David Einhorn isn't afraid of high stakes. The New York-based hedge fund manager has taken Magna founder Frank Stronach to court, charging oppression of shareholders. He has also written a book that is highly critical of investment firm Allied Capital. What's more, he's a top finisher in the World Series of Poker.
ERMAN People in Canada know you from your battle with Frank Stronach. What's it like investing in one of Frank's companies?
EINHORN That's another one that gets credit for extra emotion. It's right up there with Allied. There's a range; they are not all like this, I promise. If everything was like these two investments, I wouldn't be able to get up every day.
What drew you to invest in MI Developments [the Stronach-controlled real estate company that owns a majority stake in Magna Entertainment]?
We thought it was cheap. They had this land, these leases, these buildings...you were basically buying Magna credit at a high-teens cap rate. I don't want to go through the whole litigation again, but we had certain views as to how the company was going to conduct itself. We felt we were given certain assurances. The matter has now been litigated and the courts have decided that we didn't. That is what it is.
What becomes of the position now?
We're still here.
Your book, Fooling Some of the People All of the Time, tells the tale of Allied Capital v. David Einhorn. Is it a parable for something larger?
The book is one story; it's a case study. But it has broad applicability because a lot of the behaviours that I describe have played out, or are playing out, in a much bigger sense in the current en----vironment.
Short sellers have taken a lot of heat for the demise of Bear Stearns, but they were also dead right about bond insurer MBIA, one of your big winners. Can you hold your head higher now than six months ago and say, "Shorting is what I do for a living."I don't know. I'm not ducking that question. But honestly, I don't know.
What's your take on the rumour that hedge fund managers got together at breakfast to celebrate the downfall of Bear Stearns?
Who was at that breakfast? Name one person. I don't think it happened. I definitely wasn't there. I don't know anyone who was there. Not only that, the timeline doesn't make any sense because people didn't know that Bear was being bought out by JPMorgan at $2 until late Sunday. So why would there be a breakfast on the weekend to celebrate it? The whole thing doesn't make sense.
In the book, you worry that "a free-fraud zone" will result from the reluctance of regulators like the U.S. Securities and Exchange Commission to take on companies for fear of hurting investors. Doesn't the fact that the government demanded a fire sale of Bear Stearns show that's not an issue?
Even with Bear, they left the creditors whole, by transferring the risk from Bear to JPMorgan, instead of having those claims resolved in some sort of a bankruptcy court. There was definitely the moral-hazard issue relating to that.
Why are you so critical of the SEC?
The SEC is unable to figure out what to do about fraud when they see it practised by issuers, because they don't want to harm supposedly innocent shareholders and employees. That's a problem that the SEC doesn't have an answer to.
The good news is, the SEC has all the rules it needs. They just need to decide that it makes sense to enforce them. None of this requires an act of Congress or anything. It probably doesn't require more funding. It just requires a philosophy change.
Some short bets take years to pay off. When do you decide that enough is enough?
If we decide we're wrong, we give up, and it does happen. When we're right, it ends when it ends. The discipline is to be honest with yourself. Every day the market gives you the ability to change your mind, and you should avail yourself of that from time to time.
How is it different with long positions?
Longs you tend to make money on gradually--although not in this market--and shorts you tend to lose money on and then suddenly make money. We lost on MBIA for five years. But it was the biggest winner in our fund last year.
In the book, you say you're an optimist.
How can you be an optimistic short?
I'm an optimistic person, but that doesn't mean I'm not a critical thinker. I'm optimistic that over time investors will be treated better, that the people who are acting on bad agendas will be found out, and that the markets will become better regulated. I'm even optimistic that the me-----dia will do a better job, over time.
Einhorn's next book
"I don't think I could boil my investing rules of thumb down into a sound bite. I'd have to write another book. That's a joke. There's not another book coming."
In that case, what are your top 2 investing books
YOU CAN BE A STOCK MARKET GENIUS BY JOEL GREENBLATT
"Joel's book talks a lot about how you identify inefficient situations," says Einhorn, who has made his bones doing just that.
MARGIN OF SAFETY BY SETH KLARMAN"Seth's book does a very good job of explaining how to value things," says Einhorn. But is it worth the $2,000 that the out-of-print tome is currently fetching on eBay? "I didn't pay $2,000. But it's a good book--if you can find it in your library; it's a library rental for sure."
Poker advice for investors
"There are some parallels. Both involve incomplete information. You know certain things. You try to deduce certain things. And then there's more cards coming. The cards are like future events."
Living in a momentous age
"Since 1996, our returns have averaged better than 25% a year.
For 2008, we can't give exact statistics, but suffice it to say it's been a tough year."
"It's a momentum market," says Einhorn. "And those are tough for value investors because they don't like to buy the stuff that's already going up. They like to buy the stuff that's going down. But, in this market, what's going down goes down more, and what's going up keeps going up more. So it's very challenging."
1968: Born in New York City
1976: Family moves from New Jersey to Wisconsin
1991: Graduates from Cornell with a degree in government. Joins investment bank Donaldson, Lufkin & Jenrette for "two miserable years"
1993: Gets first job at a hedge fund, Siegler, Collery & Co.
1996: Starts Greenlight Capital with a Siegler, Collery colleague and $900,000 (U.S.), mostly from his own parents
2000: Buys a stake in Frank Stronach's MI Developments
2002: Makes the fateful call to put down 7.5% of Greenlight's fund on a short bet against Allied Capital
2006: Finishes18th in the World Series of Poker's main event and donates $659,730 (U.S.) in winnings to charity
© 2007 The Globe and Mail. All rights reserved.
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