market folly

Greenlight Capital's David Einhorn recently was interviewed and completed a question and answer session at Oxford Union.  He's been quite busy in recent months as he also spoke at the Capitalize For Kids conference.

Einhorn noted he likes debate and did it in high school, as you had to be able to argue both sides of the argument.  That trait is useful in investing as you look at the contra viewpoint to your position.

"We're wrong all the time.  I shouldn't say all the time.  We're wrong often.  We have to constantly question whether we're wrong."

On launching Greenlight: There's very low barriers to entry in the hedge fund industry and he thought if they could do a good job with a small amount of money they could live a good life.  He never dreamed that it would grow as much as it did.

He attributes his success to critical thinking skill.  If you can have a distinct viewpoint from everybody else and be right, you can be successful. 

About Greenlight's culture:  He thinks Greenlight has a lot of humility and respect with smart and nice people working together.  They want to respect each other's time.  Critical thinkers that reason and think before they speak and can adjust to new facts and feedback.

Einhorn is an avid poker player and he says it's a very similar skillset as you have certain facts you know (info about the company) and then things you can surmise (CEO's motivation, etc), and then unknown things that could come in the future.  "So you combine what you know, with what you think you can surmise, combined with understanding the range of outcomes relating to the uncertain things and saying is this a good place to commit a fraction of my capital?"

In poker, you know how many chips everyone has, what your cards are, what the card on the table are.  But you have to surmise what the other players might have or might do.  And then the uncertainty is the range of future cards that aren't yet displayed.

In investing, Einhorn likes to focus locally or in developed markets.  He says the further you get away (geographically or developmentally) there's a lot of local customs, local knowledge you have to acquire and it's hard to compete when you're sitting in New York, even if you go visit every once in a while.


Q&A Session:

On the environment for launching funds: If you're launching today, you're basically hiring 14-40 people from analysts to traders to CFO to backoffice, etc.  So you basically need to have enough assets under management right out of the gate to justify all that hiring and to fund the business.  His launch wasn't really like that: it was him and another guy in a tiny office doing all the various duties.  With a small AUM, there wasn't a lot of expense so you could do that.  He thinks you could still do that today if you had a differentiated strategy and articulated it well and had a client base.  He relied on word of mouth once he had a good start performance-wise.   He notes that the whole 'capital introduction' industry has spawned since then and so that's been a big difference.

On shorting companies/bubble basket:  He doesn't short companies on overvaluation.  He always looks for some sort of deterioration.  There's been a lot of companies that aren't really profitable (his bubble basket of 40-50 companies) and while 4 or 5 really worked against him, the vast majority of the basket worked in their favor.  That is, until this year.  They've all gone up and rallied against him but until they start showing profit, he won't take a different view.

On being contrarian:  He has to re-assess constantly, especially if the position moves against him.  So you have to constantly evaluate and understand the other side.  If something's changed, you've got to reduce/increase/exit based on that information.  Generally his choice is to reduce or eliminate a position.  But if he thinks he's right, patience is the way to go.

On if he'll change his strategy as value hasn't worked as well recently:  "Our goal is to achieve attractive risk-adjusted returns over time while taking demonstrably less risk than the market as a whole.  Which means fundamentally we're not comparing ourselves to the S&P 500 or an index, so we don't evaluate ourselves that way."

"The way you deal with unknown unknowns is through portfolio construction.  We like to run a concentrated portfolio, but even our best idea we're not going to put all our money in.  You have to have some level of diversification ... a certain amount of market risk."

"We tend to think of risk as how much can we lose in the worst case?"

On machine learning/competing with robots:  "We view these investments as puzzles.  There are the few things you know, but they're not the most important things because everybody knows them.  The most important things are what is that you can infer and how good are you assessing the possible range of outcomes, either the known unknowns or unknown unknowns and how do you construct that into a portfolio.  I'm sure the machines have views on these and the shorter-term the decision, the more likely the machine is going to figure it out better and faster than the human.  But our goal here is just to find things that are widely misunderstood by a large margin such that we're not competing with that kind of technology, because I don't think we would beat them."

On short-termism vs long-term focus:  "I think that one of the inefficiencies in the market is investors are generically too short-term oriented and time arbitrage is one of the best inefficiencies in the market."

Embedded below is the video of David Einhorn's talk at Oxford Union:



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