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Rupert Hargreaves
Rupert Hargreaves
Articles (626)  | Author's Website |

What Went Wrong for This Fund Manager?

A postmortem of David Einhorn after a year of losses

November 07, 2018 | About:

I have been tracking the investment performance this year of David Einhorn (Trades, Portfolio), who, until recently, had one of the best records of success for value hedge fund managers around.

Over the past several years, however, a series of missteps have cost Einhorn significantly in terms of performance. According to performance figures to the end of October, his hedge fund is down 25% for the year.

Although the firm managed a small recovery in October, reporting a modest gain of 1%, it looks as if Greenlight Capital isn't going to pull out of its tailspin over the final three months of the year. 2018 is turning out to be Einhorn's worst year ever.

But rather than claim defeat and change his strategy, Einhorn is doubling down on one of his riskier short investments. Earlier this week, the hedge fund manager announced that Greenlight is doubling down on its short position against Tesla (NASDAQ:TSLA).

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On an earnings call for Greenlight Re, his reinsurance company, Einhorn told listeners that the company's recently announced quarterly profit will be "as good as it gets for the company" and "Tesla is contending with a litany of competitive, regulatory, human resources, vehicle quality and capital structure issues."

Value hunter

One of Einhorn's qualities that helps him stand out is his ability to stick with positions maintaining conviction and waiting for the value to materialize.

As I covered at the beginning of October, when the hedge fund manager released his latest letter to investors, rather than jump out of poorly performing long positions, he reviewed his strategy and doubled down on the stocks he thought had the most value. Here is the extract from the letter I used at the time:

"During September we spent two days offsite reviewing the entire portfolio. As a result of that process, we made some changes to the portfolio – some of which we are still implementing. But, the bigger take-away is that we believe we have a deep understanding of the fundamentals of the companies we are invested in and the perceived misunderstandings by the market."

Einhorn's performance this year is the result of a perfect storm: Longs have fallen while shorts have risen. Particularly damaging to returns has been the "bubble basket" of stocks, bets against technology companies such as Tesla and Amazon (NASDAQ:AMZN), which have soared higher while the rest of the market has struggled for direction.

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Learning from the mistakes

Is this where the highly experienced value investor has gone wrong? I believe it is.

Compared to finding the market's best short positions, finding value investments is relatively easy. What's more, when it comes to speculating on the short side, the potential for profit is limited, but the loss potential is unlimited. One or two bad calls on the short side can eliminate years of hard work almost overnight.

We know Einhorn knows how to find value stocks; his record of successfully beating the market is a testament to that. But when it comes to finding shorts, his success has been limited. While the guru has made some fantastic short calls throughout his career, mainly betting against Lehman Brothers before the financial crisis, he has made many more bets that have not worked out so well for Greenlight's investors.

I am a big believer in learning from the mistakes of others, so I think on this occasion there is a valuable lesson to be learned here. Shorting stocks is a very challenging and complex game.

Almost all of the most successful investors have made their money on the long side. Meanwhile, some fantastic reputations have been ruined by ill-fated short bets. Einhorn may yet see a profit on his "bubble basket," but the pain suffered while waiting for the ultimate collapse may not be worth it.

Disclosure: The author owns no stocks mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


Rating: 5.0/5 (4 votes)

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Comments

stephenbaker
Stephenbaker - 5 days ago    Report SPAM

Good message.

Thomas Macpherson
Thomas Macpherson premium member - 4 days ago

Great article Rupert. I won't short for two reasons. First, it's against my nature. I am comfortable rooting for growth rather than collapse. This isn't a moral judgement against those who short, it just isn't something that gets my juices flowing. Rather, it would keep me up all night. Second (as you mention), the risk/reward proposition simply is unacceptable to me. Having the potential for unlimited losses and capped gains is a game I'm simply unwilling to play. Thanks again for a great article. Best - Tom

Rupert Hargreaves
Rupert Hargreaves - 2 days ago    Report SPAM

Hi Tom, thanks for the comment. I agree 100%, studying the greatest investors of all time, they've all got where they not by shorting but by taking significant positions on the long side. I think that's very telling. Best, Rupert

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