“Sometimes, after analyzing the risk and reward, an investment appears attractive, but the unfortunate or unlikely happens. Such is life. Other times, the analysis is simply flawed…” – David Einhorn
David Einhorn: Background & bio
Einhorn is Chairman of the Board of Greenlight Capital Re, Ltd. (NASDAQ:GLRE) and serves on the boards of Hillel: The Foundation for Jewish Campus Life, The Michael J. Fox Foundation for Parkinson’s Research, and the Robin Hood Foundation. Einhorn also owns a large stake in the New York Mets.
Einhorn graduated summa cum laude with distinction in all subjects from Cornell University, where he earned a B.A. in Government, from the College of Arts and Sciences.
When David was graduating college he was unsure what field he wanted to go into. He even met with the CIA about a possible job opportunity. Einhorn decided to work as an analyst at an investment bank called Donaldson, Lufkin & Jenrette (DLJ). Einhorn hated the job and the 100+ hour work weeks that came along with the position.
However, after two years at the firm, Einhorn joined a hedge fund with an $150m AUM called SC Fundamental Value Fund. Einhorn had a great learning experience there, and mastered the art of financial statement analysis. Einhorn described the most important lessons he learned at the firm as: “To understand the nature of the business, the economics of the business compared to reported earnings, and are the managements’ decisions aligned with shareholder interests.”
In 1996, Einhorn left the firm with his colleague Jeff Keswin to start Greenlight Capital.
David Einhorn is a hedge fund hot shot, but his investment returns have been pretty unremarkable in recent years. After a decent 2013, where his Greenlight Capital returned nearly 20% after fees but still underperformed the stock market, Einhorn’s largest positions remain Apple, gold, and Micron Technology. Einhorn’s net returns were in the 6% range in the first half of 2014. Known for bringing down companies with crushing short calls, Einhorn’s most public short, Keurig Green Mountain [closed third quarter 2014], is still roasting him.
Regardless, his short-selling reputation remains strong, having been proven right with his short call of Allied Capital in 2002 and then,famously, Lehman Brothers, which he shorted into bankruptcy. A dedicated poker player, Einhorn managed to cash out in this year’s Main Event at the World Series of Poker, where he represented the Robin Hood Foundation (where he’s vice-chair; he’s also on the board of the Michael J. Fox Foundation).
Einhorn had a public fight with blogging platform Seeking Alpha earlier in 2014, after an anonymous contributor leaked information about his hedge fund’s position in Micron Technologies that hadn’t yet been disclosed with the Securities and Exchange Commission. He took Seeking Alpha to court, but dropped the suit after having claimed to identify the blogger and settling the matter. Einhorn, who grew up in Wisconsin and graduated from Cornell University, co-founded Greenlight Capital in 1996 with $900,000, more than half of which came from his parents; today, assets under management stand at $10 billion.
David Einhorn: Greenlight Capital
Greenlight Capital Inc. is the hedge-fund firm run by David Einhorn and is best known for wagering on a decline in Lehman Brothers Holdings Inc. before the bank collapsed in 2008. The $10 billion firm has been closed to new cash since the first quarter of 2012, although it reopened and began accepting new capital from existing investors on Nov. 1 2014 and new clients on Dec. 1 2014 according to Bloomberg. Greenlight said the new capital will be subject to a 25-month lock-up. Any redemption prior to the third anniversary of the investment will be subject to a 5% fee that will accrue to remaining partners, according to the letter.
According to letters from Greenlight, the firm has been having difficulty finding bargains recently after a five-year stock rally propped up by the Federal Reserve’s asset purchases. At the end of the third quarter of 2014, Greenlight’s portfolio was invested 114% in long positions and 75% short.
Two of the group’s most prominent shorts at present are Athenahealth Inc. (ATHN), a Watertown, Massachusetts-based health-care software maker and Mallinckrodt Plc (MNK). Greenlight believes that Athenahealth is “caught up in a bubble” and could fall by as much as 80%. While Mallinckrodt Plc, a specialty-pharmaceuticals manufacturer has been spending more than it can afford on expensive acquisitions.
