The Greatest Investors: David Einhorn

Born: November 20, 1968 (New Jersey)

Key Positions: Donaldson, Lufkin & Jenrette

SC Fundamental Value

Greenlight Capital

Personal History:
David Einhorn spent his childhood in Wisconsin and attended Cornell University, graduating in 1991 with a degree in Government. After considering a career with the CIA, Einhorn decided to work as an analyst for investment bank Donaldson, Lufkin & Jenrette. After two years, Einhorn shifted careers and began working for SC Fundamental Value, a hedge fund. It was in this experience that he gained crucial expertise in analyzing financial statements. One of the lessons he took away from this experience was that in order “to understand the nature of the business, the economics of the business compared to reported earnings, and are the management’s decisions aligned with shareholder interests.” (What is the "Einhorn Effect"?)

Einhorn left SC Fundamental Value in 1996 with colleague Jeff Keswin to found Greenlight Capital. Greenlight has made headlines in recent years for a number of polarizing bets, bringing Einhorn both substantial gains and major losses. The fund gained prominence surrounding the 2008 financial crisis when it bet on a decline in Lehman Brothers Holdings, Inc. before the bank collapsed. The U.K. Financial Services Authority fined Einhorn and Greenlight $11.2 million in early 2012 on allegations of trading based on inside information. Einhorn publicly disparaged the fine but indicated that he would pay it rather than contest.

On July 4, 2018, The Wall Street Journal reported that Greenlight Capital's assets in management shrunk from $12 billion in 2014 to about $5.5 billion. 

Einhorn is a major philanthropist, serving on the boards of the Michael J. Fox Foundation, the Robin Hood Foundation, and more. In 2011, he purchased a minority share of the New York Mets baseball team for $200 million.

Investment Philosophy

Einhorn’s early experiences at SC Fundamental Value prompted him to ask three basic questions before making an investment in any company:

1) How competitive is the business?
2) How does the company perform relative to its competitors?
3) Are the management’s interests aligned with those of the shareholders?

Einhorn has described his own investment style as follows:

“We start by asking why a security is likely to be misvalued in the market. Once we have a theory, we analyze the security to determine if it is, in fact, cheap or overvalued. In order to invest, we need to understand why the opportunity exists and believe we have a sizable analytical edge over the person on the other side of the trade.

… We accept more industry risk, but assemble a portfolio where we believe our longs are ones and twos and our shorts are nines and tens. We do not short to hedge. If we are uncomfortable with the risk in a position, we simply reduce or eliminate it. By having a portfolio of worthwhile longs and worthwhile shorts, we achieve a partial market hedge without having to spend capital on negative – expected – return propositions.”

Noteworthy Publications:

• “Fooling Some of the People All of the Time,” by David Einhorn (2010)

Quotes:

“The loss was not bad luck. It was bad analysis.”

“In the real world, illiquid assets carry a discount.”

“You have a certain set of facts and you are looking for situations where you have an edge, whether the edge is psychological or statistical.”

“What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.”