Speaker 1: This is Master's in Business with Barry rid Holds on
Speaker 1: Bloomberg Radio. This week on the podcast, I have an
Speaker 1: extra special guest, David Einhorn, founder of Greenlight Capital. What
Speaker 1: a fascinating investor and what a fascinating career David has had.
Speaker 1: He came to public attention for shorting, probably most famously
Speaker 1: Lehman Brothers about eight months before the company went bankrupt,
Speaker 1: but he has very publicly talked about other companies that
Speaker 1: he thought were either wildly overstating their results or actually
Speaker 1: engaging in outright fraud. He has put together an amazing
Speaker 1: track record at Greenlight in the middle two and tens.
Speaker 1: The performance at the fun flagged, which sort of set
Speaker 1: him back hunting for what was going wrong with his
Speaker 1: style of value investing, and he came to some really
Speaker 1: fascinating conclusions which led him to change how they approached investing.
Speaker 1: And since that happens, I don't know, about four or
Speaker 1: five years ago, the fund has been putting up great numbers, outperforming,
Speaker 1: doing really really well. It's kind of rare to not
Speaker 1: only find somebody whose variant perspective has allowed him to
Speaker 1: make some tremendous and successful investments. Early in their career,
Speaker 1: but when the world changed, they figured out they had
Speaker 1: a change, also made those adjustments, and did so successfully.
Speaker 1: I thought this conversation was absolutely fascinating, and I think
Speaker 1: you will also with no further ado, my discussion with
Speaker 1: Green Light Capitals. David Einhorn, thank you so much.
Speaker 2: I'm excited to be here, bab.
Speaker 1: I've been looking forward to this for a long time.
Speaker 1: You and I had met way back when You've been
Speaker 1: one of the people that I've really been enthusiastic about
Speaker 1: getting here. So I'm thrilled you're year. Let's start out
Speaker 1: talking a little bit about your background. You graduate from
Speaker 1: Cornell Suma cum laude with distinction of ply Beta Kappa,
Speaker 1: all the good stuff. What'd you study there? What was
Speaker 1: the original career plan?
Speaker 2: I studied government. I was a government major. And the
Speaker 2: thing with me is that I don't really think too
Speaker 2: far out into the future. What I just try to
Speaker 2: do is do a really good job whereever I'm doing
Speaker 2: when i'm doing it, and figure that that will just
Speaker 2: create good options for me going forward. So in high school,
Speaker 2: I didn't worry where I'd go to college. I just
Speaker 2: tried to do well in college. I didn't try to
Speaker 2: worry about what my career would be. I just figured
Speaker 2: if I do well, I would be able to be
Speaker 2: presented with good options. So I didn't even begin thinking
Speaker 2: about my career really until my senior year, and at
Speaker 2: that point I decided what I really wanted to do
Speaker 2: was be a PhD in economics. So I applied to
Speaker 2: half a dozen of the best programs. I got rejected
Speaker 2: at all of them, really, and that gave me an
Speaker 2: opportunity to enter the job market. So then I just
Speaker 2: started interviewing with companies as they came on the on
Speaker 2: campus recruiting to see what I could find. I interviewed
Speaker 2: with the CIA. I interviewed with car Guilt they could
Speaker 2: put me running a grain elevator, Gosh knows where. I
Speaker 2: interviewed with consulting companies and banking companies. I interviewed with
Speaker 2: some airlines. I interviewed with just whatever was coming on
Speaker 2: to campus, and eventually I got a job offer at
Speaker 2: Donaldson Lufkin Jenrett, which is no longer here, but it
Speaker 2: was an investment bank of some note at the time,
Speaker 2: and I joined their two year analyst programs so I
Speaker 2: get the full benefit of knowing what happened and hindsight bias,
Speaker 2: But I have a fairly good sense of you and
Speaker 2: your personality, and I know what DLJ was like.
Speaker 1: I don't really see that as a great fit.
Speaker 2: Oh it wasn't a great fit. It was miserable for
Speaker 2: me within three weeks of getting there. The one thing
Speaker 2: you get in college is you have control over your time,
Speaker 2: and so you study when you want to study, and
Speaker 2: as long as you get your work done, you know
Speaker 2: you can do great. And at DLJ, you know they
Speaker 2: control your time. And I never really I came from
Speaker 2: the West and in the Midwest where I grew up,
Speaker 2: like all the dads were home for dinner, not just
Speaker 2: my dad, everybody's dad was home for dinner. And we
Speaker 2: didn't understand this thing about you know, overnights in the office,
Speaker 2: and you know, if you don't come in on Saturday,
Speaker 2: don't even think about coming in on Sunday, and all
Speaker 2: of this kind of stuff. So I didn't really understand
Speaker 2: what I was signing up for. And by the time
Speaker 2: I figured it out, I mean it was it was
Speaker 2: a tough, tough cultural fit for me.
Speaker 1: I read somewhere you described it as similar to a
Speaker 1: frat Hazen.
Speaker 2: Well, I was in a fraternity and there was hazing,
Speaker 2: but it wasn't bad. I actually didn't mind the hazing
Speaker 2: at all because it was combined with basketball and parties
Speaker 2: and beer and hanging out and people you want to
Speaker 2: spend time with. When you have that same behavior, and
Speaker 2: when they're done hazing you, then they're abusing you over
Speaker 2: your work and your schedule and the rest of it,
Speaker 2: well that's not fun at all.
Speaker 1: So Siegler Collery and Company was next. Tell us what
Speaker 1: you did there?
Speaker 2: Well, I went to Siegler Collery. I worked for Peter Collery.
Speaker 2: He was the research oriented of the two partners, and
Speaker 2: he basically would tell you, here's an idea, Go look
Speaker 2: at the idea, go figure it out, tell me if
Speaker 2: we should invest in it. And I would go and
Speaker 2: read all the stuff and spend a week getting ready
Speaker 2: and making spreadsheets and talking to people, and I would
Speaker 2: give it to Peter and then he'd take it all
Speaker 2: home the next night that night, come back the next
Speaker 2: day and ask me fifteen questions and I wouldn't know
Speaker 2: the answer to any of them, and by the time
Speaker 2: I progressed the next time, I could answer maybe five
Speaker 2: of them. And then after that, eventually I could I
Speaker 2: could figure out how to answer most of the questions.
Speaker 2: But it was an amazing opportunity because he would just
Speaker 2: show me what I should be asking, what I should
Speaker 2: be looking for, and ultimately I just learned how to
Speaker 2: do that. Huh.
Speaker 1: Really interesting. Then nineteen ninety six you launch green Light Capital.
Speaker 2: What were you.
Speaker 1: Twenty seven at the time. What gave you the confidence
Speaker 1: to say, sure, I could raise some money and launch
Speaker 1: a hedge fund and have my entire income dependent on
Speaker 1: how well we do. Where did the gumption for that
Speaker 1: come from?
Speaker 2: It came up on very very short notice. You know.
Speaker 2: I got to the end of nineteen ninety five and
Speaker 2: I was a little bit disappointed in how the compensation
Speaker 2: worked out, as was the fellow who was in the
Speaker 2: office next to me. And we went out to lunch
Speaker 2: that December one day and said, why don't we just
Speaker 2: go launch our own thing? And in early January there
Speaker 2: was a huge snowstorm and we were on the street
Speaker 2: looking for office space.
Speaker 1: And how did you find the process of raising money
Speaker 1: for a hedge fund when you guys were a bunch
Speaker 1: of young tucks barely a few years out of school.
Speaker 2: I would describe it as nearly impossible.
Speaker 1: Really, yeah, and yet you guys still managed to raise
Speaker 1: enough to launch with a decent pile cap.
Speaker 2: We didn't. We raised with with of outside money. We
Speaker 2: raised about just about one million dollars.
Speaker 1: So not a lot of money.
Speaker 2: Not a lot of money.
Speaker 1: How did you ramp up from there? That that seems
Speaker 1: like it's tough to make a living trading a million dollars.
Speaker 2: Well, the thing was, I didn't really view it as
Speaker 2: all that risky because I'd had some savings. I'd had
Speaker 2: you know four you know, small Wall Street bonuses. I
Speaker 2: had very little living expenses. There was no chance I
Speaker 2: give this work. Didn't work, I'd be on the street.
Speaker 2: So I would just go get another job similar to
Speaker 2: the one that I just left if I needed to.
Speaker 2: So I just didn't see this as so risky, and
Speaker 2: it didn't matter if I didn't make very much money.
Speaker 2: I didn't expect to make any money right away. But
Speaker 2: the thing was is we did get to meet a
Speaker 2: lot of people, and as we began to tell our
Speaker 2: story and day with zero, they're not going to in
Speaker 2: bad but as one of the best things my original
Speaker 2: partner said was in April when we hadn't raised as
Speaker 2: much money as we thought. He said, we better get started,
Speaker 2: and I said, why are we going to get started? Well,
Speaker 2: you know, you're not going to have a three year
Speaker 2: record until you've been going for three years, so you
Speaker 2: may as well get going. And that kind of worked.
Speaker 2: So as we got going, and then as the initial
Speaker 2: results just turned out to be, you know, extremely fortunate
Speaker 2: some of the people that we met with earlier that said, yeah,
Speaker 2: you know, two young guys. I don't know, but now
Speaker 2: they're putting up some results. And the results were following
Speaker 2: from the thesis that we were telling them, here's our style,
Speaker 2: here's how we implement it. We're going to buy these
Speaker 2: five stocks. Then we bought those five stocks, and then
Speaker 2: they went up, and now we made this money, and
Speaker 2: here's the next five stocks that we're going to buy.
