David Einhorn – Investment Strategy And Philosophy

Last Updated on August 19, 2022 by Oddmund Groette

David Einhorn is a well-known US investor. Who is he? How does David Einhorn invest? Does he have any particular investment strategy or philosophy? These are some of the answers we answer in this article. At the end of the article, we have collected many quotes taken from his books and writings (quarterly letters). Einhorn has a great investment track record and is full of investment wisdom. Read and learn!

Who is David Einhorn?

David M. Einhorn is a well-known American “activist investor” and an eminent short-selling speculator. He’s among one of the most successful hedge fund managers of all time and makes his trading bets in his hedge fund Greenlight Capital, where he is the co-founder and president. Greenlight Capital is a long-short value-oriented hedge fund.

Einhorn was also named among the Time 100 most influential people in the world for the year 2013. Einhorn published the book Fooling Some of the People All of the Time about his shorting a mid-cap financial company called Allied Capital which he accused of distorting the real value of its stocks.

David Einhorn’s childhood and education

Born in Demarest, New Jersey, in 1968, David Einhorn did his graduation from Cornell University’s College of Arts and Sciences in 1991. His father, Stephen Einhorn, is the founder and president of a consulting firm Einhorn & Associates, and venture capital fund Capital Midwest Fund.

David Einhorn married Cheryl Strauss Einhorn, a financial report and media consultant, in 1993 and the pair has two daughters and one son.

David Einhorn’s career

Einhorn started his career as an analyst with boutique investment bank Donaldson, Lufkin & Jenrette (DLJ). After two years, in 1993, he switched to the hedge fund Siegler, Colliery & Co., where he sharpened his stock valuation skills and understanding of the financial world.

At the age of 27, in 1996, he started the hedge fund Greenlight Capital with his co-worker at Siegler, Collery & Co., Jeff Keswin, in New York with less than $1million in assets under management, most money raised from family and friends. Greenlight Capital was more or less an instant success from the get-go.

Besides running his hedge fund, David Einhorn has served as an investment advisor for DME Advisors and as a director of BioFuel Energy Corp. He has also been a major contributor and board member of The Michael J. Fox Foundation, in addition to being on the board of directors of New Century Financial Corp. from March 2006 to March 2007.

David Einhorn’s philanthropy and social works

Most of Einhorn’s philanthropy has come via The Michael J. Fox Foundation and Robin Hood Foundation. We don’t have the numbers for all his charity donations, but we know he has donated most (if not all) of his poker winning (he’s an avid poker player). For example, in 2006 he donated the whole amount ($650,000) of his winning from the World Series of Poker in which he got 18th position.

One other example of his donations, happened in 2007 when his firm Greenlight Capital donated all the profits ($7 million ) that they earned from the shorting of Allied Capital Stock to three organizations including Tomorrows Children’s Fund, The Project on Government Oversight, and the Center for Public Integrity for social and charity purpose.

David Einhorn’s rise to prominence

David Einhorn first caught the headlines for betting correctly with a short position in Lehman Brothers stocks before it collapsed during the 2007-2008 global financial crisis. Prior to this, in July 2007 at a public conference, he accused Lehman Brothers of using dubious accounting practices in their financial filing, and in April 2008 Einhorn announced his Lehman short position, which turned out to be a gigantic win for Greenlight Capital.

Since the Lehman Brothers debacle, David Einhorn is frequently mentioned in the news, and many investors follow the holdings and positions of Greenlight Capital. Einhorn frequently uses any contrarian trading strategy, and this is something the media loves.

David Einhorn’s Greenlight Capital

As mentioned, David Einhorn’s hedge fund is called Greenlight Capital. When he set up the fund in 1996, together with Jeffrey Keswin, they had a very modest 900,000 USD under management. Today it has a massive 7 billion.

However, in recent years Greenlight Capital has had significantly lower returns than during the early years. We are not sure of the reasons, but this could be due to both fewer opportunities, increased money supply (hiding the zombie companies), and a roaring bull market. Greenlight’s main focus is on the short side, something which is very difficult to master. Besides, you have the odds stacked against you due to inflation and productivity gains.

What assets does Greenlight invest in?

Greenlight Capital primarily invests in publicly-traded equities and corporate bonds. It invests in both long and short-term equities but it is mostly recognized for short-selling. Greenlight became widely known after Einhorn’s short-bet on Lehman Brothers in 2008. Worth noting is that the firm also manages funds of funds and private equity funds through its affiliates, Greenlight Masters and Greenlight Private Equity Partners.

What is David Einhorn’s investing strategy?

Since its inception in 1996, David Einhorn’s Greenlight Capital has been a success story: 12.3% annual returns net of fees and expenses. The investors have in aggregate made over 5 billion dollars in profits on this journey.

What kind of investment strategies does David Einhorn use to manage such great returns?

David Einhorn’s investment strategies (investment style)

David Einhorn is famous for his bold market calls and for being a “whistleblower” when he is certain he spots accounting irregularities. He has on numerous occasions spotted irregularities close to fraud. Because of this, he is one of Wall Street’s most closely watched investors.

Einhorn is best known for his short-selling strategies, something that is extremely difficult to be successful at. However, he frequently uses short positions as hedges, a long-short equity strategy, more like pairs trading, when he takes a long position on the companies he believes are undervalued and shorting shares of companies he thinks are overvalued or have accounting issues.

Best known for his short position in the financial market, Einhorn applies a well-thought scientific strategy to choose the best stock while constructing a perfect portfolio for his hedge fund. His unparalleled and aggressive way of investing made him a stalwart of Wall Street in a very short span of time, whose single commentary on stocks could affect the market drastically.

