David Einhorn is one of the most successful long/short equity hedge fund managers of the past decade. Since we strive to imitate the best of the best and free ride their stock picking skills, we were certainly happy we had some of his time.
Greenlight Capital returned 21.5% per year since its inception in 1996, beating the S&P 500 Total Return Index by more than 15 percentage points per year. This was a great opportunity for us to uncover David Einhorn’s stock picking secrets.
We first asked about his overall strategy. “We try to find things that are misunderstood,” said Einhorn. “And then if we think something is misunderstood then we figure out if it’s misvalued. And if we figure out that it’s misunderstood and misvalued, then we tend to invest.”
Then we asked him how he narrows the selection field. Seems Einhorn doesn’t follow any blog or website for investment ideas. This didn’t surprise us because we all tend to follow him instead. What about newspapers?
“It could be newspapers but more often it’s stories. It’s other people discussing their investment thesis or um observing kinda what’s going on, and then just thinking about things. A lot of the stories we hear, we start with, started with somebody else’s idea,” Einhorn said.
Actually that’s what we observed too. Einhorn’s has several common positions with certain hedge funds. Hedge fund managers share investment ideas with certain other hedge fund managers for two reasons. First, to double check their investment thesis and accuracy of their analysis. Second, to receive investment ideas in return in the future. A hedge fund doesn’t have enough resources to cover thousands of companies in depth, so they rely on other proven hedge fund managers. In a sense, they monkey each other. This is what we at Insider Monkey are trying to do as well. To test the accuracy of our hypothesis we asked Einhorn whether the Sprint Nextel (S) investment he recently made was somebody else’s.
David Einhorn: “Yes, I think so actually. I think that was somebody else’s idea actually.”
Scoggin Capital’s Curtis Schenker started adding Sprint Nextel to his portfolio during the third quarter of 2010. Considering how David Einhorn and Schenker are close, we speculated that Schenker shared his ideas with Einhorn. There are other stocks where Schenker imitated Einhorn’s positions.
We also wondered whether he invests in certain countries or industries. Turns out Greenlight Capital mostly invests in United States and Europe and they tend to look at individual ideas rather than industries. He says gold is the biggest position in their portfolio and Delta Lloyd is his favourite pick for 2011. Insider Monkey has been a gold investor for the past five years and we asked him whether he thinks gold is undervalued, or more specifically, if he uses a valuation metric to evaluate his gold investments.
“I dont know if we think of gold in that sense,” said Einhorn. “It’s more of a feeling of worry about the value of the fiat currencies. My feeling is that as long as the fiscal and the monetary policy don’t make any sense, gold should do very well.”
David Einhorn predicted another crisis in the coming years a couple of weeks ago. He reiterated his negative medium-term outlook:
“We’re in a sort of ongoing cyclical recovery”, he said. “And I think there’s a lot of danger out there a little further, at some point in the future, relating to the impacts of what I consider to be the bad fiscal and monetary policies. And some of the unfinished business from the previous crisis. “
Our readers know that we like to calculate each hedge fund manager’s alpha using Carhart’s four factor model. Greenlight Capital’s alpha has been very high since inception and it’s greater than Whitney Tilson’s alpha over the most recent three years. This is, of course, our analysis. You should do your own analysis before making any investment decisions.
Greenlight Capital performed in line with other hedge funds in 2008 and this hurt their performance. Einhorn said that was difficult.
“Yes, we’re paying more attention to the bigger picture. …2008 was a very tough year,” said Einhorn. “For a lot of reasons and I’m not trying to dismiss what impact what you’re just saying has, but 2008 was a very peculiar year and I don’t think we did very well and I think that it was a very tough environment for what we’re doing and we made some mistakes along the way which compounded it. I think as we have phrased it, some of the results from 2008 proved to be rather temporary, and it makes more sense to look at a multiyear result, which you sort of described.”
Einhorn also added that his firm’s huge increase in AUM definitely affected the performance. “As we’ve grown,” he said, “the smallest opportunities no longer become available to us or they become less material and its harder to exit positions or to invest you know in scale and I think that those considerations make it a bit harder. We’ve noticed that size is an issue going back all the way to 1998, and in ’96 we bought a big position with a $20M market cap and within 2 years it wouldn’t have been possible to have replicated that so this has been an ongoing issue for a long time”
You can read more on David Einhorn here:
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