Interview with David Einhorn

[dcollon]

I thought some of you might enjoy this interview

 

https://ritholtz.com/2024/02/mib-david-einhorn/

[ValueArb]

Jim Carrey won't, obligatory Ace Ventura

 

 

[Spooky]

57 minutes ago, dcollon said:

I thought some of you might enjoy this interview

 

https://ritholtz.com/2024/02/mib-david-einhorn/

 

Thanks for sharing. I found his hypothesis that passive investing has broken price discovery for certain segments of small stocks interesting.

[Libs]

7 hours ago, Spooky said:

 

Thanks for sharing. I found his hypothesis that passive investing has broken price discovery for certain segments of small stocks interesting.

Would you mind summarizing this hypothesis?

[Kupotea]

12 hours ago, Libs said:

Would you mind summarizing this hypothesis?

There’s no money chasing small cap value (it’s all gone to passive large cap) so if a company beats expectations no one notices. Without price discovery you need to find companies willing to initiate large buybacks if you want to get paid. In the meantime, the most overvalued components of the S&P continue to attract ever larger inflows.

[Gmthebeau]

In looking at his latest holdings Mr Einhorn owned NYCB.  Perhaps his way of valuing companies just no longer works.  The markets are forever changing.   Passive has been growing for decades it isn't a new thing.   Since GFC we had zero interest rates which changed the markets again.   

[Spekulatius]

If passive is truly becoming more and more dominant and value agnostic, than the opportunities for value investors should only increase as there is less and less competition. So the problem with passive taking over the investing business is somewhat self limiting.

 

If truly nobody cares about valuation any more, the few that do should be able to find extraordinary opportunities. I don’t think it will be as easy as buying all low PE or low P/B stocks, you can simply automate that process and it is ridiculous to assume it’s going to be that easy.

Edited February 9 by Spekulatius

[Spooky]

1 hour ago, Spekulatius said:

If passive is truly becoming more and more dominant and value agnostic, than the opportunities for value investors should only increase as there is less and less competition. So the problem with passive taking over the investing business is somewhat self limiting.

 

If truly nobody cares about valuation any more, the few that do should be able to find extraordinary opportunities. I don’t think it will be as easy as buying all low PE or low P/B stocks, you can simply automate that process and it is ridiculous to assume it’s going to be that easy.

 

I believe this is correct - you can't just buy the universe of low PE / PB stocks and expect it to work the same as in the past. Einhorn is looking for companies with a 5x or 6x P/E and that are buying back significant amount of stock. He is not banking on the market to re-rate at a higher price but rather return of capital over time. I like it.

[Libs]

2 hours ago, Kupotea said:

There’s no money chasing small cap value (it’s all gone to passive large cap) so if a company beats expectations no one notices. Without price discovery you need to find companies willing to initiate large buybacks if you want to get paid. In the meantime, the most overvalued components of the S&P continue to attract ever larger inflows.

Thank you. Not very persuasive though. My small caps move pretty violently to quarterly results, so someone is noticing.

[ValueArb]

1 hour ago, Gmthebeau said:

In looking at his latest holdings Mr Einhorn owned NYCB.  Perhaps his way of valuing companies just no longer works.  The markets are forever changing.   Passive has been growing for decades it isn't a new thing.   Since GFC we had zero interest rates which changed the markets again.   

 

He's beaten the market by 100% over the last three years (and beaten market significantly over funds history) so I think he's figured it out. In the interview he's mainly talking about a 5 year stretch in mid to late 2010s where he did poorly every year, that's when he struggled to understand how things had changed. If you previously averaged over 20% returns for your entire career, it's a lot harder to realize you need to change your investing approach than if your career was more marginal before.

 

I really liked the interview and found it inspiring. It's not great for decent value managers who had to leave the industry, but the more money in passive vehicles like index funds and ETFs, the more opportunities for remaining active managers. Makes me want to read even more 10Ks.

[Saluki]

2 hours ago, Kupotea said:

There’s no money chasing small cap value (it’s all gone to passive large cap) so if a company beats expectations no one notices. Without price discovery you need to find companies willing to initiate large buybacks if you want to get paid. In the meantime, the most overvalued components of the S&P continue to attract ever larger inflows.

 

If you play that scenario out further, then people buying index funds are buying the components of the index regardless of the valuation. So the index fund becomes like a fund with a momentum strategy.  Especially if they are using some  kind of dollar cost averaging strategy like contributing through a workplace retirement plan like a 401k. And the value of the top performers in the index, because it is cap weighted, will be affected more by fund flows than fundamentals.  So more people contributing to it through their work 401ks will move it up and fewer contributions will move it down.  So it should become, over time, much more sensitive to employment numbers: fewer people employed means fewer people contributing. It will also have a secular headwind as boomers retire and begin to sell from their index funds to meet retirement expenses rather than contributing at their end of their work life, which is when they make the most money and therefore have been pushing the index higher. 

[Gmthebeau]

1 hour ago, ValueArb said:

 

He's beaten the market by 100% over the last three years (and beaten market significantly over funds history) so I think he's figured it out. In the interview he's mainly talking about a 5 year stretch in mid to late 2010s where he did poorly every year, that's when he struggled to understand how things had changed. If you previously averaged over 20% returns for your entire career, it's a lot harder to realize you need to change your investing approach than if your career was more marginal before.

 

I really liked the interview and found it inspiring. It's not great for decent value managers who had to leave the industry, but the more money in passive vehicles like index funds and ETFs, the more opportunities for remaining active managers. Makes me want to read even more 10Ks.

