Tuesday, June 17, 2008

David Einhorn

Many of you have probably seen this but this is a great article on David Einhorn. I thought it was fair and balanced. There were a couple of points I wanted to bring out since the story is very long.


The news convinced Einhorn that a much larger crisis was imminent, and on a Friday afternoon, he called together his analysts and they developed a plan for the weekend—to come up with as comprehensive a list as possible of financial firms with exposure to subprime loans. “We did something we’d never done before. We left on Friday, and by Sunday night, we had a list of 25 financial firms that we wanted to short. Research-wise, we did a lot less work than we usually do when we take a position. There wasn’t time.”

Over the next three days, Greenlight shorted all 25 stocks. “It was what we called the ‘credit basket,’ ” says Einhorn. “A big macro call. One percent of this, one percent of that. No large positions. We were looking for the firms that we thought had the most exposure.

A couple of things I want to point out from this. First is that traditionally Einhorn is very concentrated. He believes in making concentrated bets. He is also known as one of the most research intensive shops on the street. Yet obviously he is not tied to a formula. He is willing to break the mold when urgency comes. I am always amazed at those who quote Buffett basic tenants of investing as rigid unbendable rules. Guess what, Buffett did the same thing with railroad stocks a little over a year ago. He bought a basket (what I still argue was more of a macro call) before narrowing it down. He also did the same thing in the 60s when he was a hedge fund manager shorting a basket of stocks. I did the same thing buying MOO the agriculture ETF. I had more time to do more research and am not out of MOO and in 3 individual agriculture names (I got over 20% returns in MOO in less than six months). Investing is an art not a science. It calls for rules to be broken at times. Do not drink your own cool aide or anybody elses.

A senior partner at a buyout firm, though no fan of Lehman’s, summarized one cynical view of Einhorn on the Street: “When a guy stands to profit as much as he does, shorting a company in so precarious a condition that the Fed had just moved in to protect it, well, you have to wonder about his motivation. Yeah, there’s truth to his argument, but now is not the time. Two years ago would’ve been heroic. If he brings down Lehman, the guarantors are going to be me and you the taxpayer.”

This is a legitimate question. Alot of people have come to Einhorn's defense including myself, but this is the question that must be asked even by those who think Einhorn did the right thing. Yes I know the other side of the coin (which I am in agreement with) that what he did caused Lehman to raise capital and that the Fed and taxpayers should be grateful to Einhorn. While that is what happened probabilistically that was not a given. It could have very easily gone the other way with Lehman collapsing in a matter of weeks. Like I said I endorse Einhorn's actions and made alot of money from his publicity but do not be blind to see that there is a legitimate argument on the other side of the aisle.

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