Speaker 2: That explaining that process in communication to people built confidence,
Speaker 2: and one by one they began to give us some capital.
Speaker 1: So not that complicated. You went out and said here's
Speaker 1: our strategy. You executed on the strategy, and when people
Speaker 1: saw you were doing what you said, suddenly the capital
Speaker 1: access became a little better. When was it clear, hey,
Speaker 1: we're going to get through a billion dollars or more.
Speaker 1: How long did that take?
Speaker 2: Yeah, I don't know about a billion dollars. But at
Speaker 2: the end of the first year we were at ten
Speaker 2: and at the end of the second year we were
Speaker 2: at one hundred. And that was our best year ever.
Speaker 2: We made fifty seven percent now and we have a
Speaker 2: dinner for our partners every year in January, and I
Speaker 2: remember going to that partner dinner and in January after
Speaker 2: our fifty seven percent year, and we announced we were
Speaker 2: going to close the fund for the time being to
Speaker 2: absorb what we were doing. And we had about I
Speaker 2: don't know, we had about eight or ten tables and
Speaker 2: I do a presentation PowerPoint in the rest of it,
Speaker 2: and then you have questions and answers, and what we
Speaker 2: had essentially was a bloodbath. The partners were raising their
Speaker 2: hands and saying, you've raised too much money, How are
Speaker 2: you going to keep these returns up? This is really terrible,
Speaker 2: And I just couldn't believe, like this dinner didn't go well.
Speaker 2: It was like one of the worst partner dinners that
Speaker 2: we that we ever had. And my answer was is
Speaker 2: we're probably never going to fifty seven percent again. And
Speaker 2: it doesn't matter what the amount of the capitol was, like,
Speaker 2: we just had an incredible it was just a perfect
Speaker 2: year nineteen ninety seven.
Speaker 1: Yeah, there was a big drop in the latter part
Speaker 1: of the year and then the fast recovery. If you
Speaker 1: were on the right side of that, you would have
Speaker 1: done really well. And if you're in the right companies.
Speaker 1: There were some companies in ninety seven that really screamed high.
Speaker 1: So you close the fund, when do you reopen the
Speaker 1: gates to take capital in again?
Speaker 2: We reopened I don't know sometime then. Nineteen ninety eight
Speaker 2: was a tough year. That was the long term capital year,
Speaker 2: and by the end of the year some people were
Speaker 2: beginning to redeem because we had six straight down months
Speaker 2: from like March to September, and so we opened again
Speaker 2: and we were able to replace the capital that wanted
Speaker 2: to leave with new capital that was coming in. Then
Speaker 2: we stayed open until about two thousand and then in
Speaker 2: two thousand I don't know, we were maybe around six
Speaker 2: or seven hundred million at that point, and we closed
Speaker 2: the fund and then we left it closed until two
Speaker 2: thousand nineteen. We had four openings where we would say
Speaker 2: we're open, and we raised a capital around like in
Speaker 2: a week or like in a month or something like this.
Speaker 2: But other than those grounds, we were hard closed for
Speaker 2: the better part of like nineteen years.
Speaker 1: And there's nothing that makes a wealthy investor want in
Speaker 1: more than a closed fund, right, isn't that the psychology there?
Speaker 2: Absolutely? Right now, we're an open fund and it's really
Speaker 2: hard to convince people to invest.
Speaker 1: You want to get more capital, close announce your closing,
Speaker 1: and they'll be knocking your doors there.
Speaker 2: You know, Well, maybe we'll get to that point.
Speaker 1: So before we talk a little more about the style
Speaker 1: and the process at green Light, I have to mention
Speaker 1: that you've done incredibly well as an amateur poker player.
Speaker 1: You played in the World Series of Poker finishing is
Speaker 1: at eighteenth and the Poker Main Event finishing third or
Speaker 1: do I have that backwards?
Speaker 2: Eighteenth in the main event, Yes.
Speaker 1: And one of them was a four million in change,
Speaker 1: the other was six hundred and sixty thousand dollars pot,
Speaker 1: all of which donated to charity. Tell us a little
Speaker 1: bit about your interest in poker.
Speaker 2: Yeah, Poker's just a hobby. I play it for fun.
Speaker 2: I enjoy the game, I enjoy the people. So you
Speaker 2: get some banter and then I like sorting out the
Speaker 2: card problems and just trying to figure out, like how
Speaker 2: to manipulate my way through a tournament or just even
Speaker 2: a game with friends.
Speaker 1: Are you playing the cards or playing the person across
Speaker 1: the table from you both both The obvious question what
Speaker 1: are the parallels between poker and investing?
Speaker 2: There are some There's there's you know, when solving a
Speaker 2: poker hand, there's things that you know like what cards
Speaker 2: can you see? And investing there's facts that you know
Speaker 2: like what was the actual in the press release? What
Speaker 2: was the financial statements? What do they actually say? Right?
Speaker 2: And then there's things that you can infer. You know,
Speaker 2: what do I infer in a poker hand for what's happened?
Speaker 2: What your behavior been? How what do I think your
Speaker 2: bet means or something like this. And then in an investment,
Speaker 2: what can you infer you know, how did management's tone
Speaker 2: sound when they were on the conference call, how do
Speaker 2: they react to particular questions? Or if you're doing research
Speaker 2: in the field, like what can you find in the
Speaker 2: field that's not definitive, but what can you adduce from
Speaker 2: individual facts that lead you to a conclusion? Right? And
Speaker 2: then there's uncertainty, like what's going to happen next, Like
Speaker 2: what is the next card? You don't know what the
Speaker 2: next card is going to be in a poker hand,
Speaker 2: and you don't know what the next you know, macro
Speaker 2: event is going to be in an investment, or what's
Speaker 2: the next actual development? And then you play those things
Speaker 2: out to a result and you manage your risk along
Speaker 2: the way.
Speaker 1: Really interesting. Let's talk process. Long term value is a
Speaker 1: big aspect of what green Light Capital does. Tell us
Speaker 1: what your decision making process is, like where do the
Speaker 1: ideas come from, how do you screen them? And how
Speaker 1: do you figure out we're going to pass on this
Speaker 1: one but invest in that one?
Speaker 2: Right? Our idea finding is very idiosyncratic. We generally start
Speaker 2: with a narrative. We start with a qualitative assessment. What
Speaker 2: is it that we think is likely to be misunderstood
Speaker 2: about something? And if we think something is misunderstood, then
Speaker 2: perhaps it's misunder misvalued. And since we're looking for narratives
Speaker 2: as opposed and then do valuation work second as opposed
Speaker 2: to cheap we don't screen, so we're not looking for
Speaker 2: quantitative measures like this thing is trading it half a
Speaker 2: book value. Let's go figure out why it's a good
Speaker 2: thing to buy or not. We find we start with, well,
Speaker 2: what is it that we think that other people are
Speaker 2: likely to be overlooking about the situation? And if they
Speaker 2: are in fact overlooking something, and then we deem it
Speaker 2: to be important, perhaps it's mispriced. And so we're looking
Speaker 2: for those differences of opinions.
Speaker 1: So how do you figure out what the variant perception is?
Speaker 2: Meaning?
Speaker 1: How do you suss out what's the consensus on a
Speaker 1: particular co company? And then tease out here's where the
Speaker 1: misunderstanding is.
Speaker 2: Sure, I'll give an example. Why non I do that?
Speaker 2: You know, about a decade ago, we bought this company.
Speaker 2: You might have heard of it. It's called Apple. And
Speaker 2: at the time, Apple was trading at about nine times earnings,
Speaker 2: and yeah, that seems kind of crazy right now, But
Speaker 2: at the time we bought Apple at about nine times earnings.
Speaker 2: The narrative that was out there, the general belief was
Speaker 2: is they had this thing called an iPhone, and eventually
Speaker 2: Samsung would compete it away, and the Chinese would compete
Speaker 2: it away. And people would look at the builds and say,
Speaker 2: you know, how much does the memory cost and how
Speaker 2: much does the processor cost? And hardware companies never make
Speaker 2: any money for a long period of time, and Apple
Speaker 2: would eventually go the way the Nokia flip phone went,
Speaker 2: which was followed by the BlackBerry phone and so on
Speaker 2: and so forth. So you didn't want to pay a
Speaker 2: high multiple for Apple. And our assessment was was that
Speaker 2: Apple was not just a hardware company, that was actually
Speaker 2: a software company too, and also services company three and
Speaker 2: so you really had some blend that was needed between
Speaker 2: a hardware commodity margin and a software you know, high
Speaker 2: sustainable margin and a service which is a recurring cash
Speaker 2: flow stream. And as you bought one Apple product, then
Speaker 2: you wanted other Apple products. And then once you had
Speaker 2: two or three Apple products, you weren't going to switch
Speaker 2: to another phone because it was, you know, fifteen percent cheaper,
Speaker 2: because it was too much of a pain to like
Speaker 2: pourt all of your stuff over. So we thought they
Speaker 2: were just building a recurring business and it deserves sort
Speaker 2: of like a consumer branded multiple. And I made many
Speaker 2: speeches about this, and nobody cared about it at all,
Speaker 2: and we held it for I don't know, for a
Speaker 2: number of years, and eventually the earnings went up twenty
Speaker 2: five or thirty percent a year and the multiple went
Speaker 2: from nine to eighteen and we had a We had
Speaker 2: a great result.