 

Right I would think the market is becoming less and less efficient if most everyone is going passive.

[Kupotea]

3 hours ago, Saluki said:

 

If you play that scenario out further, then people buying index funds are buying the components of the index regardless of the valuation. So the index fund becomes like a fund with a momentum strategy.  Especially if they are using some  kind of dollar cost averaging strategy like contributing through a workplace retirement plan like a 401k. And the value of the top performers in the index, because it is cap weighted, will be affected more by fund flows than fundamentals.  So more people contributing to it through their work 401ks will move it up and fewer contributions will move it down.  So it should become, over time, much more sensitive to employment numbers: fewer people employed means fewer people contributing. It will also have a secular headwind as boomers retire and begin to sell from their index funds to meet retirement expenses rather than contributing at their end of their work life, which is when they make the most money and therefore have been pushing the index higher. 

Agreed with the assertion that the index itself has become sort of its own fund or even asset class.
 

I’m not sure this is an entirely new phenomenon. You’ve always had the cycle of an underperforming sector gets beaten down, funds that focus in that sector are forced to redeem and it gets beaten down some more until the next up cycle. This is just an interesting situation where momentum/large cap is riding the hot hand and value/small cap is out.

 

Eventually the S&P 500 becomes so overbought that it underperforms other indexes and investing factors. Then you get outflows and maybe some mean reversion. I think passive indexing will remain the dominant investment strategy you’ll just see those passive flows moving into other geographies and factors.

[Gregmal]

The whole “value investing is dead” rhetoric is total loser bullshit. If a company proves its ability to generate value for its owners, it will be noticed, and assuming no onerous capital structure, somebody will eventually get greedy and try to acquire it. 

[LC]

21 hours ago, Gregmal said:

The whole “value investing is dead” rhetoric is total loser bullshit. If a company proves its ability to generate value for its owners, it will be noticed, and assuming no onerous capital structure, somebody will eventually get greedy and try to acquire it. 

Agreed- what do you think old guys with liver warts do on park avenue? Spend time with their family? I don’t think so!

[ratiman]

Einhorn owned GM for years. Is he saying that GM was really trading at 5x when it was trading at 5x and he had to sell GM because the market wouldn't recognize the true value of GM? Because if that is his argument then he's just making excuses for owning a bad company with a low multiple.

[ratiman]

A former Greenlight analyst basically refutes Einhorn point by point in this clip. It's not that the market has gotten too irrational, the market is too efficient.

 

https://www.youtube.com/watch?v=7ZpLMWpUQPM&t=1683s

 

Edited February 11 by ratiman

[Spekulatius]

1 hour ago, ratiman said:

Einhorn owned GM for years. Is he saying that GM was really trading at 5x when it was trading at 5x and he had to sell GM because the market wouldn't recognize the true value of GM? Because if that is his argument then he's just making excuses for owning a bad company with a low multiple.

What Einhorn is saying that starting in 2019 he realized that GM trading at a PE of 5 doesn’t matter, since they were not paying a large dividend or buying back a lot of stock back then. So shareholder yield (buyback and dividends ) was quite low, despite the low PE. He is now preferably looking at stocks with a high shareholders yield.

Edited February 11 by Spekulatius

[ratiman]

Does anyone believe that GM is trading at 5x earnings? It came public at $25 in 2010 and is currently at $38.

[ratiman]

Was EInhorn ever long GM and short TSLA at the same time? This is perfect midwit meme content because both the dumbest and smartest investors know that you don't want to be long the past and short the future.

[Gregmal]

I look at Prem Watsa and David Einhorn and see a case where both have done well last couple years, but only one has really learned from his mistakes of the previous decade. Einhorn still seems to do all the same dumb shit shorting tech stocks and complaining about stuff like Tesla. His fund also got so concentrated in Greenbrick that outperformance became inevitable. Watsa on the other hand stopped doing the “look how smart I am” shit and now just cashes checks for shareholders. 
 

So given the noise lately, I’d be long Watsa and short Einhorn here.

 

Over time investors need to learn that more often than not if something doesn’t make sense to you or whatever, just move on and invest your time in better causes. Don’t sit around shorting it.

Edited February 11 by Gregmal

[lnofeisone]

I think there is a lot of truth to what Einhorn is saying and we see it play out with multiple favorites on this board - JOE, BTI, FRPH, CPNG. One of my holdings - VET. Small companies where value is "easier" to recognize are appreciating just fine without shareholder yield. Companies where things are complex really do need that extra push. The value is not dead, it just requires a little bit more thinking, recognition, and patience. 

 

[coc]

On 2/9/2024 at 2:52 PM, Gregmal said:

The whole “value investing is dead” rhetoric is total loser bullshit. If a company proves its ability to generate value for its owners, it will be noticed, and assuming no onerous capital structure, somebody will eventually get greedy and try to acquire it. 

 

Have to double this take. Einhorn is saying all that fresh powder lying around doesn't want to make money because they don't seem to be interested in some of his stocks. Seems a lot more likely that he made some bad investments. (And some amazing ones)

 

That said, he's picked it up a lot lately so his switch in approach, theory aside, has been a good one. 

[Gregmal]

I saw this, and just thought....how disingenuous? 

 

https://www.cnbc.com/2024/04/03/david-einhorn-thinks-inflation-is-reaccelerating-and-has-made-gold-a-very-large-position.html

 

Aint this dude been long and loud gold since basically the GFC?

[CorpRaider]

Yes.