In 2008, Einhorn grabbed headlines yet again with his short thesis for Lehman Brothers. A few weeks later, the company posted a surprising $2.8 billion quarterly loss; less than six months later, Lehman no longer existed.
Despite the high profile nature of these two speeches, neither has been as instrumental to Einhorn’s image as the speech he made in May 2002. The focus of his short thesis, a financial institution called Allied Capital, was a registered investment company (RIC) that made mezzanine loans to private companies. Due to their RIC designation, they were not required to set up loan loss reserves; instead, they were required to mark each investment to fair value on a quarterly basis. Without going into too much detail, the company effectively decided that they would use more aggressive accounting than allowed because they wanted to (the section about the company’s “white paper” is truly eye opening). This, among other things (including attempts to illegally obtain Einhorn’s phone records), led to an endless with Allied that lasted through 2008; in 2003, only a year into the six year battle, Einhorn had this to say in response to a SEC officials question about the reaction from Allied: “If what you’re asking is did I feel that the reaction was much, much greater than I would have anticipated? The answer is yes.”
I don’t want to spoil any of the book for potential readers and will simply leave it at this: read it. For most investors (if not all), what you read will truly shock you; the questionable practices of SEC regulators, Wall Street analysts, corporate executives (not just at Allied), and professors from prominent business schools show yet again that personal incentives, more than anything else, are the driving force of human action and decision making. For me, the most interesting part was reading about Einhorn’s background, and the beginnings of Greenlight; the company started with less than $1 million, more than half of which ($500,000) was funded by his parents. As is evident throughout the book, his success is dependent upon his intelligence, but even more so upon his dedication and drive. People like to suggest that successful investors are outliers, and possess innate skills that cannot be taught; after reading about many of the most successful investors of the past hundred years, I think it is clearly evident that hard work, not a high IQ, is the name of the game.
Hopefully, at the end of the day, reading this book will cause some people to rethink their position on short selling, and the very necessary role it plays in balancing irrational and herd-like behavior in financial markets. I think Steve Eisman of FrontPoint Partners put in best his praise for the book, “Got [it] Friday, finished it on Sunday. To me, like reading porn.”
Disclosure: I paid for my copy of this book, and will not benefit in any way from readers’ purchases.
About the author:
I hope to own a collection of great businesses; to ever sell one, I demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.