Speaker 1: That's really that's really intriguing. So it's narrative. First figure
Speaker 1: out where it differs from the crowd, and then look
Speaker 1: at the data to make sure that that above thesis
Speaker 1: is correct. So I asked this about the longside. How
Speaker 1: does the process differ when you're looking on the short side.
Speaker 2: It doesn't. In the research process, again, we're looking for
Speaker 2: things that are misunderstood. What is it that we think
Speaker 2: is true that other people are the consensus or whatnot
Speaker 2: are overlooking or not putting weight on, or where they're
Speaker 2: putting too much weight on something that is unimportant, And
Speaker 2: then we decide whether we think that it's misvalued, and
Speaker 2: that as a result, whether we think that the risk
Speaker 2: reward of owning the stock is sufficiently unfavorable that it
Speaker 2: makes sense to take a short position. Huh.
Speaker 1: Really really interesting. So let's talk a little bit about
Speaker 1: the workflow between you and the other analysts in the firm.
Speaker 1: I'm assuming there are other managers as well. Tell us
Speaker 1: a little bit about how that back and forth works.
Speaker 2: First of all, I love how you said you and
Speaker 2: the other analysts. Yes, because I view myself as an analyst. First,
Speaker 2: So I am I think that's fantastic. I'm the portfolio manager,
Speaker 2: and I'm actually the only portfolio manager, But I view
Speaker 2: my I enjoyed my analyst's job is certainly as much
Speaker 2: as I enjoy the best.
Speaker 1: And let me interrupt and point out that when you've
Speaker 1: given presentations on not just Apple, but Applied Capital and
Speaker 1: Lehman Brothers and anybody else I've seen you discuss, you
Speaker 1: don't sound like a fun manager. You sound like an
Speaker 1: analyst who's saying, here's my review of the everything but
Speaker 1: great quarter. Guys, that's what the presentation looks like.
Speaker 2: Well, first of all, that's fantastic, But I do have
Speaker 2: to acknowledge a lot of these presentations come with a
Speaker 2: lot of help, like these are team efforts. I usually
Speaker 2: have an analyst who is helping me. I have other
Speaker 2: people at the firm helping me prepare these these presentations.
Speaker 2: It's a it's a lot of work to do these things,
Speaker 2: to do these things correctly, but I really do enjoy it,
Speaker 2: and I love rolling at my sleeves and getting into
Speaker 2: the heart of things.
Speaker 1: So let's talk a little bit about the team at Greenlight,
Speaker 1: So how many other analysts are there? How many people
Speaker 1: are thinking about Hey, this is an interesting story, let's
Speaker 1: dive into it.
Speaker 2: I have six analysts, I have two traders who execute
Speaker 2: the trades, and we have a field researcher, and that's
Speaker 2: kind of the investment team.
Speaker 1: Field researcher. Yes, just what it sounds. They're out there
Speaker 1: kicking tires and.
Speaker 2: Yes, and finding people to talk to. You know, an
Speaker 2: analyst will say I need to find an expert about this,
Speaker 2: and he'll go around LinkedIn or through his network or
Speaker 2: whatever it is, or are some of these other services
Speaker 2: and help connect analysts with who that they might need
Speaker 2: to talk to and help bring them online. Or we'll
Speaker 2: do proprietary surveys, or we'll do you know what. We
Speaker 2: will travel around and look.
Speaker 1: At things so you have a reputation as a value investor.
Speaker 1: I'm not sure that really best describes the sort of
Speaker 1: holistic approach that you guys bring to the table. But
Speaker 1: I have to ask a question. You found green Light
Speaker 1: in nineteen ninety six. Does it mean the same thing
Speaker 1: today to be a value investor that meant twenty thirty
Speaker 1: years ago.
Speaker 2: I think things have changed a lot. I think the
Speaker 2: idea that we had back then, which a value investor
Speaker 2: to us means buying something for less than it's worth.
Speaker 2: So we don't view growth as the opposite of value.
Speaker 2: We view anti value as the opposite of value. Right,
Speaker 2: Growth is in our view, a component of value. So
Speaker 2: if something is growing fast, it's going to be more valuable.
Speaker 2: So I don't really see that continuity the same way.
Speaker 2: But what we've learned over time. You know, when I
Speaker 2: started in nineteen ninety six, you know, the main thing
Speaker 2: people would say when we would pitch our services was, well,
Speaker 2: what do we need another hedge fund for? Right, there's
Speaker 2: a million guys trying to do what you're doing. In
Speaker 2: addition to the hedge funds, there were all these mutual funds,
Speaker 2: and so there were lots and lots of people trying
Speaker 2: to pay attention and find undervalued things for customers. And
Speaker 2: that's changed a lot because the passive world has taken
Speaker 2: over and the number of active managers is down a lot,
Speaker 2: and the active long only managers are down a lot,
Speaker 2: and they still have people paying attention to certain stocks,
Speaker 2: but there's entire segments now, mostly in the smaller part
Speaker 2: of the market, where there's literally nobody paying any attention.
Speaker 2: Like these companies could announce almost anything other than the
Speaker 2: sale of the company and nobody would notice. And so
Speaker 2: we've had to adjust our thinking because our thinking before
Speaker 2: used to be, if we buy this at this time's earnings,
Speaker 2: and they're going to do twenty percent better than everybody thinks,
Speaker 2: and the multiple rerates as a result of that, we're
Speaker 2: going to do terrifically. And that assumes that we're going
Speaker 2: to figure out what somebody else is going to buy
Speaker 2: six months, a year, two years before they come to
Speaker 2: that conclusion. But what if those people aren't in business anymore,
Speaker 2: or to the extent they are in business, they don't
Speaker 2: have any capital to employ into new ideas. As those
Speaker 2: situations develop, they fire their staffs. There's way fewer people listening.
Speaker 2: And the result is is if we buy these things,
Speaker 2: we're not going to get the same kind of return
Speaker 2: that we used to get. So what we have to
Speaker 2: do now is be even more disciplined on price. So
Speaker 2: we're not buying things at ten times or eleven times earnings.
Speaker 2: We're buying things at four times earnings, five times earnings,
Speaker 2: and we're buying them where they have huge buybacks and
Speaker 2: we can't count on other long only investors to buy
Speaker 2: our things. After us, We're going to have to get
Speaker 2: paid by the company. So we need fifteen twenty percent
Speaker 2: cash flow type of type of numbers, and if that
Speaker 2: cash is then being returned to us, we're going to
Speaker 2: do pretty well over time.
Speaker 1: So I'm intrigued by that description, but buried within it
Speaker 1: is essentially the rise of passive has damaged either price
Speaker 1: discovery or the reaction to price discovery on the sell side.
Speaker 1: Is that a fair statement?
Speaker 2: Oh, no question. I view the markets as fundamentally broken, like.
Speaker 1: The fundamentally broken.
Speaker 2: That's a big statement. Yeah, there's there's value is just
Speaker 2: not a consideration for most investment money that's out there.
Speaker 2: There's all the machine money and algorithmic money, which is
Speaker 2: which doesn't have an opinion about value. It has an
Speaker 2: opinion about price. What is the price going to be
Speaker 2: in fifteen minutes and I want to be ahead of
Speaker 2: that or zero day options? What is the price of
Speaker 2: the S and P or whatever stock you're doing for today,
Speaker 2: what's it going to be in the next half hour,
Speaker 2: two hours, three hours. Those are opinions about price. Those
Speaker 2: are not opinions about value. Passive investors have no opinion
Speaker 2: about value. They're going to assume everybody else has done
Speaker 2: the work right. And then you have all of what's
Speaker 2: left of active management, and so much of it the
Speaker 2: value industry has gotten completely annihilated. So if you have
Speaker 2: a situation where money is moved from active to passive.
Speaker 2: When that happens, the value managers get redeemed, the value
Speaker 2: stocks go down more. It causes more redemptions of the
Speaker 2: value managers. It caused those stocks to go down more, right,
Speaker 2: and all of a sudden, the people or performing are
Speaker 2: the people who own the overvalued things that are getting
Speaker 2: the flows from the indexes that are getting the re
Speaker 2: you take the money out of the value put in
Speaker 2: the index. They're selling cheap stuff and they're buying whatever
Speaker 2: the highest multiple most overvalued things are in disproportionate weight.
Speaker 2: So then the active managers who participate in that area
Speaker 2: of the market get flows and they buy even more
Speaker 2: of that stuff. So what happens is instead of stocks
Speaker 2: reverting toward value, they actually diverge from value. And that's
Speaker 2: a change in the market, and it's a structure that
Speaker 2: means that almost the best way to get your stock
Speaker 2: to go up is to start by being overvalued.
Speaker 1: Huh really interesting. I know value has had a rough
Speaker 1: I don't know since the financial crisis. Let's go it
Speaker 1: fifteen years. That's the most cogent explanation I've heard for
Speaker 1: here's why value hasn't mean reverted since that period. And
Speaker 1: it's the first time I've heard anyone say you can
Speaker 1: blame passive in the flows to the biggest company as
Speaker 1: a reason for that taking place. So let's dive into
Speaker 1: that a little bit. You go through the twenty tens,
Speaker 1: value is out of favor. I think your explanation makes sense.
Speaker 1: What was it like on you when, Hey, I have
Speaker 1: this philosophy that's worked for one hundred years, it's not
Speaker 1: working anymore. How do you manage around that?
