but began to drilling into the company’s recent assertions that it will get a big boost from development around the Northwest Florida Beaches International Airport, an airport surrounded by timberland north of Panama City Beach, Fla. St. Joe had given land to help build the airport, Einhorn said.

In a December 2009 press release, the company’s president said: “‘The Southwest Effect,’ the connectivity Southwest brings is expected to stimulate economic development, job growth and real estate absorption in the company’s projects across Northwest Florida. Southwest, with their renowned customer service, is a game changer for the entire region.”

But Einhorn said that of the seven gates at the airport, only one can accommodate the 737 planes flown by Southwest Airlines Co. (LUV). In addition, he questioned the attractiveness of property owned by St. Joe immediately around the airport and said that St. Joe is now trying to re-lease land it had given to help get the airport built.

The center of his argument that St. Joe has been overvalued is its residential developments. One big issue, Einhorn said, is that St. Joe has already sold many of its best properties, especially those that are beach-front real estate. Many of the properties the firm is carrying on its books are in some cases miles from the beach. Worse, Einhorn said, many of the properties that St. Joe sold are undeveloped lots that are in the hands of land speculators or owned by banks through foreclosure. Thus St. Joe is having to compete against those owners who are selling properties at sharply lower prices than on St. Joe’s books.

For this Einhorn’s team visited St. Joe’s developments, scoured the property records in Florida and publicly information on the relatively few sales that have been made in recent years. One community is Rivertown, where Einhorn presented a video shot from a car driving down empty streets. At another, Watersound, they visited a golf course, which he said was “deserted.” For Summercamp Beach he showed displayed a picture of an unfinished house.

He described the St. Joe community of Windmark as his “favorite” example. “This is a ghost town,” he said. Not only was the St. Joe property empty, “it seems like everything surrounding Windmark is for sale.”

One (of) his final slides compared the values assigned to properties in three communities by St. Joe – $280.8 million, against Greenlight’s assessment, $38.7 million. “I think that St. Joe and it’s accountants might want to update their calculations,” he said. “They need to take a substantial impairment” against the value of their real estate, he said. Einhorn closed by noting that St. Joe has filed suit for damages caused by the BP oil spill this summer. But St. Joe’s website notes that press releases from downplayed the impact of the oil spill. Pictures on the company’s website show swimmers frolicking in the surf.

Asked where he could go wrong with his call against St. Joe, Einhorn replied “they could discover real oil.”

Einhorn says he’s been looking at the stock since 2006 and this summer he contacted Berkowitz to see if he would discuss the company. “I’m waiting for his call,” Einhorn said. Einhorn also said he attempted to contact officials from St. Joe but they would not talk to him.

Note: We’ve put in a request for comment to company representatives and will up date this post when/if we get one.

  -For continuously updated news from The Wall Street Journal, see WSJ.com at http://wsj.com.

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