David Einhorn’s Shift in Value Investing Strategy: Prioritizing Cash Flow

During their latest episode of the VALUE: After Hours Podcast, Carlisle, Taylor, and John Rotonti Jr discussed David Einhorn’s Shift in Value Investing Strategy: Prioritizing Cash Flow. Here’s an excerpt from the episode:

Tobias: Just before we came on, we were talking about Einhorn’s latest letter.

John: Yeah. So, it’s something I’ve been thinking about a lot recently. David Einhorn is investor that I have deep admiration for. In fact, if you were to ask me who I want to have most on my podcast, the JRo Show, it would be David Einhorn. He’s done a few interviews where he’s talked about this, and then he wrote about it in his year end 2023 letter, where he said that his theory, his philosophy is he can no longer wait for the market to properly value stocks. So, traditional value investing was, you buy what you believe to be an undervalued security and you wait for the market–

If you’re right, sometimes you’ll be wrong, but if you’re right, you wait for the market to come around to your correct point of view, and the market will rerate the shares higher, and then you can benefit in two ways. You benefit from the closing of the gap from the stock price to the estimate of intrinsic value, which is higher than stock price, and then you can also benefit from growth of per share value over time. Einhorn believes that the active fund management industry has been decimated. That’s the word that he used in his 2023 letter. And I can read a “If you’d like.”

Tobias: 1 out of 10 have been gone out into the field and killed themselves.

John: Right.

Tobias: Just to frighten the enemy.

John: Yeah. [Jake laughs] And that certain companies have been forgotten or left for dead. They’re just not covered anymore. And so, he doesn’t think he can rely on the market to properly value these securities anymore, at least not in a reasonable time period. So, he doesn’t think he can rely on the market to rerate a company to a higher deserving, justified multiple. And so, he shifted his strategy, at least in his larger positions, of investing in companies that are not only cheap, but that are currently returning gobs of cash to shareholders through either dividends, buybacks, or in some cases, interest on a high yielding debt security. So, he’s getting current cash flow from the securities.

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