In this interview with Masters in Business, David Einhorn explains why his investing approach is based on narrative and potential, which can lead to undervalued discoveries.
Key takeaways include:
- Start with a qualitative assessment: seeking undervalued companies by identifying misunderstood narratives
- Focus on differences of opinion, not quantitative ratios
- Look for companies with hidden potential overlooked by others
Here’s an excerpt from the interview:
Einhorn: Our idea finding is very idiosyncratic. We generally start with a narrative. We start with a qualitative assessment.
What is it that we think is likely to be misunderstood about something? And if we think something is misunderstood, then perhaps it’s misvalued.
And since we’re looking for narratives as opposed, and then do valuation work second as opposed to cheap, we don’t screen.
So we’re not looking for quantitative measures. Like this thing is trading at half a book value, let’s go figure out why it’s a good thing to buy or not. We find we start with, well what is it that we think that other people are likely to be overlooking about this situation?
And if they are in fact overlooking something and then we deem it to be important, perhaps it’s mispriced. And so we’re looking for those differences of opinions.
You know, about a decade ago we bought this company, you might have heard of it, it’s called Apple, right?
And our assessment was, was that Apple was not just a hardware company, that it was actually a software company two, and also a services company three.
And so you really had some blend that was needed between a hardware, commodity margin and a software, you know, high sustainable margin and a service, which is a recurring cash flow stream.
And, and as you bought one Apple product, then you wanted other Apple products, and then once you had two or three Apple products, you weren’t going to switch to another phone because it was, you know, 15% cheaper because it was too much of a pain to like port all of your stuff over.
So we thought they were just building a recurring business and it deserved sort of like a consumer branded multiple.
And I made many speeches about this and nobody cared about it at all. And we held it for, I don’t know, for a number of years. And eventually the, the, the earnings went up 25 or 30% a year, and the multiple went from nine to 18 and we had a, we had a, a great result.
You can listen to the entire interview here:
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