Greenlight’s Einhorn Allows Us to Learn from His Mistakes

David Einhorn is a value investor with an excellent track record and a willingness to take controversial stands against powerful interests (that have frequently proven correct).  He is also willing to engage in public critique of his own investment process, which allows us all to learn vicariously from his mistakes.  He recently presented at the Value Investing Congress and made the following very relevant points.

  1. Regarding specific investments where he ignored the macro-picture (i.e. the housing bubble).  “The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture.”  Einhorn goes on to say that this does not mean that individual security selection is irrelevant, but rather that an investment process that combines top-down and bottom-up analysis is best.
  2. On why politicians are continuing to kick the can down the road regarding the nation’s fiscal imbalance.  Two basic problems with our government: a) the need to get re-elected (or stay appointed) makes politicians short-term oriented and b) special interests drive the agenda because the benefits of their initiatives are concentrated and the costs are spread out so much that no individual feels too much pain.
  3. On the right approach to the economic crisis and an alternative theory for the 1938 double-dip recession.  Einhorn points out that GDP grew 17% in 1934, 11.1% in 1935, and 14.3% in 1936, yet the current powers that be warn that removing stimulus too soon caused a double-dip recession in 1938.  His theory:  “An alternative lesson form the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial.”
  4. On the results of the government’s largess.  “I believe that the conventional view that government bonds should be ‘risk free’ and tied to nominal GDP is at risk of changing.  Periodically, high quality corporate bonds have traded at lower yields than sovereign debt.  That could happen again.”

The full speech is worth reading and is available here.