Speaker 2: It took us a little time to figure out what
Speaker 2: the dynamic was really. From twenty ten to twenty fourteen,
Speaker 2: we were fine, but then things got a little tougher
Speaker 2: in twenty fifteen and we ran through five years where
Speaker 2: we had two awful years and three mediocre years, and
Speaker 2: it was very tough. You come in every day, you
Speaker 2: check your work. You see your stocks are undervalued. Whatever
Speaker 2: you think your shorts are overvalued. You see the news,
Speaker 2: the news actually is positive. Your lungs announced great results,
Speaker 2: your shorts announced mediocre results. You feel like you should
Speaker 2: be making money. On the day they announced the earnings,
Speaker 2: you actually do make money, and then you spend the
Speaker 2: next ninety days until the next quarterly report losing money
Speaker 2: again as they kind of go up for a day
Speaker 2: and then roll kind of back down the hill to
Speaker 2: a lower level. And it was just super frustrating, and
Speaker 2: we didn't really understand what was happening. But what was
Speaker 2: happening was is what I just explained before. There were
Speaker 2: just massive redemptions from people's style like ours. And I
Speaker 2: was always worried about co investors, but co investors usually
Speaker 2: meant like hedge funds, not like these long only mutual funds,
Speaker 2: And that's where the real redemptions were. Hedge funds are
Speaker 2: tiny piece of the market. But I mean there were many,
Speaker 2: many years where all anybody cared about what's fidelity going
Speaker 2: to do, what's Capital group going to do, what's you know,
Speaker 2: a tiro price going to do. They were getting flows
Speaker 2: of retirement money on a continued basis, and as that
Speaker 2: money got redeemed or switched to index right then they
Speaker 2: had to be selling the things that we were owning,
Speaker 2: and then the index were buying things that we were
Speaker 2: probably short, the overvalued things. And we had just a
Speaker 2: rough go until we figured this out.
Speaker 1: And to put some numbers on that industry is about
Speaker 1: to and have three trillion dollars. Mutual funds are a
Speaker 1: multiple of that. They're ten x or more. Throw an
Speaker 1: ETFs and passive and it's even bigger. What was the
Speaker 1: moment that the aha moment that oh, this is what's
Speaker 1: going on? How did you figure this out?
Speaker 2: You know? I sat down I think it was sometime
Speaker 2: in early two thousand and nineteen with Michael Green, and
Speaker 2: he explained what was going on to me better with
Speaker 2: the index funds, and then I was able to take
Speaker 2: what he was singing along with a couple of other
Speaker 2: insights that I had relating to how the market structure was,
Speaker 2: and I kind of developed this understanding of what was
Speaker 2: going on.
Speaker 1: Huh, really intriguing. I have to assume once you get
Speaker 1: through that difficult stretch and sort of reframe your perspective
Speaker 1: and understand what's going on, that has to make you
Speaker 1: a better investor going forward. How did it change how
Speaker 1: you approached what you were doing well.
Speaker 2: We made two signals it can changes. First one, I
Speaker 2: kind of explained before, we're not going to buy something
Speaker 2: at ten times earnings thinking the earnings are going to
Speaker 2: be fifteen percent better and then think we're going to
Speaker 2: get a thirteen multiple at the end of that and
Speaker 2: have made fifty to fifty percent over a year and
Speaker 2: a half. Like that was our old way of doing it.
Speaker 2: Because that isn't going to work.
Speaker 1: Not enough juice and that squeeze to make it worthwhile.
Speaker 2: Well, no, there's just nobody who's going to pay attention
Speaker 2: to notice that the earnings were fifteen percent better. So
Speaker 2: if nobody notices, nobody's there, nobody's going to buy. Nobody's
Speaker 2: going to care. As Peter Coller used to say, a
Speaker 2: bargain that remains a bargain is no bargain, right. And
Speaker 2: so now we can take that to we can realize, well,
Speaker 2: what has been created from this, which is what's been
Speaker 2: created is is is there's complete apathy in a certain
Speaker 2: segment of the market and you no longer have to
Speaker 2: pay ten times earnings for that type of a situation.
Speaker 2: I mean that there are ones at ten times earnings
Speaker 2: and we pass on those But we can find that
Speaker 2: same type of situation right now at four times earnings
Speaker 2: and at five times earnings. And if you pay four
Speaker 2: or five times earnings and the balance sheet is not
Speaker 2: levered and they're able to return the cash and buy
Speaker 2: back ten, fifteen to twenty percent of the stock, in
Speaker 2: four or five years, they're going to run out of
Speaker 2: stock or the stock is going to go up. So
Speaker 2: you're literally counting on the companies to make that happen
Speaker 2: for you.
Speaker 1: So I want to think about this in terms of
Speaker 1: the tradeable US equities out there. Willshure five thousand is
Speaker 1: kind of about thirty four hundred names, not quite five thousand.
Speaker 1: It sounds like you're looking at a huge percentage of
Speaker 1: those names and pretty much funding their uninvestable I don't
Speaker 1: know if it's the bottom thousand or fifteen hundred, but
Speaker 1: they're just too mediocre and underfollowed for it to be
Speaker 1: interesting to you.
Speaker 2: Look, we have always had generally between thirty and sixty
Speaker 2: percent of our capital and our top five names m H.
Speaker 2: And we have maybe fifteen or twenty names that make
Speaker 2: any difference at all in the long part of our portfolio.
Speaker 2: So we don't need five hundred companies to invest in.
Speaker 2: We need fifteen.
Speaker 1: And you're today. So since that change about five years ago,
Speaker 1: the numbers of the fund have improved dramatically. You're outperforming,
Speaker 1: you're putting up good numbers. That's on a concentrated portfolio
Speaker 1: when it's ten, fifteen, twenty stocks are the drivers? Yes,
Speaker 1: huh really interesting. Short sellers seem to be an endangered species.
Speaker 1: Value investors are thrown in the towel. What allows you
Speaker 1: to stick to your disciplines.
Speaker 2: Well, it's actually much more exciting now. Like I mentioned before,
Speaker 2: in nineteen ninety six, there was just tons of competition,
Speaker 2: and right now I just feel like there's way fewer
Speaker 2: people competing with us for ideas trying to do what
Speaker 2: we're doing, and so I just think the opportunity is
Speaker 2: actually probably is good or better than than it's ever been,
Speaker 2: and that energizes me every day to come in and
Speaker 2: try to find ideas.
Speaker 1: So Professor Andrew Lowe over at MIT was discussing the
Speaker 1: issue of price discovery and the rise of passive and
Speaker 1: his theory plays very much into what you're saying, which is,
Speaker 1: as passive attracts more and more assets and people exit
Speaker 1: things like shorting and value. It creates inefficiencies and suddenly
Speaker 1: where there wasn't a whole lot of opportunity pre shift,
Speaker 1: now those opportunities seem to be more and more available.
Speaker 1: Is that a fair I know he's an academic, but
Speaker 1: is that a fair description of what you see going on? Yeah?
Speaker 2: No, it really is. The competitors have essentially left the field.
Speaker 2: And it means, like I said, things that we used
Speaker 2: to have to pay ten times earnings for we can
Speaker 2: pay five times earnings for. And you think that the
Speaker 2: market is very expensive, but our names are not expensive companies.
Speaker 2: And these aren't terrible companies. They're just companies that are
Speaker 2: too small and nobody cares, and you know they're not
Speaker 2: in the sexiest of places.
Speaker 1: So your strategies include long, short, and macro as well
Speaker 1: as hedged. Can you explain what you focus on in
Speaker 1: the macro portion of the funds or is that something
Speaker 1: that just colors everything?
Speaker 2: No? No, No, Macro is a it's a separate category.
Speaker 2: And what we do and I'm the macro manager And
Speaker 2: what I've learned over time is if you have an idea,
Speaker 2: find the most direct way to express it. So if
Speaker 2: you want to be bullish about oil prices. Don't buy
Speaker 2: ten oil stocks. Buy oil. If you have an opinion
Speaker 2: about interest rates, don't try to buy a bunch of banks,
Speaker 2: buy sofa futures or sell sofa futures, or buy ten
Speaker 2: year futures, or whatever it is that you think you
Speaker 2: want to do. And I find that if you can
Speaker 2: make your insight translate most directly into the investment, then
Speaker 2: at least if you're right or you're wrong, it's going
Speaker 2: to be for the reasons that you thought. And it's
Speaker 2: not going to be because you bought some oil company
Speaker 2: it turned out that they spilled the oil or the
Speaker 2: well turned dry or something like that. You don't really
Speaker 2: have a lot of insight about that. If your view
Speaker 2: is is there's a great oil prospect and look at
Speaker 2: this well it's going to be amazing, well, then go
Speaker 2: ahead buy that oil company because that's what your insight is.
Speaker 1: That sounds very different than the way a lot of
Speaker 1: macro oriented funds invest. They have a big, top down
Speaker 1: picture and they kind of spread the bets around. Hey,
Speaker 1: these are the sectors, and these are the areas we
Speaker 1: think are going to be most affected. If our macro
Speaker 1: col is right, you're suggesting much more focus, much more
Speaker 1: precise than that sort of thirty thousand foot view.
Speaker 2: Well, I just think like a few years ago, we
Speaker 2: came to the view that there was going to be
Speaker 2: a bunch of inflation, and we could have bought a
Speaker 2: bunch of commodities, but the best thing to do or
Speaker 2: commodity companies or companies that would benefit from inflation, but
Speaker 2: the best thing to do was there's a derivative called
Speaker 2: an inflation swap where you actually got to bet on
Speaker 2: what will the reported inflation be versus the market expectations,
Speaker 2: and it's a derivative, and they pay you the difference.
