We would like to look closely on the contrary views of the two greatest investors of our generation, Bruce Berkowitz and David Einhorn.
The clash between Bruce Berkowitz and David Einhorn over Jacksonville, FLlorida based St. Joe (JOE, Financial) has been widely covered. We realized their totally opposite view over the company. However, most of investors do not realize that they have almost contrary views on a lot of aspect. Also they do agree on one company, CIT Group (CIT, Financial).
Both are great investors
Both Bruce Berkowitz and David Einhorn have achieved amazing track records. Since inception in 1996, David Einhorn’s Greenlight Capital, LP has averaged more than 20% a year, net of fees and expenses. He is also the chairman of reinsurer Greenlight Capital. The insurance float of the company is managed by Einhorn through his hedge funds.
Bruce Berkowitz started his fund in 1999, at the peak of the tech bubble. He certainly did not foresee that he would experience two major market crashes in the coming decade. But that didn’t matter. His fund almost tripled investor’s money in the period, while the S&P stayed almost flat.
Different Investment Strategies
Both Berkowitz and Einhorn are great investors. But if you look carefully into what they do, they achieved those amazing records in totally different ways. As a hedge fund manager, David Einhorn has more tools. He can invest anything he wants, like longs, shorts, and commodities, and derivatives. He earned his fame mostly in short positions. On May 15, 2002, he gave a speech alleging illegal accounting practices in Allied Capital. The stock of Allied Capital then collapsed from $30, eventually the company was taken private at $5 a share. In May of 2008, he presented his case for shorting Lehman Brothers. A month later, Lehman went bankrupt. A few months ago, he made a compelling presentation on St. Joe (JOE). Following the news the stocks prices of JOE went down by more than 20%. It did not go lower further, because Bruce Berkowitz is there. St. Joe (JOE) is one of his most favorite companies.
Contrary to Einhorn, mutual fund manager Bruce Berkowitz can only long stocks. His performance comes from picking the winning stocks. With money consistently pouring in, his fund has grown to $19 billion. He seems to be handling it just fine.
This is the returns of Bruce Berkowitz and David Einhorn from 2004 through 2010:
One can see that Bruce Berkowitz has beaten the market every one of these years. Einhorn tends to underperform when the market is quietly going up. But in the market crash of 2008, Einhorn’s fund did much better. His short positions certainly helped the portfolio from sinking together with the market.
Different Views on Market
Going into 2010, David Einhorn was concerned about the Fed policies and government deficit, his portfolio was “conservatively constructed”, with only about 30% net long positions. His fund gained about 11% in 2010, while the S&P500 gained about 15%. Not being fully invested in 2010 certainly hurt his overall performances.
On the other hand, Bruce Berkowitz keeps about 50% of the portfolio in “securities of mostly hated financial services and real estate related companies.” His cash level was about 35%. Although 35% is high for most fund managers, it is close to the average throughout the lifetime of Fairholme Fund. The fund gained 25.5% in 2010, well ahead of the S&P500.
Different Political Views
David Einhorn is not shy from sharing his political views. He co-authored an op-ed on New York Time in 2009, called it “The End of the Financial World as We Know It.” He publicly criticized the Fed policies on its notion that quantitative easing would carry with it a wealth effect. He cautioned investors against buying heavily into stocks, because their prices could collapse if the market were to lose faith in the Fed's monetary interventions.
On the contrary, Bruce Berkowitz rarely talks about politics. We did not know his position on Fed policies until he made a press release to thank the US government. He wrote: “Overthe past few years, Fairholme’s performance is due in large part to thousands of patriots in civil service who rescued the global financial system with much intelligence and hard work, demonstrating government at its best during a time of national crisis.”
On St. Joe
The differences between David Einhorn and Bruce Berkowitz became the starkest in Oct. 2010, when David Einhorn presented his short thesis on St. Joe, believing the land that St. Joe owns is worth much less than those on the book. He said “On that analysis St. Joe is worth $1.9 billion. Subtract $400 million of debt, leaves $1.5 billion of equity or $20 per share. I believe that adding in the time value of money would take this analysis down to the $15 number I used at the conference.”
Some investors of St. Joe think Einhorn was wrong, trying to use discounted cash flow model to prove it. While we don’t necessarily agree with Einhorn, but we know that DCF model cannot be applied to unpredictable businesses like St. Joe.
Berkowitz, Gad and Heller believe that land is worth more. JOE owns huge tracts of undeveloped land in Florida. Access to JOE’s land holdings is via an international airport, the Northwest Florida Beaches International Airport, which opened on May 23 of 2010. JOE donated the land for the airport and owns over 71,000 acres in the surrounding area. JOE’s 172,000 inland acres have sold for around 1,500 per acre, indicating they are collectively worth around $260M. With $150M in cash and long-term debt of $38M, after backing out the inland acres, JOE’s ~$2B enterprise value implies that the remaining 405,000 acres within 15 miles of the coastline are worth only around $5,000 per acre.
