Hedge fund manager David Einhorn has made a big splash this month, with his calls on Herbalife and Green Mountain Coffee.But the famed founder of Greenlight Capital has been making waves in the financial industry for a long time with his astute short calls—which have usually turned out to be completely accurate.
Here’s the full run down of how Einhorn became so huge. You might want to take notes.
After graduate summa cum laude from Cornell, Einhorn weighed several career options--including a possible stint with the CIA.
In the end, he took an analyst position with the now-defunct boutique investment bank Donaldson, Lufkin & Jenrette--it was bought by Credit Suisse in 2000. After working at DLJ for two years, Einhorn went to work for hedge fund Siegler, Collery & Co., where he picked up his stock valuation skills.
Einhorn started Greenlight Capital with Jeff Keswin, his co-worker from Siegler, Collery & Co, in 1996. They started the fund with only $900,000 in assets under management.
Today, the fund manages over $10 billion and is currently closed to investors. Last year, Greenlight saw returns of 2.9%--which, although a small number, is an impressive feat for a period when most hedge funds were in the red. Annualized, the fund has returned over 22% since inception.
Last week, everyone witnessed the power of Einhorn's word when he hopped on the earnings call for Herbalife, a maker of fitness and nutrition products.
It's no clear what Einhorn's position on Herbalife is, but he questioned the company's sales and distributors base and network. After Einhorn asked the questions on the call, there was an immediate sell-off in Herbalife's stock--it tanked over 20% in mere seconds.
Last year, Einhorn announced a short position on Green Mountain Coffee Roasters, which caused a big sell-off in the stock.
Green Mountain was already a popular stock to short, but Einhorn backed up his position with a massive 100+ slide presentation on why the company was headed for doom, pointing to its questionable accounting methods and possible limited demand for its K-cup products.
Nowadays, more two quarters after Einhorn's call, Green Mountain has slashed guidance for 2012 and the stock is still only making news when it tanks. Ouch.
But it also stretches back over a decade—he first caught attention for his short call on Allied Capital in 2002.
In 2002, Einhorn offered up an investment idea at a charitable conference to raise money for a cancer hospital. His idea was to short Allied Capital, a mid-market private equity firm. Einhorn reasoned that the firm was valuing its debt in a questionable manner, which inflated the stock.
His idea initially backfired--EInhorn was accused of market manipulation after Allied's stock plunged following his speech and was investigated by the SEC.
But he was vindicated in 2007, when the SEC investigated Allied and found it guilty of securities fraud. Allied was eventually bought out and taken private by another company.
Source: Fooling Some People All The Time
In May 2008, Einhorn publicized his most famous short--Lehman Brothers. At a conference, Einhorn explained that Lehman was taking too much risk and there were discrepancies in their numbers in SEC filings. He had also recently met with newly-appointed Lehman CFO Erin Callahan and was unimpressed when she was unable to answer some of his questions about the investment bank.
In case you needed reminding--Lehman Brothers filed for bankruptcy in September 2008. Einhorn's insight strikes again.
Einhorn has publicly said he also likes to see the stock market go up, and that he has several long positions in his hedge fund also. But he reasoned his short calls:
'But I do think that there is a social value in identifying companies that are doing bad things and betting against them. I've seen the demise of a fair number of these companies, and it's not because we've bet against them, it's because these were flawed companies. And our country, our markets, our economy are better when companies that are flawed or cheating are replaced by better ones.'
In 2006, Einhorn participated in the World Series of Poker and made it to 18th place. He donated his $650,000 winnings to the Michael J. Fox Foundation for Parkinson's research, where he is a board member.
He participated in the event last year too, but busted out on the second day.
In 2011, Einhorn was in talks to buy a minority ownership stake in the New York Mets--of whom he had been a life-long fan--for $200 million.
The deal, however, fell apart in the end because the Mets owners were worried about Einhorns' intentions to eventually obtain a majority ownership in the team.
Einhorn revealed it was a talk by his grandfather that inspired his confidence in gold. Now, most of Greenlight's assets are denominated in gold.
Apparently, Einhorn's fund also has a vault of gold stashed somewhere in New York City--he's said it is used as a hedge against inflation. We can only wonder where it is.
Like most in finance, Einhorn isn't scandal-free. His hedge fund was fined for insider trading earlier this year.
Greenlight Capital was fined $11.2 million in January by Britain's Financial Services Authority for trading on inside information over the company Punch Taverns. The FSA pointed to the fact that Greenlight sold stock in Punch Taverns three days before the pub operator announced it was planning on raising more funds from investors.
Although Einhorn paid the fine because he didn't want to deal with the hassle of fighting the charge, he publicly stated that his fund's actions 'resembles insider dealing as much as soccer resembles football.'
Einhorn is relatively media shy and doesn't go on TV much, but he knows when to be outspoken and how to be heard.
Recently, he wrote a column in the Huffington Post--where Einhorn blasted Bernanke for keep interest rates low. The kicker? He used a Simpsons (yes, the TV show) metaphor, along with jelly doughnuts and Mr. Burns, to explain why the Fed's low-interest rate policy wasn't going to help the economy and only aid the wealth. That's a guy who really knows how to connect to his audience in a way that's not boring.
Also, when Einhorn was being attacked by many in the financial industry for his Allied call in 2002, he wrote a book about it--Fooling Some of the People All of the Time.