During this speech at the Value Investing Conference 2009, David Einhorn reflects on a costly investment mistake during the housing bubble, attributing it not to bad luck but to flawed analysis.
He dismissed warnings from Stanley Druckenmiller about the risks of a housing and debt bubble, believing timing such macroeconomic shifts was too uncertain. This oversight taught Einhorn the importance of considering the broader economic picture, even as a “bottom-up” investor.
He now emphasizes balancing long-short exposure, monitoring industry risks, and obtaining insurance against foreseeable macro threats. While stock picking remains essential, he acknowledges the need to integrate big-picture awareness into successful portfolio management strategies.
Here’s an excerpt from the speech:
I want to revisit this because the loss was not bad luck; it was bad analysis. I downplayed the importance of what was then an ongoing housing bubble. On the very same day, at the very same conference, a more experienced and wiser investor, Stanley Druckenmiller, explained in gory detail the big picture problem the country faced from a growing housing bubble fueled by a growing debt bubble.
At the time, I wondered whether, even if he were correct, it would be possible to convert such big-picture macro-thinking into successful portfolio management.
I thought this was particularly tricky since getting both the timing of big macro changes as well as the market’s recognition of them correct has proven at best a difficult proposition.
Smart investors had been complaining about the housing bubble since at least 2001. I ignored Stan, rationalizing that even if he were right, there was no way to know when he would be right.
This was an expensive error.
The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom-up” investor.
Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure ratio more actively, worrying about what may be brewing in certain industries, and, when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.
You can find a transcript of the speech here:
David Einhorn Speech – Value Investing Conference 2009
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