Speaker 2: And so if you think, if the market says inflation
Speaker 2: is going to be two percent over the next year,
Speaker 2: and you bet on the over effectively, and then it
Speaker 2: turns out that it's six percent, well you make four
Speaker 2: points times you're notional. And it doesn't matter what anybody's
Speaker 2: opinion is, because the CPI is the CPI and that's
Speaker 2: what defines the bet. So you don't even have to
Speaker 2: figure out what market sentiment is going to be or
Speaker 2: what other investors are going to do. It just realizes
Speaker 2: all the way through. And so I always find if
Speaker 2: we can find a direct way to express an opinion.
Speaker 2: That's better than an indirect way.
Speaker 1: Huh. Very interesting. Let's talk about shorting, which is really
Speaker 1: what made your name way back when it seems especially
Speaker 1: challenging these days, when the markets have been going up
Speaker 1: as much as they have last year and twenty and
Speaker 1: twenty one short funds are disappearing. How do you think
Speaker 1: about shorting today and how different is it now than
Speaker 1: the days of Allied Capital and and Lehman Brothers.
Speaker 2: Yeah, shorting is very difficult. You know, a couple of
Speaker 2: years ago we had a great year shorting. Last year
Speaker 2: was not a good year shorting for us. You know,
Speaker 2: a lot of the absence of market participants figuring out
Speaker 2: what things are worth translates into more difficulty in shorting
Speaker 2: because value it's just not a consideration for so many
Speaker 2: investment strategies or so many investors. I mean, like all
Speaker 2: the retail investors, not all, but many of them. They
Speaker 2: couldn't figure out value even if they wanted to. Many
Speaker 2: of the professional investors have completely lost their view of
Speaker 2: what value is. Again, they have opinions about price, but
Speaker 2: they don't have opinions about value. And the other thing
Speaker 2: is is the world has become very cynical, and so
Speaker 2: you know, if a company is like committing fraud, the
Speaker 2: market has been conditioned well. When they announced the fraud,
Speaker 2: that's a great time to buy the stock. And that
Speaker 2: used to be like the opposite of that. And then
Speaker 2: you add in that the regulatory infrastructure is essentially gone,
Speaker 2: like they're.
Speaker 1: Gone regulatory not not weekends, just gone exist.
Speaker 2: There is no SEC policing corporate behavior, you know, they're not. Look,
Speaker 2: they used to do real things to companies. They used
Speaker 2: to go after the management and tell them they can't
Speaker 2: be directors or officers. They used to, you know, and
Speaker 2: for for a while they would, you know, they would
Speaker 2: they would find some companies. Occasionally they would make people
Speaker 2: even like, oh, well we'll just improve the disclosure, restate
Speaker 2: the financials, stuff like that. Like these things don't don't
Speaker 2: happen anymore, like they've did.
Speaker 1: They yell at Elon Musk for smoking weed on Joe
Speaker 1: Rogan's show.
Speaker 2: Or I don't know, I don't think that. I don't
Speaker 2: think it was the SEC with that. What happened with
Speaker 2: the SEC was last year there was a story that
Speaker 2: there was a whistleblower who sent a letter to the
Speaker 2: SEC said there's massive accounting fraud at Tesla, and I
Speaker 2: have twenty thousand documents I'd love to show you. And
Speaker 2: the SEC didn't even bother to follow up with the whistleblower. Wow.
Speaker 2: So that that's kind of where we're at.
Speaker 1: Wow, that's a huge, huge statement. The regulators are not
Speaker 1: doing their job. Do you think there's appreciably more fraud
Speaker 1: in corporate statements today than what we saw twenty years ago?
Speaker 2: Right? Well, let me just say it's not like the
Speaker 2: SEC is completely gone. Like, if you have some inside information,
Speaker 2: you tip off your brother in law and he makes
Speaker 2: fifty thousand dollars, they're going to find that and come
Speaker 2: down a ton of bricks on that. What all kinds
Speaker 2: of regulations they want to deal with, like the hedge
Speaker 2: fund industry and the rest of it. They're doing stuff
Speaker 2: in crypto and things like this, But in terms of
Speaker 2: their basic policing of financial statements, financial disclosures, corporate behavior,
Speaker 2: that's where the SEC has They've essentially stopped they're what
Speaker 2: they're doing there unless the company completely goes to bankruptcy,
Speaker 2: and once the bankruptcy has happened, possibly they will look
Speaker 2: at it.
Speaker 1: That's a little little too late to help out the
Speaker 1: investors involved.
Speaker 2: I don't think they view that as their role because
Speaker 2: they're The concern is is if they come in and
Speaker 2: do something to you know, before the money has been lost,
Speaker 2: that might make the stock go down a few percent
Speaker 2: that day, and then they'll be blamed because then they'll
Speaker 2: have helped cause investors to have lost money, and they
Speaker 2: don't want that responsibility.
Speaker 1: So let's talk about a little more about those financial statements.
Speaker 1: There are four large accounting firms that do the vast
Speaker 1: majority of the orderling for most of the biggest companies
Speaker 1: in the US, and they're hired and paid by those companies.
Speaker 1: I've always wondered that seems to be a little bit
Speaker 1: of an incestuous relationship. Kind of reminds me back on
Speaker 1: the rating companies SMP and Moody's being paid by the
Speaker 1: bonds underwriters, which wasn't how it always was. It sounds
Speaker 1: like you're implying that the entire system for identifying, policing,
Speaker 1: and punishing fraud before a company runs into trouble is
Speaker 1: not working.
Speaker 2: Look, most people in business who are running companies try
Speaker 2: to conduct their business basically honestly, so they're they're they're
Speaker 2: selling their product, they're developing their product, they're paying their people,
Speaker 2: they're they're recording their books. The auditors come in, they're
Speaker 2: trying to show them the right results. Things work out
Speaker 2: pretty good. The question is is for the handful that
Speaker 2: are that don't view the world that way, that want
Speaker 2: to take advantage of the system and you know, fake
Speaker 2: it or lie or cheat or whatever that is they
Speaker 2: want to do. And for those companies, there's there's probably
Speaker 2: that they can probably get away with what they want to.
Speaker 1: And at one point in time, the regulators were aggressively
Speaker 1: policing that and that seems to have faded.
Speaker 2: Yeah, I think that's right.
Speaker 1: Huh, really really fascinating. So so, so let's talk about
Speaker 1: something related. You do these wonderful post mortems in your
Speaker 1: quarterly letters. It's kind of legendary. Here's what went right
Speaker 1: with this trade, here's what went wrong. Here's why this
Speaker 1: sector did well or poorly, or why this stock did
Speaker 1: or didn't work out. Explain what goes into putting these
Speaker 1: letters together together. It reminds me a little bit of
Speaker 1: the presentations you do.
Speaker 2: Like the quarter letters is something I enjoy doing. I
Speaker 2: start thinking about it maybe a month before the quarter ends,
Speaker 2: like what themes are going on in the world that
Speaker 2: I might want to talk about. And then sometime after
Speaker 2: the quarter I get some information about like how we
Speaker 2: did in the market and what stocks helped us and
Speaker 2: the rest of it. And then I write a letter
Speaker 2: and I write the first draft. The first draft is
Speaker 2: what I want to say. It's unedited and unfiltered, and
Speaker 2: then I pass it off to the team and they
Speaker 2: fill in the holes and then they help correct me
Speaker 2: about things maybe that I shouldn't say, and it gets
Speaker 2: edited down through a few cycles. But in terms of
Speaker 2: the post mortems, I've always been like, you know, if
Speaker 2: something goes great, explain why it went great. If it
Speaker 2: didn't go well and we lost money on it, just
Speaker 2: say so, if we do a really, really good job,
Speaker 2: we're going to be wrong thirty five percent of the time, right, right,
Speaker 2: So what's the shame in writing in a letter we
Speaker 2: invested in this particular stock and it didn't work out
Speaker 2: the way that we wanted it to and we lost
Speaker 2: a whole bunch of money. It's in the result anyway,
Speaker 2: so you may as well describe it.
Speaker 1: Huh, that's really interesting. So I know what your presentations are, like,
Speaker 1: I know what the quarterly letter is, like, what's a
Speaker 1: typical day like for you at Greenlight? What happens on
Speaker 1: a random Wednesday?
Speaker 2: You know, the great thing about this business is every
Speaker 2: day you wake up and you just don't know what
Speaker 2: you're going to get.
Speaker 1: You.
Speaker 2: You know, you have things that are on your schedule, Oh,
Speaker 2: this company's going to announce earnings, or you're going to
Speaker 2: talk to this analyst, or you're going to talk to
Speaker 2: this management team or whatever it is. And you have
Speaker 2: a few things that are on your calendar, and then
Speaker 2: you have the rest of the day. And the rest
Speaker 2: of the day is dealing with the incoming email, it's
Speaker 2: dealing with the news, it's dealing with developments that you
Speaker 2: did in particular really expect and deciding if there's anything
Speaker 2: that you need to research further or trade or do,
Speaker 2: and so you know, you just you know, you never
Speaker 2: know what you're going to get on any particular day,
Speaker 2: and that's what makes it so exciting.
Speaker 1: Huh, really really interesting. In your most recent met letter,
Speaker 1: you mentioned the FED did they do a good job
Speaker 1: on inflation? What sort of grade would you give them
Speaker 1: for how well they've handled the entire post COVID era.
