In his conversation with David Rubenstein, David Einhorn discussed his view on the current state of value investing. When asked if value investing had been profitable over the last decade. His diagnosis of the current market is: “The market structure has changed and there has been what I consider it to be a broken market or the value investing industry I think is defeated, so to speak.”
Einhorn explained how the investing landscape has transformed. “Used to be that most money was invested by these long only investors, these big mutual funds and stuff like that. And they had money coming in every day and they were getting nice fees on all of that money. And they had large research teams and they would sit around following all of the companies with teams of analysts.” Back then, the process was analytical and conviction-driven: “They would say this company, we think, is undervalued by 30%… And if I buy it and I hold it, I’ll make the S&P plus 30.”
But those days are long gone. “Now, as we’ve moved to passive, they’ve lost their customers and the remaining customers are paying them lower fees and they have reduced their research staffs and they don’t have new money coming in to make new investments in any case.”
What dominates the markets now? Einhorn is clear: “The market is now dominated by passive, you know, index funds which buy what everyone else has already decided things that are worth, or algorithms which are basically trying to figure out what is everybody else doing and how do I front-run that, or retail, which is buying things because they think it’s cool or they think it’s going up.”
This, he believes, marks a dramatic departure from traditional investing. “Most of the investing these days is no longer done by people who are buying something because they think it’s worth more. They have opinions about price, like what is the price going to be tomorrow? And so the result is, is most trading that is going on right now has nothing to do with value.”
In that context, Einhorn sees himself as part of a fading tradition. “So it leaves us sort of as a dinosaur. We’re one of the remaining few people left who are looking at things on a traditional basis.”
You can watch the discussion here:
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