During this interview with Invest Like The Best, David Einhorn discusses what to do when all of your stocks appear to be losers. Here’s an excerpt from the interview:
Einhorn: It was very, very difficult. We weren’t making money on anything. It’s not like you had some winners and some losers. It’s like everything was a loser. So part of it was you can say, “Well, how stubborn do you want to be?” The only thing we really could have done better would have been like liquidate the whole portfolio and go to cash or something like that.
We weren’t going to do that. We had large amounts of investors who left us and understandably so because they’re here because they want to make good returns, and we weren’t making good returns. So your investors, one by one, leave. Friends say, “Why are you still doing this? You made enough net worth for yourself. Why are you fighting this battle?” And I’m sitting here saying, “Well, what am I doing wrong?” Then you start saying, “Well, what are other people doing?”
People say, well what you’re not doing is, is you’re not doing factor analysis. That was the big thing, I think, in 2018. So we said, okay, well, let’s get the factor analysis people in here. We signed a confidentiality agreement and they analyzed our portfolio and they come back and say, “You’re short the value factor.” And you say, “Really? How is that?” And they come back and tell me that my two biggest shorts are value. And that is because they correlate with how value trades, not because they’re actually value.
So I look at it and go, “Well, these things are, like, 100x earnings. How are they valued?” And it’s like, “Well, we don’t know, but this is what the machines tell us.” And I said, “Well, I can’t do anything with this.” If the problem is that I’m short the value factor when I think that I’m a value fund or value-oriented, this is a problem.
So similarly, somebody said, “Well, what you really need to do is technical analysis.” So I said, “Great, I’m going to give you 10 stocks, five of them I’m long, five of them I’m short. I’m not going to tell you which ones are longs and which ones are short. Tell me what they’re going to do over the next three months. Should I buy them? Should I short them? What should I do?”
And he looks at the charts and maps it all out and gives me his recommendations. And three months later, he was right on exactly five of them and wrong on five of them. I don’t know what you do with this. So the point is I would open to trying to figure out better ways to, like, do what we’re doing. But at the end of the day, this was just going to be an impossible environment for what we were doing.
And frankly, the fact that we didn’t double down on things and we risk managed and we covered shorts or at least proportionally as they went up, it probably saved us. We easily could have lost 100% or something like that instead of what we did. And I know that doesn’t feel great or didn’t feel great at the time. But in hindsight, I don’t have a lot of regrets about the period, and I’m glad that maybe we’ve made it to the other side of it.
You can listen to the entire discussion here:
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