Before releasing his presentation, David Einhorn emailed Berkowitz, asking if he would debate about the stock. Berkowitz did not respond the email. Later on, he said “I want to buy you a box of chocolates” to thank Einhorn for bringing down the stock prices so that he can buy more.
In December, both Bruce Berkowitz and his partner, neighbor and relative Charles Fernandez joined St. Joe’s board. Yesterday St. Joe announced that Standstill Agreement with Fairholme Capital will expire and be terminated immediately. The agreement will allow Fairholme to acquire more than 30% of the non-voting shares.
Following the recent news, shares of St. Joe has jumped to about 20% higher than the time when Einhorn released his short thesis.
So far Bruce is winning!
On CIT Group (CIT)
Although they don’t agree with each other on so many things, they do agree on the investment with CIT. Bruce Berkowitz owns 15,442,529 shares of CIT, valued as $630 million as of Sep. 30, 2010, which accounts for 5.61% of his equity portfolio. David Einhorn owns 10,590,429 shares of CIT, valued as $432 million as of Sep. 30, 2010, which accounts for 10.76% of his long equities.
CIT contributed significantly to the performance of Einhorn’s fund in 2009, it may have also helped a lot in 2010 as its stock prices gained about 50% in 2010. For Bruce Berkowitz, CIT belongs to the group of distressed financials he loves. The contribution to his performance is smaller.
Both of them have been adding to the position over the past quarters. We are still waiting to see whether they will do differently on CIT since the stock prices have appreciated dramatically.
Conclusions
You can succeed in investing in many different ways. But you need a right framework, and stick to it. Bruce Berkowitz and David Einhorn have contrary views on a lot of things, but they both succeed.
We have a lot to learn from both of them.
As a side note, you can check out the consensus holdings David Einhorn and Bruce Berkowitz and any other combinations of Gurus with our screen of Aggregated Portfolio of Gurus. You do need to be a premium member to access this screen. If you are not a Premium Member, we invite you for a 7-day Free Trial.
The clash between Bruce Berkowitz and David Einhorn over Jacksonville, FLlorida based St. Joe (JOE, Financial) has been widely covered. We realized their totally opposite view over the company. However, most of investors do not realize that they have almost contrary views on a lot of aspect. Also they do agree on one company, CIT Group (CIT, Financial).
Both are great investors
Both Bruce Berkowitz and David Einhorn have achieved amazing track records. Since inception in 1996, David Einhorn’s Greenlight Capital, LP has averaged more than 20% a year, net of fees and expenses. He is also the chairman of reinsurer Greenlight Capital. The insurance float of the company is managed by Einhorn through his hedge funds.
Bruce Berkowitz started his fund in 1999, at the peak of the tech bubble. He certainly did not foresee that he would experience two major market crashes in the coming decade. But that didn’t matter. His fund almost tripled investor’s money in the period, while the S&P stayed almost flat.
Different Investment Strategies
Both Berkowitz and Einhorn are great investors. But if you look carefully into what they do, they achieved those amazing records in totally different ways. As a hedge fund manager, David Einhorn has more tools. He can invest anything he wants, like longs, shorts, and commodities, and derivatives. He earned his fame mostly in short positions. On May 15, 2002, he gave a speech alleging illegal accounting practices in Allied Capital. The stock of Allied Capital then collapsed from $30, eventually the company was taken private at $5 a share. In May of 2008, he presented his case for shorting Lehman Brothers. A month later, Lehman went bankrupt. A few months ago, he made a compelling presentation on St. Joe (JOE). Following the news the stocks prices of JOE went down by more than 20%. It did not go lower further, because Bruce Berkowitz is there. St. Joe (JOE) is one of his most favorite companies.
Contrary to Einhorn, mutual fund manager Bruce Berkowitz can only long stocks. His performance comes from picking the winning stocks. With money consistently pouring in, his fund has grown to $19 billion. He seems to be handling it just fine.
This is the returns of Bruce Berkowitz and David Einhorn from 2004 through 2010:
| Year | S&P500 (%) | Bruce Berkowitz (%) | David Einhorn (%) |
| 2004 | 12 | 24.93 | 5.2 |
| 2005 | 4.91 | 13.74 | 14.2 |
| 2006 | 15.79 | 16.71 | 24.4 |
| 2007 | 5.61 | 12.35 | 5.9 |
| 2008 | -37 | -29.7 | -17.6 |
| 2009 | 26.5 | 39.01 | 32.1 |
| 2010 | 15.1 | 25.5 | 11 |
One can see that Bruce Berkowitz has beaten the market every one of these years. Einhorn tends to underperform when the market is quietly going up. But in the market crash of 2008, Einhorn’s fund did much better. His short positions certainly helped the portfolio from sinking together with the market.
