In his recent Q4 2022 Letter, David Einhorn explained why a ‘debilitated’ value investing industry is great news for his firm. Here’s an excerpt from the letter:
2022 was an exceptionally good year. In many ways it was our best ever and is most comparable to 2001, the year after the last technology bubble popped. Before going into all the glorious details, let us simply say:
We are probably not as smart as we appeared in 2022, but we are probably not as dumb as we appeared in 2018 either. The market environment, as we have been highlighting, turned extremely favorable for our strategy in a period that immediately followed one that was extremely unfavorable for our strategy.
We believe that our strategy has and will continue to achieve attractive absolute and risk-adjusted returns over a long period of time.
The last number of years cumulatively have proven to be quite challenging for many investors, including ourselves. It reminds us of a favorite baseball scene from Field of Dreams:
Shoeless Joe Jackson: The first two were high and tight, so where do you think the next one’s gonna be?
Archie Graham: Well, either low and away, or in my ear.
Shoeless Joe Jackson: He’s not gonna wanna load the bases, so look low and away.
Archie Graham: Right.
Shoeless Joe Jackson: But watch out for in your ear.
You can’t prepare for a low and away breaking ball and a high and inside fastball at the same time. In 2022, a lot of investors took one in the ear.
From the bottom in 2009 to the top around the end of 2021, we experienced an enormous bull market culminating with a massive bubble, particularly in the most speculative stocks. As we have previously observed, we believe most surviving investors either never had, or ceased to have, valuation as an important part of their investment process.
We are very grateful to those of you who have stuck with us. We are pleased to be able to reward you with a good year in what for most was a difficult investing environment. We have learned a lot in this period and hope to continue to reward you.
However, most did not stick with us, and understandably so. The results for a sustained period were unattractive. For us, it was challenging to remain disciplined (some have said stubborn) by refusing to make investments that didn’t make sense to us.
Many investors that have historically had a value bent either adapted, retired or went out of business. Value investing, as an industry, is unlikely to ever fully recover. The outflows into passive and other strategies were debilitating. Prospectively, we believe this is a positive for our strategy as we face much less competition than we did a few years ago.
In hindsight, we believe that our unwillingness to take risks that others were so willing to bear, enabling them to outperform during the bull run, was the flip side to our ability to have a successful 2022. This was a year where many of those who rode the bubble suffered losses, raising the question as to whether the risks were worth taking.
You can read the entire letter here:
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