Here are some excerpts from Greenlight Capital’s third quarter 2014 investor letter:
“The Greenlight Capital funds (the “Partnerships”) returned (3.9)%, net of fees and expenses, in the third quarter of 2014, bringing the year to date net return to 2.2%. By comparison, the S&P 500 index returned 1.1% during the quarter and 8.3% year to date. It was a frustrating quarter. We lost a small amount on longs, shorts and macro. We had a typical number of individual losers, but an unusually large number of days with small losses: half the trading days ended with us losing less than 50 basis points. We had the unusual experience of going the entire quarter without a day where we made more than 70 basis points.
In fact, looking at the quarter’s contribution from profitable positions, we haven’t had a quarter this thin in about three years; Apple (AAPL) was our only material winner. Prior to Civeo’s (CVEO) September 29th news (discussed further below), nothing particularly bad happened; we just got ground down gradually. In such circumstances, it’s not obvious what to do other than stay the course and be patient…
…We added to our exposure of “Bubble Basket” shorts. AMZN’s recent disappointment is notable in that for years, the story has been that AMZN isn’t profitable because it is growing so fast. Now growth is slowing, but rather than unleashing higher profits, the slower growth is leading to even greater losses. One of the principal bullish assumptions supporting many bubble stocks is, “the company is growing too fast to be very profitable.” We think AMZN is just one of many stocks for which this narrative will ultimately prove false…
Medium-Sized Long Investments
We made new medium-sized long investments in CONSOL Energy (CNX) and EMC Corporation (EMC)…
CNX owns significant coal and natural gas reserves. Since its legacy is in coal and CNX is covered mostly by coal analysts, its stock has languished along with other coal stocks. However, CNX is transforming itself into a natural gas company. It is investing in shale gas production, while harvesting cash from its operating coal assets and selling its coal reserves….
EMC is an enterprise storage systems provider with additional operations in software virtualization via a majority ownership stake in publicly traded VMware (VMW), and emerging cloud infrastructure and application development software via a business called Pivotal. These businesses essentially operate as independent companies, but trade as one under EMC’s corporate structure, which we believe has caused EMC to trade at a sizable discount to the sum of its parts…
We closed out a number of positions including the remainder of our short position in Keurig Green Mountain (GMCR)…As many of you recall, GMCR was the subject of our October 2011 presentation titled “GAAP-uccino” at the Value Investing Congress. The gist of our thesis was that the company had engaged in various accounting shenanigans, the market opportunity would prove smaller than the bulls thought, and the 2012 patent expirations on K-cups would attract competition, limiting growth and margins…this has proven to be incorrect. After expiration, there was a raft of competition which, in the short term, took substantial share of the market. In response, GMCR management developed a clever strategy to re-close the system and preserve its monopoly position…
We closed out several other positions during the quarter including:
Computer Sciences Corporation (long), bought at $27.89 and sold at $51.04. Starting in early 2012, new management (led by CEO Mike Lawrie) executed a successful turnaround by cutting overhead and selling non-core assets, leading to higher operating margins, better free cash flow and a more shareholder-friendly capital allocation policy…
Tempur Sealy International (long), bought at $39.81 and sold at $59.46. We expected the company would see increased North American revenue, driven by new products, following several quarters of decline. We were also attracted to Tempur’s synergy potential from its Sealy acquisition along with the overall benefit from industry consolidation…
Bell Alliant (short), sold at CAD 26.53 and covered at CAD 31.24. This was a deteriorating business that was acquired by Bell Atlantic at a small premium.
Galenica AG (short), sold at CHF 914.78 and covered at CHF 836.17. We suspected its new products would not meet lofty market expectations and were proven correct.
Joy Global (short), sold at $66.72 and covered at $62.35…we shorted JOY because of our bearish view on Chinese steel production, which we thought would impact global demand for its coal and iron ore mining equipment.
Lululemon Athletica (short), sold at $65.14 and covered at $55.75. The company had many issues during our investment including product quality, marketing, management and competition. Results deteriorated, and the company repeatedly missed expectations.
Under Armour (short), sold at $25.76 and covered at $40.65. This was a busted thesis from 2013 when the company worked through apparent inventory issues…We gave up on waiting.