Speaker 2: Well, I don't know how to award a grade. That's
Speaker 2: I'm not the professor, and I'm not here to grade
Speaker 2: the FED. I would observe that they've done some things
Speaker 2: very well. You know, they created a stability at the
Speaker 2: bottom of the crisis. They provided liquidity, they didn't let
Speaker 2: lots of things go bankrupt and so forth. Now there's
Speaker 2: a moral hazard that comes from that, because you condition
Speaker 2: people to think that things won't be allowed to go bankrupt,
Speaker 2: and essentially you're socializing a lot of risk effectively onto
Speaker 2: the national balance sheet. Then they had the period of
Speaker 2: pretending that there wasn't going to be any inflation, no
Speaker 2: matter how much money that they printed, and then when
Speaker 2: that became evident, they spent a long time explaining that
Speaker 2: it was transitory. And then they finally decided that maybe
Speaker 2: it wasn't transitory and they should do something about it.
Speaker 2: And then they decided after none of it was transitory,
Speaker 2: it turned out that some of it was transitory, and
Speaker 2: now it's rolling itself back down. The basic thing with
Speaker 2: the FED, I think is they don't seem to have
Speaker 2: I disagree with their view relating to the relationship between
Speaker 2: interest rates and the economy and inflation and what they're
Speaker 2: actually doing, because I believe that when rates get low
Speaker 2: below a certain amount, they actually slow down the economy
Speaker 2: by lowering them further and when so as a result,
Speaker 2: I had this thesis called I called it the jelly
Speaker 2: donut monetary policy. Where the first jelly donut tastes great,
Speaker 2: but the twenty fifth jelly donut, you're not really helping
Speaker 2: yourself anymore. And so you had these emergency fed policies,
Speaker 2: and that in an emergency, that makes sense. But then
Speaker 2: after the emergency passes, they kept the policies and you
Speaker 2: kept rates at zero for like some really long period
Speaker 2: of time, and it was essentially just like giving a
Speaker 2: diabetic person more jelly donuts. Since the economy had a
Speaker 2: very gradual and slow recovery, and now as they had
Speaker 2: the inflation and the rates have come back up, they
Speaker 2: thought that they would be slowing the economy, but they're
Speaker 2: actually strengthening the economy higher rates getting off the zero bound.
Speaker 2: Not if you moved rates from five to ten, it
Speaker 2: would certainly slow the economy, but from zero to five
Speaker 2: it actually strengthens the economy. I think that's why we
Speaker 2: have this really strong GDP growth that is that is
Speaker 2: persisting right now. I think it's surprised a lot of people,
Speaker 2: and so I think it's really weird now that everybody
Speaker 2: thinks that they're going to lower rates. Things are pretty good,
Speaker 2: like employment is really pretty full right now, and the
Speaker 2: economy is kind of humming along, and I think the
Speaker 2: idea that they're going to rush back to really lower rates,
Speaker 2: and they may do it right, but I don't think
Speaker 2: that they're really going to to help anybody, you know,
Speaker 2: by by doing so.
Speaker 1: The argument, the best argument I've seen anyway, for lower
Speaker 1: rates is, hey, you have all these people with three
Speaker 1: and four percent mortgages. We've had a wild shortfall in
Speaker 1: home construction in the twenty tens following the financial crisis.
Speaker 1: I know you were a big fan of the home builders.
Speaker 1: Certainly worked out well given the shortfall. And if we
Speaker 1: want to get some supply to the market, you have
Speaker 1: everybody frozen in place with four percent mortgages. You got
Speaker 1: to get mortgages down from seven to at least low
Speaker 1: sixes or high fives, and all that supply will come out,
Speaker 1: and therefore inflation will come down in the housing sector.
Speaker 1: Do you buy that sort of analyst or economist commentary
Speaker 1: that that's what's going to drive rates lower.
Speaker 2: Well, a couple of things. First of all, housing prices
Speaker 2: off the tenure. It doesn't price off the Fed funds.
Speaker 2: So if the Fed Funds goes from five and something
Speaker 2: to three and something like everybody thinks that it's going
Speaker 2: to do, it's not clear that that's going to move
Speaker 2: the ten year rate at all.
Speaker 1: The ten year place, right, we went from just about
Speaker 1: five percent to.
Speaker 2: Three eight or so great and the Fed Funds hasn't
Speaker 2: even moved yet, right, So it's not clear that these
Speaker 2: two rates correlate one hundred percent. And so you could
Speaker 2: even have a situation where you lower the rates and
Speaker 2: the inflation starts coming back and it causes the long
Speaker 2: rates to go up. It wouldn't surprise me at all,
Speaker 2: you know, relating to the housing. I mean, I'm the
Speaker 2: chairman of a homebuilder. It's Green Brick Partners, and we're
Speaker 2: building houses as fast as we can. There's a ton
Speaker 2: of demand for the houses. The rates are. I mean, sure,
Speaker 2: we'd love lower rates to get people's monthly payments down
Speaker 2: a little bit. I mean that would be great, but
Speaker 2: it doesn't really matter. There's plenty of demand. The market
Speaker 2: is very very strong for us, and so you know,
Speaker 2: we're we're limited by how fast can we build the houses,
Speaker 2: and that's terrific.
Speaker 1: So it's interesting how you discuss variant perception in various
Speaker 1: acre issues, in various stocks. It seems like the consensus
Speaker 1: for what the Fed's going to do and what the
Speaker 1: economy is going to do more broadly has been so
Speaker 1: wrong for so long. When you're looking at everybody predicting
Speaker 1: both the recession for two years and getting it wrong
Speaker 1: and FED cuts for two years and getting it wrong,
Speaker 1: how do you think about that in terms of analyzing
Speaker 1: the FED and what that means to deploying capital.
Speaker 2: Sure, look, I think that the economy is strong. I
Speaker 2: don't think we are in a recession. I don't think
Speaker 2: we're about to be in a recession. And so as
Speaker 2: a result, I'm still more worried that if they lower
Speaker 2: rates a whole bunch, they'll get the inflation to come back.
Speaker 2: So I'm still long inflation, and I kind of don't
Speaker 2: think we're going to see anywhere near as many FED
Speaker 2: cuts as people are talking about this year. You know,
Speaker 2: it's kind of funny people often look at just like
Speaker 2: the wrong thing or are they look at they find
Speaker 2: something very irrelevant and they spend a lot of time
Speaker 2: on it. Like recently, you know, it came out that
Speaker 2: the federal government was gonna borrow like fifty billion dollars
Speaker 2: less this quarter. So they're only gonna borrow seven hundred
Speaker 2: billion instead of seven hundred and fifty billion and.
Speaker 1: Pass on the savings to you.
Speaker 2: You know, it's it's it's fantastic. And so there's a
Speaker 2: lot of enthusiasm for like a data point, and this
Speaker 2: is like the world looking for data points, but they're
Speaker 2: missing like it's a forest for trees, Like who really
Speaker 2: cares if they're borrowing seven hundred billion or seven hundred
Speaker 2: and fifty billion. They're borrowing so much money that you
Speaker 2: just have to look at this and go like, where's
Speaker 2: three trillion dollars gonna go to lend to the Fed
Speaker 2: this year? Where's three or four trillion to go next
Speaker 2: next time? So if you just take a step back
Speaker 2: and you say, like how sustainable is this and where
Speaker 2: is all of this money gonna come from? You realize, like,
Speaker 2: instead of being enthusiastic for hey, they're gonna borrow fifty
Speaker 2: billion less is if that's going to make all of
Speaker 2: the difference in the world. Hey, we could we can
Speaker 2: sell seven hundred billion of bonds, but we can't sell
Speaker 2: seven hundred and fifty Like this is completely strange to me.
Speaker 2: And I think as you, as the market looks at it,
Speaker 2: over the course of the year, we're gonna at some
Speaker 2: point get back to the point where they're saying, you know,
Speaker 2: we're really borrowing, maybe more than more than we should.
Speaker 2: And when you talk to people in Congress, like they
Speaker 2: have no plans to do anything about this, Like it's
Speaker 2: not even like there's an intermediate plan for fiscal responsibility.
Speaker 2: So the idea that the market is focused on fifty
Speaker 2: billion here they're of incremental treasury borrowings or how many
Speaker 2: ten year bonds they're going to sell, or how many
Speaker 2: thirtyer bonds. What it is is underneath that is an
Speaker 2: acknowledgment that there's a big problem, because otherwise they wouldn't
Speaker 2: be focused on it. But they're distracting from the problem
Speaker 2: by trying to find like a second derivative incremental data point.
Speaker 2: And I think that the easier thing to do is
Speaker 2: to keep the eye on the bigger picture, which should
Speaker 2: play itself out, maybe over the more intermediate term.
Speaker 1: So here's the pushback to the to the deficit challenge.
Speaker 1: You know, we're not that far apart in age. My
Speaker 1: entire adult life, I've been told deficits are a problem.
Speaker 1: They're going to cause inflation, destroy the dollar, crowd out
Speaker 1: private investments. None of that seems to have happened over
Speaker 1: the past couple of decades. Do we really need to
Speaker 1: make the deficit our biggest priority? Tell us what the
Speaker 1: risk factors are from that.
Speaker 2: Well, we can't make the deficit our biggest priority. It's
Speaker 2: our biggest problem. Like Congress can't do anything about this.
