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Fooling Some of the People All of the Time, A Long Short by David Einhorn

February 19, 2011 | About:
“Remember, you can fool some of the people all of the time. Those are the people we need to concentrate on. “

This caption appears below a picture of executives talking at a conference table in David Einhorn’s updated book, Fooling Some of the People All of the Time, A Long Short. The book is about a company called Allied Capital, a midcap stock involved with numerous financial shenanigans.

For anyone unfamiliar with David Einhorn, below is a brief bio.

David Einhorn president and co-founder of Greenlight Capital, a long-short value-oriented hedge fund, which started with $1 million under management in 1996, and now has over $7billion under management. The fund has been closed to new investors for several years. Over the ensuing years, Greenlight has generated greater than 30% gross returns on an annual basis.

It is hard to write a review on this book since it is filled with exorbitant amounts of information, all of which is exceptionally interesting. The beginning of the book starts out with Einhorn's personal and professional background, giving insight into what has shaped him to become the man he is. Einhorn also discusses the factors leading up to his launch of Greenlight capital in 1996. He talks about his success in getting investors and producing great returns from both shorts and longs.

In 2002, David made a speech at the Ira Sohn Conference Speech where he stated his short thesis about Allied Capital (The speech can be found here). Einhorn discovered Allied Capital, when a hedge fund manager pointed out the stock to him. The manager mentioned that Allied seemed to be similar to Sirrom Capital, which Einhorn had shorted in 1998. Both companies had similar strategies, seemed to be valuing their assets too high, and were both business development companies (BDC). Einhorn began his lengthy analysis into Allied and a brutal battle continued for the next six years.

As a BDC, Allied had to use fair value accounting to value their loans. Suzanne Sparrow (former head of IR at Allied) admitted that the company was not following SEC regulations as early as 2002 using the excuse that fair value was subjective. Einhorn questioned this practice and very quickly Einhorn became a person non-grata. Allied did not stop there. The company engaged in a smear campaign full of outright lies against Einhorn. Allied stated that Einhorn never tried to get in touch with the company and discuss his analysis, although this was a complete falsehood. Allied also stole Einhorn’s phone records, and the records of anyone who criticized the company.

It would be impossible to detail all the fraud Allied engaged in, however most of it came through a company Allied owned called Business Loan Express (BLX).BLX was in the business of providing small business loans, that unfortunately were going into default very soon after being issued. For example, in 2001 BLX provided a $1.35 million to Ryan Petromart LLC. The property was assessed at only $443,000, about $900,000 less than the amount of the loan. Only one partial payment was received before a default several months later.

Some of the most frustrating news to Einhorn was despite the fact that he presented countless evidence, investors continued to be fooled by Allied. What was even more frustrating to Einhorn was that even though the S.E.C. ruled that Allied had broken multiple securities laws in specific relation to Einhorn’s claims, yet Allied continued operating business as usual (at least at the time the first edition was written).

Einhorn does the best job summarizing his experience at the end book (the first edition).

“Six years ago, I told the SEC about Allied’s aggressive, inappropriate, and illegal accounting. Five years ago, I told multiple government agencies about the fraud at BLX. Four years ago, I told the FBI that other Allied critics and I had our phone records stolen. Three years ago, I notified Allied’s Board in detail about its management’s misconduct and made a very detailed presentation to the U.S. attorney in Washington outlining a variety of illegal actives. Two years ago, the USDA was notified about BLX’s fraud at the agency. One year ago, Allied admitted it had Greenlight’s and my phone records. Neither Allied nor any regulator has commented on the matter since. It is hard to imagine that an investigation should take so long, if Allied is, in fact, co-perating.”

The story has a happy ending for Einhorn. In the updated version, one of Allied's portfolio companies declared bankruptcy on September 30th 2008, and was bought out in 2010 by Ares Capital. Einhorn briefly discusses his short of Lehman Brothers and more fraud that Allied was involved in, which could not be published at the time of the original publication was released.

The two best parts of the book, which are really interconnected, are the discipline and extensive research Einhorn put into Allied. Einhorn did not run a quick screener and decide to short Allied Capital, he spent probably months of his life dissecting the company’s capital structure and evaluating individual loans. Einhorn held onto this short for six years and had the discipline to wait until the company finally collapsed. It is a truly amazing tale and a great lesson for any investor. This was one of the best books I have ever read. The book is a combination of a fascinating story and investors about how to do due diligence on a company. I would recommend this book both for new investors and more advanced investors.

