Graham And Doddsville

During the height of the recent economic crisis, David Einhorn became the public face of the “evil” short-selling hedge fund manager.  Einhorn, who was no stranger to being vilified for correctly identifying fraud in the public markets (if you don’t know what I’m talking about, click here), began raising questions about the strength of Lehman Brothers’ balance sheet in the middle of 2007.  We all know how that story ended.   If anyone wonders what it is like to be right most of the time, they should ask David Einhorn.

I have heard David Einhorn speak on several occasions.  While I have learned a great deal each time, there is one particular gem of wisdom I gleaned.  In the past, when David Einhorn has publicly stated a short position, he has always backed it up with a factual analysis.  Whether his analysis is right or wrong is not the issue.  One of the things that I admire most about Mr. Einhorn is that he has the courage to publicly disclose his analysis so that anyone with Internet access can debate its merit.  What is interesting to note is the public reaction to his analysis.  If someone were put together a presentation that successfully refuted a Greenlight short thesis, I honestly believe David Einhorn would be the first to admit he was wrong (and we’re not going to argue whether he would cover his position first).  However, in the case of Allied and Lehman, his analysis was not refuted by facts, but by public criticism of his character, and questions about the motivations of hedge fund managers and the morality of short selling.  As Mr. Einhorn has pointed out, when the first reaction to a solid analysis is defamation of character, you know you have uncovered a significant short opportunity.

David Einhorn was recently interviewed by Charlie Rose.  Given his track record, I think that investors would do well to at least ponder what he has to say.  See the entire interview here.

For more on David Einhorn, click here.

I recently came across a fantastic interview from The Wall Street Transcript with Donald Yacktman, Stephen Yacktman, and Jason Subotky of Yacktman Asset Management.   It is filled with gems of value investing wisdom.  A few examples include:

Ultimately, we think this business boils down to what you buy and what you pay for it.  Think of it as trying to be a good shopper. What we do is we’ll calculate a forward rate of return on prospective investments.  This is the rate we would expect if we hold the security indefinitely and the multiple we pay for the business does not change much.  We look at the cash being generated and the growth rates of the business, and by adding those components together, you get a forward rate of return.

We are not investing with a goal of mimicking a benchmark. I think that style evolved because managers could protect their personal business risk. We are bargain hunters and like it when securities go on sale. I don’t think you’ll find many long-only investors who are more excited than we are when the market declines. A lot of people talk a good game but when it really comes down to it, they flinch.

There is no substitute for knowledge. To really research and understand a situation is very important. The ability to buy into discomforting news is a function of having a really good understanding of what the business is and what its value is.

I would say we combine patience and opportunism. When valuations warrant it, particularly during dislocations, we’ve taken sizable positions very quickly.

[The original interview can be found here.]