Einhorn vs. Passive Investing: Is the Market Broken or Just Evolving?

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During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Brewster discussed Einhorn vs. Passive Investing: Is the Market Broken or Just Evolving?. Here’s an excerpt from the episode:

Tobias: Einhorn is Finkel. Did you guys listen to Einhorn–?

Bill: Yeah, I listened to Einhorn.

Tobias: Einhorn says the market is broken, passive has broken the market.

Bill: I’ll tell you what pisses me off about Einhorn, and I say this as someone who does not deserve to have this opinion. But when I listen to his argument, it sounds a lot like I used to better at the Keynesian beauty contest than everybody else and now I’ve found religion. And if I buy businesses that are returning capital to me, that’s how I’m going to win.
I just don’t understand why he didn’t start there. But he’s also David Einhorn and I’m me. So, I don’t know that I understand like, I can’t flip it to people anymore. So, therefore, market structure is messed up.

Jake: Yeah.

Bill: I more understand like I now because market structure is messed up, I look for C Corp conversions, they’re going to have index buying. I look for index inclusion that I can flip it to somebody. I buy cheap stocks that are flipping momentum, because algos are just going to buy it. Like, that to me makes some sense. But to buy cheap stocks that are returning capital is just like owning businesses. That’s like Buffett 101, I think.

Jake: Yeah, I think that’s fair. Where’s my greater fool rerating? And you’re not doing that anymore for me.

Bill: Yeah, and he’s complaining that that’s gone away. And it’s like, “Well, maybe the greater fool has just been killed.”

Jake: Where are all the dentists that were supposed to take this off my hands at an unreasonable price? [laughs]

Tobias: Wouldn’t passive breaking the market be the best thing ever for value investors? This is what I’d understand. The first time I heard Michael Green’s argument, I just thought– If this is true, this is the best thing ever– If all the money rushes to the big end of town.

Bill: Depends when.

Jake: That’s exactly right.

Tobias: What do you mean–?

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