One thing I liked about Einhorn specifically not related to his investment ideas, was his warm heart. He donated millions of dollars he made off the Allied short to charity. Additionally, Einhorn is donating 100% of the proceeds of the book to charity. Einhorn has been doing many interviews to promote the book despite not earning a penny from it. That is the fact I most admire about David Einhorn.

To purchase the updated book on Amazon.com click on the following link-Fooling Some of the People All of the Time, A Long Short (and Now Complete) Story, Updated with New Epilogue. To purchase the original edition of the book click on the following link-Fooling Some of the People All of the Time: A Long Short Story.

Disclosure: I receive free books from book publishers and authors asking me to review them. In addition I sometimes request specific books that look interesting. I try to review the books that I think will be the most interesting. I have a material connection because I received a free copy of this book from the publisher. In addition I receive a small commission if you click on the above link and buy the book (or anything else) from Amazon.com It does not cost you a penny more. So I get a commission, Amazon gets a sale, and you get your book so it is a win for everyone.

http://www.valuewalk.com/

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.4/5 (24 votes)

Comments

paulwitt
Paulwitt - 3 years ago
The story has a happy ending for Einhorn. In the updated version, Allied declared bankruptcy on September 30th 2008, and was bought out in 2010 by Ares Capital.

Yes. Ares Capital did buy out Allied Capital, but Allied Capital didn't declare bankruptcy. It was one of Allied Capital's portfolio companies that declared bankruptcy.

BTW, I hear David Einhorn is a good poker player. Myself, I never enjoyed the game. I prefer playing blackjack!

yswolinsky
Yswolinsky - 3 years ago
Sorry, thanks for pointing that out, it was a brief point in the book I missed it. It has been fixed. BTW einhorn is a great holdem player not surprised though.
Alex Morris
Alex Morris - 3 years ago
Just received the book from Amazon, excited to read it!
yswolinsky
Yswolinsky - 3 years ago
“Got your book on Friday, finished it on Sunday. To me, like reading porn.”-Steve Eisman
the Spark
The Spark - 3 years ago


One thing never clear to me was how successful a short Allied was. Most of the time Einhorn was short the stock it carried a huge dividend. Absent a lot of leverage, I am not sure Greenlight made a huge killing in the stock considering how many years it took to play out while Allied continued to pay its hefty dividend. I think the return was good, but not extraordinary. I could be wrong. Has anyone ever seen the annualized return from Einhorn's short? The book is a good story, though I felt it could have been told with a little less detail.
paulwitt
Paulwitt - 3 years ago
Yes, the dividends were hefty and increasing every year. Over 40 years ALD had a return of something like 18% annualized. In fact, Peter Lynch owned the stock and wrote about it in his book "Beating the Street".

So when I first bought ALD it was around $20 and paying 10% dividends. In the great recession it went down to 80 cents and I bought more and sold out at $4.00 when ARCC bought them out.

My whole thesis during the crisis is that when a stock goes down 90%, shorts can make 90%. But if the stock recovers to the original price, longs make 900%. I chose the latter!

And when the majority of stocks go to fair value I hope to buy some more BDC stocks!

paulwitt
Paulwitt - 3 years ago
Here's my current "FORD, the last carmaker standing in America speculation play". You know, the one where F went from $1.00 to $15.63 in a couple of years (or, in Peter Lynch's book referred to as cyclicals".)

Here it is: Bank of Ireland (IRE) and Allied Irish Banks (AIB), the #1 and #2 banks in Ireland. What are the odds the #1 bank will be ok? And the #2?

So take $2,000 and buy $1,000 of each. It's better than a lottery ticket!

yswolinsky
Yswolinsky - 3 years ago
To see how much profit he made I guess you would have to take his profit, which I believe he stated was 35m and divide it by his average investment in the company 2002-2008, then you would have to subtract dividends. If you want to calculate taxes I guess you would take 35 or 40% rate. If you wanted to calculate opportunity cost you would have to discount it by a rate, which in Einhorn's case should be very high since he has returned 30% annually.

Let me know if anyone thinks this makes sense and/or how much money he made sense.
kldd16
Kldd16 - 1 year ago
Regarding Allied performance since Einhorn's speech:

On page 356, Einhorn claims:

From April 30, 2002, through December 31, 2007, Allied returned 5.9 percent per year including tax distributions

Either Einhorn didn't have much capital in it, or he entered and exited several times.

He claims that: Greenlight’s overall performance was 17.7 percent per year during that same period.

I don't think there's a ticker for Einhorn's fund and yahoo doesn't return the old data on ALD.

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