Speaker 2: If you talk to a congress person and say or
Speaker 2: a Senator and say, well, what are you going to
Speaker 2: do about the deficit? Like the amount of change that
Speaker 2: would need to happen to move the needle, it's kind
Speaker 2: of almost like a waste of time because nobody's willing
Speaker 2: to make the major major type of tax increases or
Speaker 2: the major major types of spending cuts. You know, they're
Speaker 2: willing to like nickel and dime away at the other
Speaker 2: side's constituency. So the Republicans are willing to stick it
Speaker 2: to the Democrat voters a little bit. The Democrats are
Speaker 2: willing to stick it to the Republican voters a little bit.
Speaker 2: But at the end of the day, like there's nobody
Speaker 2: who's serious about it. It's more like, well, it's unsustainable,
Speaker 2: and we're going to go up the roller coaster and
Speaker 2: at some point it's going to go down, and then
Speaker 2: we're going to deal with it then. And what is
Speaker 2: that crisis going to look like? I don't know what
Speaker 2: that crisis is going to look like. And I know
Speaker 2: this has been a long time building, but it's going
Speaker 2: up at an accelerating pace. I mean, we're now well
Speaker 2: over one hundred percent debt to GDP, right, So if
Speaker 2: interest rates are four percent or something like that, you're
Speaker 2: paying out four percent or more of GDP in interest, right,
Speaker 2: And so you're paying out a big percentage of your
Speaker 2: tax collections in debt service, even before you get to
Speaker 2: what you actually want to have. And you're at a
Speaker 2: six and a half percent deficit to GDP with full employment,
Speaker 2: which is something we've never seen before outside of a war.
Speaker 2: And so if we have a recession, you know that
Speaker 2: number is going to get much much worse. And at
Speaker 2: some point, you know where is the three trillion dollars
Speaker 2: going to come from. We just talked about the hedge
Speaker 2: fund industry, the whole hedge fund industry, three trillion dollars.
Speaker 2: So the government's going to borrow the entire hedge fund
Speaker 2: industry this year, and then that just tides them over
Speaker 2: for twenty twenty four. Where's it going to come for
Speaker 2: twenty twenty five? Figuring this out to the nearest moment
Speaker 2: is impossible because it's a question of confidence, it's a reflexivity.
Speaker 2: It's George Soros's theory, like this is all fine until
Speaker 2: it's not fine. But when it's not fine, then we're
Speaker 2: going to have a really interesting.
Speaker 1: Problem, really interesting. Let me pivot a little bit and
Speaker 1: talk about the Einhorn Collaborative. What is that? Why did
Speaker 1: you start this organization?
Speaker 2: The Einhorn Collaborative is my philanthropic effort, and it is
Speaker 2: a view that we have a crisis of connection, that
Speaker 2: people are not connecting to one another, that the society
Speaker 2: is becoming more divided, and that we need to work
Speaker 2: on bridging people back together.
Speaker 1: So that requires stronger relationships, embracing differences. Do we have
Speaker 1: any general resources going in that direction or is this
Speaker 1: something that really isn't happening.
Speaker 2: Well, it's really interesting because like seventy percent or so
Speaker 2: of America is not politically polarized. It's just a fifteen
Speaker 2: percent on the far of each side that get all
Speaker 2: the attention and drive everybody else crazy. Most people don't
Speaker 2: care that much and they kind of want to get along.
Speaker 2: Our efforts are not just political. In fact, they're mostly
Speaker 2: not political. They're cultural. We are working on helping mothers
Speaker 2: bond with their newborn babies, for example, because if you
Speaker 2: can develop a connection with a newborn baby, between the
Speaker 2: mom and the baby in a dual kind of way,
Speaker 2: sure it's great for the mother, but it teaches the
Speaker 2: baby also how to have a normal relationship with somebody,
Speaker 2: and then they can take that forward into the rest
Speaker 2: of their life.
Speaker 1: Let's stay with that a second. How does a philanthropy
Speaker 1: help a mother bond with a baby.
Speaker 2: Well, we're literally starting a program where we've done a
Speaker 2: lot of research. We've done clinical studies, and essentially, if
Speaker 2: you teach the mother to hold the baby, you teach
Speaker 2: the mother to talk to the baby, You teach the
Speaker 2: mother what to say to a baby, how to get
Speaker 2: the baby to make eye contact, back and forth, and
Speaker 2: how when the baby becomes disregulated, you know, crying or
Speaker 2: whatever it is, how do you regulate back and calm
Speaker 2: And once you learn to calm yourself, and once the
Speaker 2: mother learns to calm the baby, and sometimes actually the
Speaker 2: baby calms the mother. By creating this kind of dual relationship,
Speaker 2: you wind up with a healthy relationship between the mother
Speaker 2: and the baby, which they're then both able to take
Speaker 2: out positively into the rest of their lives.
Speaker 1: Huh, that's really interesting. What other work does the collaborative do?
Speaker 1: Where else do you focus?
Speaker 2: We focus on what we call that bonding. We call
Speaker 2: another aspect of what we're doing, bridging. That's where we're
Speaker 2: trying to bridge across difference in communities. We're getting some
Speaker 2: people together of different religions or different political persuasions or
Speaker 2: different cultural views and giving them opportunities to experience things together,
Speaker 2: whether it's service, whether it's dinner, it's going to the
Speaker 2: church of the different religion, or going to the mosque
Speaker 2: of the different religion or the synagogue, and creating you know,
Speaker 2: bonding between religious groups and so forth.
Speaker 1: How do you measure success in these different areas? How
Speaker 1: can you tell, Hey, the philanthropic capital we're putting to
Speaker 1: work is actually having an impact?
Speaker 2: Well, well you can because like like in the in
Speaker 2: the bonding thing I was talking about with them with
Speaker 2: the babies and the mothers, you can actually follow them
Speaker 2: on a longitude and no basis and say, how are
Speaker 2: these people performing? How are these people behaving? How are
Speaker 2: they you know? Are they healthy? Are they how are
Speaker 2: their relationships? Do they make friends when they get to
Speaker 2: middle school and so on and so forth?
Speaker 1: You're tracking this over time? Yes, huh, really interesting. Let's
Speaker 1: stick with philanthropy. You've been very generous to your alma
Speaker 1: Mada Cornell. We've seen a lot of pushback, especially amongst
Speaker 1: alums from various IVY leagues to their campuses. You seem
Speaker 1: to still have a great relationship with Cornell. Well, what
Speaker 1: do you like that's going on there? What are they
Speaker 1: doing right and wrong that you Penn and Harvard seems
Speaker 1: to have dropped the ball on.
Speaker 2: Well, I think Cornell. Look, everybody has problems, and Cornell
Speaker 2: has problems too, And I'm not going to point anything
Speaker 2: at any of these other universities that I'm not as
Speaker 2: involved with. My philosophy for this is to try to
Speaker 2: bring about positive change. I think when you have a crisis,
Speaker 2: it creates an opportunity for change. And I think that
Speaker 2: that you do this internally. You do this by discussing
Speaker 2: it with the President, You discusseduss it with the Provost,
Speaker 2: you discuss it with the other trustees, you discuss it
Speaker 2: with the deans. I've been very involved in many, many conversations,
Speaker 2: and some things I'm very happy about, and some things
Speaker 2: I feel like there's a lot more that can be done.
Speaker 2: But I believe in trying to work this out through
Speaker 2: the system and not coming out in a very public
Speaker 2: way and criticize in the newspaper or on this interview
Speaker 2: or something like that.
Speaker 1: You seem to be very quietly going about bringing positivity
Speaker 1: to a rancorous debate as opposed to just throwing gasoline
Speaker 1: on the fire.
Speaker 2: I think that's right, and because I believe in bridging,
Speaker 2: like I believe, you know, people on both sides of
Speaker 2: this argument think that they're right, and they don't think
Speaker 2: that they're bad people. Right. No matter which side you're on,
Speaker 2: you think you're the good guy, right, and so at
Speaker 2: some level maybe they are, or maybe we've got at
Speaker 2: least understand it. And then you've got to figure out
Speaker 2: how to engage in it. And then how is it
Speaker 2: that you can find some commonality? What values do we
Speaker 2: all have in common even if we disagree in important
Speaker 2: ways about what policies are being being performed or what
Speaker 2: the you know, what the behavior is and and yes,
Speaker 2: you do need some base level of societal norm and
Speaker 2: if you don't have that, you can't have anything. But
Speaker 2: once you get through that base level, then you can
Speaker 2: try to figure out how you bring people together. And
Speaker 2: sometimes just agreeing to disagree is fine. Right. Another major
Speaker 2: initiative we have is something that we call the New Pluralists,
Speaker 2: and the New Pluralist is a funding collaborative. We've gotten
Speaker 2: twenty two funders of very diverse views, everything from the
Speaker 2: Cochs to the Hewletts. And what we do is we
Speaker 2: pool our money and we're working on these cultural problems.
Speaker 2: We've created a fund essentially what we do, and then
Speaker 2: we make grants out into the field, a field builders
Speaker 2: of people who are doing things to unite and bridge differences.
Speaker 2: And so what's interesting is is first you have just
Speaker 2: the funders figuring out how they can sit at the
Speaker 2: table together because some of these people don't like each
Speaker 2: other or they don't like what they do in other
Speaker 2: areas of whatever it is that they're doing, and they've
Speaker 2: agreed to come together, and then you put them together,
Speaker 2: and then you actually have to say, what is it
Speaker 2: that we have in common that we can fund for
Speaker 2: the good of the country, right, and then you do
Speaker 2: the funding and you get the benefit of that from
Speaker 2: the good of the country.
Speaker 1: That's something to collaboration.
Speaker 2: That's a real core effort from the onhearn collaboratives. We've
Speaker 2: actually kind of got this thing going for the last
Speaker 2: three years.