David Einhorn’s Greenlight Capital Shareholder Letters:
- Q3 2014 shareholder letter
- Q1 2014 shareholder letter
- Q2 2012 shareholder letter
- Q1 2012 shareholder letter
- Q4 2011 shareholder letter
- Q3 2011 shareholder letter
- Q2 2011 shareholder letter
- Q1 2011 shareholder letter
- Q4 2010 shareholder letter
- Q3 2010 shareholder letter
- Q3 2009 shareholder letter
- Q1 2009 shareholder letter
- 2008 shareholder letter
- Q2 2008 shareholder letter
- Q1 2008 shareholder letter
David Einhorn: Investing philosophy
Einhorn states that his process is the opposite of most value investors. Most value investors look for stocks at low multiples of earnings book value, free cash flow etc. and then try to figure out why they are cheap, and if the current market price is below the intrinsic value.
Einhorn takes a very different approach. He starts by asking why a security might be mis-priced; once he has a theory, he sees if the security is in fact miss-priced. Einhorn will never invest in a security if he believes that he does not have a large analytical edge over the person on the opposite side of the trade.
Some investors compare themselves to an index (usually the S&P 500). Therefore, if the S&P goes down 20%, but they are down 10% they are “happy”.
Einhorn does not use this method of investing; he is an absolute return investor. This means that Einhorn expects to make money regardless of market conditions. The goal of Einhorn’s Hedge Fund is to make money, or at least to preserve capital.
Two Rules Of Investing
This follows Warren Buffett’s two rules of investing Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Einhorn in part accomplishes this approach by shorting stocks. Einhorn does not short to hedge but rather to make money. He also does not short based on valuation, but rather based on a large analytical edge or where the company is engaging in fraud. Einhorn’s two most famous shorts are Lehman Brothers in 2007, and Allied Capital in 2002.
Einhorn takes a long-term approach to his investments. Sometimes when he invests, he has no idea when he will sell. He likes to keep a concentrated portfolio consisting with up to 20% in one holding, and the top five holdings making up 30-60% of the portfolio. The short positions are usually structured as half the size of the longs, in case the shorted securities go up in value.
Greenlight Capital’s top holdings as of September 2014:
- APPLE INC
- MICRON TECHNOLOGY INC
- SUNEDISON INC
- MARVELL TECHNOLOGY GROUP LTD
- AETNA INC NEW
- CIGNA CORPORATION
- LAM RESEARCH CORP
- CITIZENS FINL GROUP INC
- IAC INTERACTIVECORP
- E M C CORP MASS
(Note form 13F-HR does not include cash balances.)
David Einhorn: Books
In 2002, David Einhorn was asked to share his best investment idea, so he did. He described his reasons why Greenlight had sold short the shares of Allied Capital, a leader in the private finance industry.
Einhorn’s speech was so compelling that the next day, when the New York Stock Exchange opened for trading, Allied’s shares remained closed. So many investors wanted to sell or short the stock that the NYSE could not balance all the sell orders to open Allied’s trading in an orderly fashion.
What followed was a firestorm of controversy. Fooling Some of the People All of the Time is the gripping chronicle of this ongoing saga. Page by page, it delves deep inside Wall Street, showing how the $6 billion hedge fund Greenlight Capital conducts its investment research and detailing the maneuvers of an unscrupulous company.
Einhorn released an updated version of the book in December 2010 titled , where he adds an epilogue regarding further fraud at Allied, which could not be revealed at the time of original publication, the collapse of Allied Capital, and his short of Lehman Brothers. David Einhorn is donating 100% of the proceeds from the book to charity.
“When you leave a good job to go off on your own and don’t expect to make money for a while, you name the firm whatever your wife says you should.”
“The loss was not bad luck. It was bad analysis.”
“In the real world, illiquid assets carry a discount.”
“The lesson of Lehman should not be that the government should have prevented its failure. The lesson of Lehman should be that Lehman should not have existed at a scale that allowed it to jeopardize the financial system.”