According to Einhorn, an investor has to find solutions in the market situations that involve:

  • Risk- An investor has to design his portfolio while using a risk management system to minimize losses.
  • Uncertainty- Uncertainty is the prime character of the financial market, which an investor has to cope with by diversifying his/her portfolio. Tail risk has to be avoided.
  • Ignorance- Learning is the most powerful tool that Einhorn recommends to investors before investing in the market.

David Einhorn’s foundation is critical thinking

Einhorn believes that the most important factor behind his hedge fund’s success is critical thinking, and he has in interviews said that criticism by his peers opens the door for improvement.

He believes that critical thinking is the ability to look at a situation and see it for what it is, which isn’t necessarily what is presented to you. And when something doesn’t make sense then you need to figure out what makes sense. And when something doesn’t make sense and you question it, challenge it, or look at it from a different way, then it’s possible to come to the opposite conclusion of what presumably was supposed to make sense. Critical thinking should be the cornerstone in any financial institution, according to Einhorn.

Einhorn has developed a culture of openness and self-criticism in his hedge fund Greenlight Capital. He encourages his colleagues and team to question each other, including his own investing ideas, which will help them bring improvements. After all, being a short-selling investor, critical thinking and contrarian views must be at the cornerstone of the organization.

Below we mention some of Davis Einhorn’s best trading and investing strategies:

David Einhorn’s long-short equity strategy

The cornerstone of Einhorn’s mentality is to avoid the biggest risks by using the long-short strategy in a smart way. Greenlight Capital takes long positions in underpriced stocks that are expected to appreciate in the long run and short positions in overpriced stocks that are expected to depreciate in the short run. This strategy helps in minimizing the market risk by taking both long and short positions at the same time.

By using short and long positions simultaneously, Einhorn can earn profits in both bull and bear markets. The beauty of this strategy, if executed well, is to generate returns that are uncorrelated to the stock market. This is extremely valuable for wealthy investors because it mitigates risk.

David Einhorn focuses on diversification

Owing to the hidden risks in the market that investors don’t know, so-called tail risk (negatively skewed trading strategies), even the best stocks do not give a guarantee of good returns. The hidden risks can prove the best analysis wrong, making it imperative to rely on diversification of the portfolio.

Diversification is important when you are using a long-short strategy. It’s the law of large numbers. Even an investor must put some limit on his/her best stocks for better risk management to deal with unknown unknowns. According to Einhorn, diversification of portfolio is important not because of bad analysis, but because the best analysis could not give the expected results in the face of unknown circumstances in the market.

Along with diversification of portfolio, he also calls for building a risk management system to put limits on holding a losing position. He says that there should be a limit where an investor stops holding a position in case of losses.

Re-evaluate and re-assess Investments constantly

Einhorn says investors should re-evaluate and re-assess their investments periodically to find out whether they are doing well or not. When an investment position doesn’t work as per expectations, an investor needs to re-evaluate his position to know what went wrong and what worked well. An investor needs to have a trading journal.

Have patience

Investing is a game of patience! An investor has to keep patience as long as he/she gets a bargaining price to buy the stocks.

If an investor thinks that he/she has taken the right decision by taking a position, the next step is to keep patience until the game’s next level is unfolded. After patiently re-evaluating the movement of the portfolio, an investor must take well-calculated actions to minimize the losses.

Minimize leverage

In the financial market, leverage can be the end for many investors when losses pile up. But, Einhorn advises that investors should stick to the principle of avoiding financial leverage to avoid unknown risks. According to him, the investors must not use borrowing funds to buy stocks, for leverage increases your losses as much as it does your gains.

The Einhorn Effect

David Einhorn’s public comments and his stronghold on the US financial market, have led him to have a significant effect on investors. The market’s sharp reactions to Einhorn’s commentary on stocks or markets led to the inception of a phenomenon called the Einhorn Effect.

What is David Einhorn’s net worth?

According to Investopedia, Einhorn’s net worth stood is estimated to be around 1.5 billion USD. Practically all of his wealth is derived from Greenlight Capital.

One of the richest investors and top hedge fund managers, Einhorn has built most of his wealth through the success of his hedge fund Greenlight Capital. Notably, Einhorn held 1650 rank in the Forbes list of global billionaires in 2018 and stood at number 494 among American billionaires. In 2005, he was ranked 18th on the list of top hedge fund managers in the U.S

David Einhorn quotes

We end the article by giving you some of what we consider the best quotes from Ray Dalio, all taken from reading his books and interviews. Read and learn!

The loss was not back luck. It was a bad analysis.

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Both poker and investing are games of incomplete information. You have a certain set of facts and you are looking for situations where you have an edge, whether the edge is psychological or statistical.

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What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.

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One of the things I have observed is that American financial markets have a very low pain threshold.

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Market extremes occur when it becomes too expensive in the short term to hold for the long term.

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As an investor, my job is to figure out what will happen rather than what should happen.

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Investing and poker require similar skills.

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On any given day a good investor or a good poker player can lose money.

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Any stock investment can turn out to be a loser no matter how large the edge appears.

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A 99% Value-at-Risk calculation does not evaluate what happens in the last one percent… This is like an airbag that works all the time, except when you have a car accident.

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There were three basic questions to resolve: First, what are the true economics of the business? Second, how do the economics compare to the reported earnings? Third, how are the interests of the decision-makers aligned with the investors?

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It is psychologically challenging to manage a portfolio that outperforms only a falling market. I have no desire to spend my life hoping for a market crash.

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The textbooks presume that easier money will always result in a stronger economy, but that’s a bad assumption.

 

When interest rates are low, everything changes.

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As you can see both from the article and the quotes, David Einhorn is a man of a lot of wisdom. David Einhorn’s investment strategy might not suit you, but it has served him and his clients extremely well.

 

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