EINHORN: The market may have adopted an 'alternative paradigm' for calculating the value of stocks

Greenlight Capital, a $US7 billion hedge fund founded by David Einhorn, told clients that the market may have adopted an “alternative paradigm” for calculating the value of stocks.

That’s according to a third-quarter client letter sent to investors Tuesday and reviewed by Business Insider.

Here’s an excerpt from the letter (emphasis added):

The market remains very challenging for value investing strategies, as growth stocks
have continued to outperform value stocks. The persistence of this dynamic leads to questions
regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that
when a proven strategy is so exceedingly out of favour that its viability is questioned, the cycle
must be about to turn around. Unfortunately, we lack such clarity. After years of running into
the wind, we are left with no sense stronger than, “it will turn when it turns.”

Given the performance of certain stocks, we wonder if the market has adopted an alternative
paradigm for calculating equity value. What if equity value has nothing to do with current or

future profits and instead is derived from a company’s ability to be disruptive, to provide social

change, or to advance new beneficial technologies, even when doing so results in current and

future economic loss? It’s clear that a number of companies provide products and services to

customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis,

the equity holders are doing just fine.

Greenlight’s funds gained 6.2% after fees in the third quarter, bringing its year-to-date return to 3.3%, the letter said.

The firm managed $US7 billion in hedge fund assets as of mid-year 2017, according to the Absolute Return Billion Dollar Club ranking.

A spokesman for Greenlight didn’t immediately respond to a request for comment.

More to come…

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