Speaker 1: So let me ask you a philosophical question. How much
Speaker 1: of this division amongst different people and you know, actively
Speaker 1: disliking the other side just stems from a lack of
Speaker 1: empathy to people who have different views. It seems like
Speaker 1: that was something that used to be a little more
Speaker 1: available in the pre online, pre social media era, and
Speaker 1: you're trying to get back to that working around what
Speaker 1: do you do when you look at a Facebook or
Speaker 1: a TikTok or a Twitter where the vitriol and just
Speaker 1: the insanity goes off the charts.
Speaker 2: You know, I saw a little caption saying like I
Speaker 2: need to spend more time arguing with strangers on the
Speaker 2: internet about politics. Like this sounds like a really bad
Speaker 2: idea to me. I don't really spend very much time
Speaker 2: myself on these kinds of social media. I don't think
Speaker 2: that they're helping. In fact, they're probably hurting. It's hard,
Speaker 2: you know, having some humility makes a lot of sense.
Speaker 2: And that's like admitting that you're not right about everything
Speaker 2: and learning that you're wrong. And you need to spend
Speaker 2: time with people that you disagree with. You know, if
Speaker 2: you only spend time with people who agree with you, you
Speaker 2: don't learn anything. It's the people who you disagree with
Speaker 2: that can point out your biases and you can notice
Speaker 2: their biases, and it helps you learn and helps you grow,
Speaker 2: and it helps you develop your thinking. And so it
Speaker 2: makes a lot of sense to engage with people that
Speaker 2: you don't agree.
Speaker 1: With, stay out of the echo chamber a little bit,
Speaker 1: and look for diverse voices. Let's talk about the Michael J.
Speaker 1: Fox Foundation for Parkinson's Research. You serve on that board.
Speaker 1: Tell us a little bit about what you do for them.
Speaker 2: Well, for them, mostly I host poker tournaments. Oh really, yeah,
Speaker 2: because I'm not very good at the science part. Like
Speaker 2: this is really really hard problem that they're dealing with.
Speaker 2: I mean, this is a brain disease and there's nothing
Speaker 2: more complicated than the brain and trying to figure out
Speaker 2: like how to ameliorate this is really really hard work.
Speaker 2: But Michael J. Fox has put together the world experts
Speaker 2: on this, gathered a ton of funding, and is actually
Speaker 2: making real important progress. Last year they had a major
Speaker 2: major breakthrough where they have developed what they call a biomarker,
Speaker 2: which basically means that they can tap into your back
Speaker 2: and take out some of your material and figure out
Speaker 2: whether you're likely to have or maybe even already have
Speaker 2: Parkinson's and so if you're on the course to it,
Speaker 2: that means they can identify and diagnose it earlier, which
Speaker 2: means we can get to treatment faster.
Speaker 1: And I'm assuming the poker tournaments were raising a ton
Speaker 1: of money for them and everybody has a great time.
Speaker 2: Though the poker tournaments are best are the best kind
Speaker 2: of fundraiser because people want to support the cause, but
Speaker 2: they don't really want to hear all about it for
Speaker 2: an hour, and so it's way better than these dinners
Speaker 2: with the PowerPoint presentations and the speeches and the and
Speaker 2: the stuff like that. I mean we do that too,
Speaker 2: and a lot of the things that we support. But
Speaker 2: poker tournaments are fun because people are just gonna have
Speaker 2: a great evening and we're going to raise a bunch
Speaker 2: of money, which is kind of really what we want
Speaker 2: to do.
Speaker 1: And what about the robin Hood Foundation, what are you
Speaker 1: looking to do there and what's you're involvement with that group?
Speaker 2: Well, I've been involved with robin Hood for a long time.
Speaker 2: I was actually the chair of it for a couple
Speaker 2: of years, but that ended a while ago. We're onto
Speaker 2: even more effective chairs than me, which is really which
Speaker 2: is really great. You know, the Robinhood Foundation is truly remarkable.
Speaker 2: It's when you talk about measured impact. They measure like
Speaker 2: everything that they're doing. But then if you take a
Speaker 2: step back further and you ask yourself, you look at
Speaker 2: these I'll just call them blue state big cities and
Speaker 2: the problems that they have across the country, and you
Speaker 2: see what's going on in Chicago, and you see what's
Speaker 2: going on in San Francisco, and you see what's happening
Speaker 2: in you know, and some of the other major cities.
Speaker 2: And you look at New York. You know, New York's
Speaker 2: doing a lot better than a lot of these other cities.
Speaker 2: And I think that a lot some of this is
Speaker 2: from the cumulative effect of the Robin Hood Foundation. Real thing,
Speaker 2: I'm very very proud to be involved with.
Speaker 1: Huh really really quite fascinating. Let's jump to our favorite
Speaker 1: questions that we ask all of our guests, starting with
Speaker 1: what have you been either watching or listening to? What's
Speaker 1: been keeping you entertained?
Speaker 2: Entertained? Well, I just finished watching the last season of Fargo,
Speaker 2: which is deep, and it's dark, and it's fantastic, and
Speaker 2: it's right there with the previous four seasons. You know,
Speaker 2: there was the movie a long time ago. Yes, and
Speaker 2: they've done a series on FX and and and they're fantastic.
Speaker 2: They get a different cast and a different story each time,
Speaker 2: and and it's it's it's dark, and I enjoy that.
Speaker 1: I have a vivid recollection of the scene of her
Speaker 1: trying to get rid of the body with the wood
Speaker 1: chipper and the movie that stays with you a long time.
Speaker 1: That was pretty dark thing.
Speaker 2: Yeah, Well, they've built five seasons since, five different casts,
Speaker 2: five totally different casts, different stories, but the theme is
Speaker 2: always the same, you know, the stories told exactly where
Speaker 2: it is except the names have been changed to you know,
Speaker 2: protect the survivors and so forth.
Speaker 1: So let's talk about your mentors who helped to shape
Speaker 1: your career.
Speaker 2: Yeah, I don't think I ever really had like a
Speaker 2: single mentor. The closest would have been my boss, Peter
Speaker 2: Collery when I was at Siegler Collery. But he was
Speaker 2: really more my boss, I think, and I learned a
Speaker 2: lot from him. I think I've just taken on knowledge
Speaker 2: from various people and things that I've observed along the way.
Speaker 1: Let's talk about books. What are you reading now and
Speaker 1: what are some of your favorites.
Speaker 2: Well, I read a baseball book every year, usually the
Speaker 2: baseball perspectus. I read a poker book every year. Last
Speaker 2: year's was on physical tells, reading people's expressions and figuring
Speaker 2: all of that out. I don't get to read a
Speaker 2: lot of books. I'm really maybe three or four books
Speaker 2: a year at this point.
Speaker 1: And mention you read a baseball book every year? Of
Speaker 1: what went wrong in twenty twenty three for the Mets,
Speaker 1: and do we have a chance this year? What are
Speaker 1: you thinking about?
Speaker 2: You know? The thing is is it's January, and January
Speaker 2: is about the season. You really don't think a lot
Speaker 2: about baseball. It wasn't a great year for the Mets.
Speaker 2: There's been lots and lots that have been written about it.
Speaker 2: I'm also a Brewers fan. I'm from Milwaukee, so i
Speaker 2: still do Brewers, Bucks and Packers, and I'm a little
Speaker 2: still recovering from the loss to the forty nine ers
Speaker 2: from a couple of weeks ago.
Speaker 1: Our final two questions, what sort of advice would you
Speaker 1: give to a recent college grad interested in a career
Speaker 1: in either investing or finance.
Speaker 2: My advice for all young people is figure out what
Speaker 2: you're good at and find something that you can do
Speaker 2: that plays to your strength. Right, people have strengths and
Speaker 2: they have weaknesses, and you want to improve your weaknesses.
Speaker 2: But don't do that at your job. Do that in
Speaker 2: your social life. Do that for your hobbies. You know,
Speaker 2: if you want to get physical stronger, go lift weights
Speaker 2: or something like that if you're not strong. But you know,
Speaker 2: if you're not strong, don't try to become an athlete
Speaker 2: because that doesn't play to your strength. Figure it out.
Speaker 2: What is it that you are good at where you
Speaker 2: have the best advantage over other people, Because there's plenty
Speaker 2: of people who are going to be competing for whatever
Speaker 2: it is that you are trying to do, so you
Speaker 2: may as well at least be trying to play to
Speaker 2: your strength.
Speaker 1: And our final question, what do you know about the
Speaker 1: world of investing today you wish you knew thirty or
Speaker 1: so years ago when you were first starting out.
Speaker 2: Well, I guess if I had to pick one thing,
Speaker 2: I think it's been just the change in the dynamic
Speaker 2: of the market, the way that it's broken from active
Speaker 2: and passive and all of the rest of it. And
Speaker 2: to also just kind of realize that, you know, people
Speaker 2: act to follow their motivations. If you figure out what
Speaker 2: the motivations are, you can often understand people's actions. Huh.
Speaker 1: Really interesting. Thank you David for being so generous with
Speaker 1: your time. We have been speaking with David Einhorn, President
Speaker 1: and founder of Greenlight Capital. If you enjoy this conversation,
Speaker 1: check out any of the five hundred pass discussions we've
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Speaker 1: Be sure and check out our new podcast at the Money,
Speaker 1: where each week I speak to an expert for ten
Speaker 1: minutes about the most important aspect of your money, investing, earning,
Speaker 1: and spending. That's at the Money. You'll find that in
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