David Einhorn recently released his Q2 2018 shareholder letter. It’s been another difficult quarter for Greenlight Capital losing an additional (5.4)%, and bringing the Greenlight Capital funds’ (the “Partnerships”) year-to-date loss to (18.3)%. In a quarter when the S&P 500 index returned 3.4%, bringing its year-to-date return to 2.6%.
Despite the latest results Einhorn is still optimistic about his value investing strategy saying:
“Some have looked for reasons other than isolated mistakes. Theories include getting older, changing lifestyles, and an unwillingness to adapt to new market environments. We have been accused of being stubborn, but one person’s stubbornness is another person’s discipline. We will continue to be disciplined. Although it might be nice to have something to blame for the poor results, the truth is that we have been making every effort and leading with our best thinking. Even if it isn’t the whole explanation, the environment for value investing has been tough.”
Here’s an excerpt from that letter:
Over the past three years, our results have been far worse than we could have imagined, and it’s been a bull market to boot. Yes, we have made some obvious mistakes – the worst of which was not assessing that SunEdison was a fraud in 2015 – but there have been others. A number of years ago one of our investors said Amazon would surpass Apple and become the most valuable company in the world. We didn’t get it then and, truthfully, we don’t really get it now. But, there is a reasonable possibility that he will be proven right.
Some have looked for reasons other than isolated mistakes. Theories include getting older, changing lifestyles, and an unwillingness to adapt to new market environments. We have been accused of being stubborn, but one person’s stubbornness is another person’s discipline. We will continue to be disciplined. Although it might be nice to have something to blame for the poor results, the truth is that we have been making every effort and leading with our best thinking. Even if it isn’t the whole explanation, the environment for value investing has been tough.
AllianceBernstein recently reported that value investing strategies are performing in the bottom one percentile since 1990. In just the past 18 months, the Russell 1000 Pure Growth index has outperformed the Russell 1000 Pure Value index by 54%. The reality is that the market is cyclical and given the extreme anomaly, reversion to the mean should happen sooner rather than later. We just can’t say when.
Our friend Vitaliy Katsenelson once wrote an essay about value investing that articulates what the past three years have felt like better than we can. He wrote:
“Investing is a nonlinear endeavor that is full of ups and downs. Every investor will have periods when his or her strategy is completely out of sync with the market. When the market is roaring on its way up and your portfolio is down, you may be sure that pain will rear its ugly face. Value investing is almost by definition a contrarian endeavor. Growth investors ride the train of love, harmony, peace, and consensus – they buy companies that Mr. Market is infatuated with and thus prices them for love. (But just so you know, love ain’t cheap and rarely lasts forever, at least when it comes to growth stocks.)”
“Value investors, on the other hand, live in the domain of hate – they buy what others don’t want. Ironically, value investors may end up owning the same companies that growth investors used to own. When the love is gone, hate goes on a rampage; and trust me, you won’t find anyone who’ll pay extra for hate. It is cheap. Investment styles go through cycles. Sometimes your stocks are really out of favor. Nothing you do works. You keep telling yourself that in the short run there is little or no link between decisions and outcomes. That’s a truism of investing, and even you believe it on an intellectual level. But every day you come to work and the market tells you you are wrong, you are wrong, you are wrong.”
Right now the market is telling us we are wrong, wrong, wrong about nearly everything. And yet, looking forward from today we think this portfolio makes a lot of sense. One of our general goals is never to be your biggest problem. Unfortunately, we have been lately, and a good number of our partners have had enough and redeemed.
We appreciate you for sticking with us through this challenging period. We certainly understand those who have run out of patience as this period has lasted longer than we could have envisioned. Maximizing the size of our capital base has never been our goal; maximizing returns is and always has been. In our history, we have raised ~$6 billion, and paid out ~$8 billion to investors. Bad results aren’t fun, but we are determined to show up to work every day to engage in solving the puzzles in the market, as we always have. It remains exciting when we think we have figured something out – which doesn’t happen every day or even every week, but historically has been lucrative when we do.
You can read the entire Q2 2018 shareholder letter here (H/T Zerohedge):
Qlet2018-02 (1) by Zerohedge on Scribd
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