David Einhorn's Speech at The UJA (February 3rd 2011)

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Feb 06, 2011
I had the pleasure of hearing David Einhorn speak earlier this week. I wanted to try to catch everything he said so I put my notes in short bullet points. He covered a lot of interesting topics including his book Fooling Some of the People All of the Time, A Long Short (and Now Complete) Story, the Federal Reserve, St. Joe and more.

Below are the notes I took. Enjoy!

  • Einhorn barely spoke about the updated version of his book . Really just Q&A in general. 50% of David’s Allied Capital profits he donated to charity.
  • Views himself as market agnostic in stock selection.
  • Re market and economy, he’s not an “outlooker,” i.e. doesn’t generally have an outlook per se.
  • However, he’s clearly got a modestly negative bias presently towards the market from his comments.
  • Views Ben Bernanke as somewhat of a joke. Bernanke is giving the banks a free ride to bolster their profitability to offset losses; also serves to put the risk trade on aiding stocks, but pushing up inflation.
  • Irresponsible monetary and fiscal policies being pursued by the Govt/Fed and what will likely be Bernanke’s inability to stop inflation when it ramps up here underpins his conviction on Gold, which I believe is his biggest position (thru the ETF). As long as real rates negative, he’s likely to be pro-gold.
  • Views likelihood of a sovereign default as high. Such as Greece, but also possibly Japan.
  • Japan is in trouble given demographics and debt; must keep their rates down or in big big trouble.
  • He puts no faith in the ratings agencies. Whole system of reliance on it is a farce. Does not believe governments should be rated by them as can make downfall a self fulfilling prophecy.
  • Believes smaller stocks, growth stocks and cyclicals are generally over priced and larger stocks modestly priced.
  • Likes Big Pharma, including PFE, KO, WMT, AAPL, Energy. Consumer brand companies likes them as well though a little richer than he would prefer.
  • Short Health Care REITs though has been forced to cover some of late; hopes they can hang on to rest as sees real estate as still fraught with problems; I was not exactly clear on whether he was more negative on residential or commercial.
  • Discussed JOE and his battle with Bruce Berkowitz, but didn’t say much beyond the fact that he believes expenses will exceed what can be garnered from asset sales/values. Sounds like he thinks it’s worth zero. Started shorting in ’05-’06 and first spoke about it @ ~$60 and then recently @ $24. We’ll find out over time who’s right over time.
  • Always buys protection in the form of puts etc.; believes “insurance” is almost always underpriced. Value at Risk (VAR) stat analysis does not account for tail risk so sellers that almost invariably look at the market and employ this or similar – as he believes almost all do – simply don’t price that risk properly. He’ll throw pennies under the steam roller all day for protection. Costs him 2-5% every year.
  • Biggest hit ever was Freescale Semi, spun from MOT, presumably a dog of a company with bad mgmt that everyone hated. Ultimately BX put a big premium deal on the table and they sold all; deal then busted.
  • Worst day ever, outside of Volkswagon run or deal (not sure), was the day the Govt pulled the plug on shorting during the crisis. Views it as outrageous that the SEC did not look to protect investors and ensure market fairness. Sounded like he was able to keep his puts on though and recovered much of what was lost, though I’m pretty sure he too had a pretty ugly ’08.
  • Idea flow comes from all over.
  • Owns 15-20 names long usually; also shorts.
  • Key to success: discipline, patience, intellectual honesty (willingness to admit mistakes and, even if he believes he is right, to cut losses when things run too far against him)
  • Books he likes (doesn’t read much): Joel Greenblatt's “You Can Be a Stock Market Genius”; Seth Klarman's Margin of Safety; and Michael Lewis's “Liar's Poker
  • Key to success as Hedge Fund Manager: solid performance out of the gate, in part as timing was good and market strong; willingness to be transparent and discuss ideas in letters, etc. when others were not.
  • Was discussing his view on his insurance investments when I had to leave, pretty close to end.

Disclosure: Long PFE and KO