Different Views on Market
Going into 2010, David Einhorn was concerned about the Fed policies and government deficit, his portfolio was “conservatively constructed”, with only about 30% net long positions. His fund gained about 11% in 2010, while the S&P500 gained about 15%. Not being fully invested in 2010 certainly hurt his overall performances.
On the other hand, Bruce Berkowitz keeps about 50% of the portfolio in “securities of mostly hated financial services and real estate related companies.” His cash level was about 35%. Although 35% is high for most fund managers, it is close to the average throughout the lifetime of Fairholme Fund. The fund gained 25.5% in 2010, well ahead of the S&P500.
Different Political Views
David Einhorn is not shy from sharing his political views. He co-authored an op-ed on New York Time in 2009, called it “The End of the Financial World as We Know It.” He publicly criticized the Fed policies on its notion that quantitative easing would carry with it a wealth effect. He cautioned investors against buying heavily into stocks, because their prices could collapse if the market were to lose faith in the Fed's monetary interventions.
On the contrary, Bruce Berkowitz rarely talks about politics. We did not know his position on Fed policies until he made a press release to thank the US government. He wrote: “Overthe past few years, Fairholme’s performance is due in large part to thousands of patriots in civil service who rescued the global financial system with much intelligence and hard work, demonstrating government at its best during a time of national crisis.”
On St. Joe
The differences between David Einhorn and Bruce Berkowitz became the starkest in Oct. 2010, when David Einhorn presented his short thesis on St. Joe, believing the land that St. Joe owns is worth much less than those on the book. He said “On that analysis St. Joe is worth $1.9 billion. Subtract $400 million of debt, leaves $1.5 billion of equity or $20 per share. I believe that adding in the time value of money would take this analysis down to the $15 number I used at the conference.”
Some investors of St. Joe think Einhorn was wrong, trying to use discounted cash flow model to prove it. While we don’t necessarily agree with Einhorn, but we know that DCF model cannot be applied to unpredictable businesses like St. Joe.
Berkowitz, Gad and Heller believe that land is worth more. JOE owns huge tracts of undeveloped land in Florida. Access to JOE’s land holdings is via an international airport, the Northwest Florida Beaches International Airport, which opened on May 23 of 2010. JOE donated the land for the airport and owns over 71,000 acres in the surrounding area. JOE’s 172,000 inland acres have sold for around 1,500 per acre, indicating they are collectively worth around $260M. With $150M in cash and long-term debt of $38M, after backing out the inland acres, JOE’s ~$2B enterprise value implies that the remaining 405,000 acres within 15 miles of the coastline are worth only around $5,000 per acre.
Before releasing his presentation, David Einhorn emailed Berkowitz, asking if he would debate about the stock. Berkowitz did not respond the email. Later on, he said “I want to buy you a box of chocolates” to thank Einhorn for bringing down the stock prices so that he can buy more.
In December, both Bruce Berkowitz and his partner, neighbor and relative Charles Fernandez joined St. Joe’s board. Yesterday St. Joe announced that Standstill Agreement with Fairholme Capital will expire and be terminated immediately. The agreement will allow Fairholme to acquire more than 30% of the non-voting shares.
Following the recent news, shares of St. Joe has jumped to about 20% higher than the time when Einhorn released his short thesis.
So far Bruce is winning!
On CIT Group (CIT)
Although they don’t agree with each other on so many things, they do agree on the investment with CIT. Bruce Berkowitz owns 15,442,529 shares of CIT, valued as $630 million as of Sep. 30, 2010, which accounts for 5.61% of his equity portfolio. David Einhorn owns 10,590,429 shares of CIT, valued as $432 million as of Sep. 30, 2010, which accounts for 10.76% of his long equities.
CIT contributed significantly to the performance of Einhorn’s fund in 2009, it may have also helped a lot in 2010 as its stock prices gained about 50% in 2010. For Bruce Berkowitz, CIT belongs to the group of distressed financials he loves. The contribution to his performance is smaller.
Both of them have been adding to the position over the past quarters. We are still waiting to see whether they will do differently on CIT since the stock prices have appreciated dramatically.
Conclusions
You can succeed in investing in many different ways. But you need a right framework, and stick to it. Bruce Berkowitz and David Einhorn have contrary views on a lot of things, but they both succeed.
We have a lot to learn from both of them.
As a side note, you can check out the consensus holdings David Einhorn and Bruce Berkowitz and any other combinations of Gurus with our screen of Aggregated Portfolio of Gurus. You do need to be a premium member to access this screen. If you are not a Premium Member, we invite you for a 7-day Free Trial.