“When people ask me what I do for a living, I generally tell them ‘I run a hedge fund.’ The majority give me a strange look, so I quickly add, ‘I am a money manager.’ When the strange look persists, as it often does, I correct it to simply, ‘I’m an investor.’ Everyone knows what that is.”
“One of the best investors around, Joel Greenblatt, has written a popular, charming and funny book about investing in great companies at low P/E multiples. To simplify an already simple book, great companies are generally measured as companies that can generate lots of profit without requiring a lot of capital. This means that they have high ROEs.”
“A 99% Value-at-Risk calculation does not evaluate what happens in the last one percent… This is like an airbag that works all the time, except when you have a car accident.”
David Einhorn: Speeches and presentations
- Speech on Allied Capital: Fooling some of The People All the Time (2002)
- HERE IT IS: David Einhorn’s Massive Presentation
- Speech At Ira Sohn Conference (2006)
- Speech at Value Investors Congress (2006)
- Sohn Investment Conference Presentation, May 5, 2014
- Robin Hood Investment Conference Presentation, October 20, 2014
David Einhorn: Newspaper cuttings
- Gold’s Stack Continues To Balloon At World Series Of Poker
- Heads Up
- Lunch With Warren Buffett Nets 250,100 For Charity
- The Day, Friday. June 13 .Lehman Removes Two Top
- Here’s Some .Essential Bedtime Financial Reading
- Information on David’s book “Fooling Some of the People All of The Time”
- David Einhorn Shines A Little Light On His ‘Bubble Basket’
- The Confidence Man
- How Has David Einhorn Managed to Outperform the Market?
- When David Einhorn Talks, Markets Listen—Usually
- Billionaire Einhorn’s Greenlight Capital plans to raise money
- How David Einhorn Became A Hedge Fund Legend
- The Fed’s Jelly Donut Policy | David Einhorn
- Heads Up Play With David Einhorn (great interview)
- Ira Sohn Conference: David Einhorn on Microsoft and Delta Lloyd (2011)
- Showdown in the Sunshine State (2011)
- Berkowitz Wins Battle For St. Joe Board, CEO Steps Down (2011)
- Financial Crisis Inquiry Commission Interview With David Einhorn of Greenlight Capital
- Face To Face With David Einhorn: King World News
- Did David Einhorn Rebuff Buffett? – NYTimes.com (2010)
- Liquor Before Beer…In The Clear (2009)
- Greenlight’s Einhorn shorting Moody’s | Reuters (2009)
- The Curse Of The AAA (2009)
- Einhorn wants SEC’s full report on Allied Capital | Reuters (2010)
- Private Profits and Socialized Risk (2008)
- Greenlight’s Einhorn faults rating agencies on MBIA | Reuters (2008)
- Why Did David Einhorn Publicly Attack Lehman?
- Lehman Battles an Insurgent Investor – NYTimes.com (2008)
- Greenlight’s David Einhorn Quits New Century Board (2007)
- Allied Says Agent May Have Obtained Einhorn Telephone Records (2007)
- A Long Wall Street Fight, Unfinished – washingtonpost.com (2006)
- target=”_blank”Hedge Fund Manager Who Plays His Cards Right – New York Times (2006)
- Keeping Shareholders in the Dark – New York Times (2005)
- Allied Capital Discloses Federal Criminal Probe (washingtonpost.com) (2004)
- USATODAY.com – Lunch with Warren Buffett fetches $250,100 for charity (2003)
- More Buffett lunches wanted – Taipei Times (2003)
- USATODAY.com – Crisis lawyer tackles new target: Hedge funds (2003)
- Forbes.com: Hit Man (2002)
- Boat Reimbursement Ends – New York Times (2002)
- CompuCredit Reports Earnings – Forbes.com (2001)
- Stock Market Reports: Tool for Investment Research (1999)
- Einhorn: Short Athenahealth – CNBC.com
- Einhorn: Finding opportunities – Video
- Bill Ackman and David Einhorn Talk About Investing
- David Einhorn warns of tech bubble – Video
- Einhorn’s new best idea: Micron – Video
- David Einhorn Interview From The WSOP [VIDEO] – ValueWalk
- David Einhorn Laments Quick End to Market Turmoil