David Einhorn: The Biggest Change To Value Investing Today

During his recent interview with The Money Maze Podcast, David Einhorn discusses the biggest change to value investing today. Here’s an excerpt from the interview:

Einhorn: I would tend to have looked at things a long time ago, which is our business was buy things that are sort of cheap, figure out that they’re going to be a bit better, or maybe quite a bit better than the world generally understands.

Often purchasing at times of dislocation, like around when a spin-off happens, or when there’s extraordinarily bad news relating to a particular company and people are being emotional and selling.

Figure out that things either aren’t that bad or they’re a little bit better and then patiently wait for three months to go by, six months to go by.

The world to see that it’s not quite as bad as you thought and have the traditional long-only retirement funds, the big mutual fund complexes and whatnot, come in and buy the stocks.

And they were so big in the market. Those were the dominant forces in the market that once they started buying it was going to take them six months, nine months, a year to accumulate their position.

And you could just ride that flow the whole time.

So the very simple is if you think it’s ten dollars and the world thinks it’s going to earn a buck, and you you think it’s going to earn a buck fifteen.

We were never really in the ‘beat it by a penny’ business, but beat it by 15 percent is pretty good.

And then you wait forward a year and they’ve made a buck fifteen instead of a buck and now it looks like they’ll earn a buck thirty five the following year.

And you get a 13 multiple on the dollar thirty five and you paid a 10 multiple on the 10 you just made 60, 70 percent over 12 to 18 months as that’s played its way through really was what our business was.

But the problem is that those buyers aren’t there anymore.

They don’t have new money. They don’t have daily flows. They’ve been turned passive. The fees that they have for their active business have been cut dramatically.

So they’ve cut their research staffs.

They have to sell something to buy something. They’re not looking for that new opportunity the way that they had when they were getting constant positive flows.

And so if you play out that same story and it’s supposed to earn a dollar and it turns out to earn a dollar fifteen and you think now it’s going to earn a dollar thirty five.

Maybe the stock is going to be eleven at the end of that 18 months and you’ll have made six percent on your money, which beats losing, and it’s better than cash and so forth but it’s not really the exciting result that you’re able to get a year and a half ago.

So what’s changed?

What do you do if you’re not going to be able to do that?

And so I would caution people not to continue doing that because those subsequent buyers they’re just not there and they’re not there with capital.

The capital that’s trading in the markets are passive flows, they’re index flows, they’re ETF flows, they’re sector rotations, there’s correlation trades.

Where there’s times when the machines are going to want to buy a particular sector, or an industry and one day the financials are up, and the next day the oil companies are up and so on and so forth.

This is where the actual trading in the market is. In addition all the algorithms which you’re just trying to figure out what everybody else is doing and how they’re positioned and try to trade at one nanosecond before you and be right 56 percent of the time, and never have a down day.

That’s what the market now consists of those big long-only behemoths, they don’t have the footprint in the market that they did.

You can listen to the entire discussion here: