Monday, December 18, 2017

David Einhorn's Investing Talk at Oxford Union

Greenlight Capital's David Einhorn recently was interviewed and completed a question and answer session at Oxford Union.  He's been quite busy in recent months as he also spoke at the Capitalize For Kids conference.

Einhorn noted he likes debate and did it in high school, as you had to be able to argue both sides of the argument.  That trait is useful in investing as you look at the contra viewpoint to your position.

"We're wrong all the time.  I shouldn't say all the time.  We're wrong often.  We have to constantly question whether we're wrong."

On launching Greenlight: There's very low barriers to entry in the hedge fund industry and he thought if they could do a good job with a small amount of money they could live a good life.  He never dreamed that it would grow as much as it did.

He attributes his success to critical thinking skill.  If you can have a distinct viewpoint from everybody else and be right, you can be successful. 

About Greenlight's culture:  He thinks Greenlight has a lot of humility and respect with smart and nice people working together.  They want to respect each other's time.  Critical thinkers that reason and think before they speak and can adjust to new facts and feedback.

Einhorn is an avid poker player and he says it's a very similar skillset as you have certain facts you know (info about the company) and then things you can surmise (CEO's motivation, etc), and then unknown things that could come in the future.  "So you combine what you know, with what you think you can surmise, combined with understanding the range of outcomes relating to the uncertain things and saying is this a good place to commit a fraction of my capital?"

In poker, you know how many chips everyone has, what your cards are, what the card on the table are.  But you have to surmise what the other players might have or might do.  And then the uncertainty is the range of future cards that aren't yet displayed.

In investing, Einhorn likes to focus locally or in developed markets.  He says the further you get away (geographically or developmentally) there's a lot of local customs, local knowledge you have to acquire and it's hard to compete when you're sitting in New York, even if you go visit every once in a while.

Q&A Session:

On the environment for launching funds: If you're launching today, you're basically hiring 14-40 people from analysts to traders to CFO to backoffice, etc.  So you basically need to have enough assets under management right out of the gate to justify all that hiring and to fund the business.  His launch wasn't really like that: it was him and another guy in a tiny office doing all the various duties.  With a small AUM, there wasn't a lot of expense so you could do that.  He thinks you could still do that today if you had a differentiated strategy and articulated it well and had a client base.  He relied on word of mouth once he had a good start performance-wise.   He notes that the whole 'capital introduction' industry has spawned since then and so that's been a big difference.

On shorting companies/bubble basket:  He doesn't short companies on overvaluation.  He always looks for some sort of deterioration.  There's been a lot of companies that aren't really profitable (his bubble basket of 40-50 companies) and while 4 or 5 really worked against him, the vast majority of the basket worked in their favor.  That is, until this year.  They've all gone up and rallied against him but until they start showing profit, he won't take a different view.

On being contrarian:  He has to re-assess constantly, especially if the position moves against him.  So you have to constantly evaluate and understand the other side.  If something's changed, you've got to reduce/increase/exit based on that information.  Generally his choice is to reduce or eliminate a position.  But if he thinks he's right, patience is the way to go.

On if he'll change his strategy as value hasn't worked as well recently:  "Our goal is to achieve attractive risk-adjusted returns over time while taking demonstrably less risk than the market as a whole.  Which means fundamentally we're not comparing ourselves to the S&P 500 or an index, so we don't evaluate ourselves that way."

"The way you deal with unknown unknowns is through portfolio construction.  We like to run a concentrated portfolio, but even our best idea we're not going to put all our money in.  You have to have some level of diversification ... a certain amount of market risk."

"We tend to think of risk as how much can we lose in the worst case?"

On machine learning/competing with robots:  "We view these investments as puzzles.  There are the few things you know, but they're not the most important things because everybody knows them.  The most important things are what is that you can infer and how good are you assessing the possible range of outcomes, either the known unknowns or unknown unknowns and how do you construct that into a portfolio.  I'm sure the machines have views on these and the shorter-term the decision, the more likely the machine is going to figure it out better and faster than the human.  But our goal here is just to find things that are widely misunderstood by a large margin such that we're not competing with that kind of technology, because I don't think we would beat them."

On short-termism vs long-term focus:  "I think that one of the inefficiencies in the market is investors are generically too short-term oriented and time arbitrage is one of the best inefficiencies in the market."

Embedded below is the video of David Einhorn's talk at Oxford Union:

You can view Greenlight Capital's portfolio in the latest issue of our newsletter.

Bill Miller Has 50% of Hedge Fund in Bitcoin: Wealthtrack Interview

Bill Miller of Miller Value Partners recently appeared on Consuelo Mack's Wealthtrack.  His hedge fund, MVP1, invested in bitcoin in 2014 and 2015 and he said it now comprises 50% of his fund.  Here's a summary of the conversation:

His average cost is around $350 and he was buying between $200 and $500.  Bitcoin recently traded around $20,000.  He likened his purchase of bitcoin early to his purchase of Amazon (AMZN) way back in the day.

"One of the things we try to do is to have an open mind, especially about new technologies.  Most of them don't work, so you have to believe you have a high probability of being wrong, and if you have confidence in it, it's likely not going to work.  So it's really a question of assessing risk and reward on a case by case basis."

He says he was aware of it before he bought it but didn't take it too seriously... likened it to an experiment.  He read a book called Digital Gold and he also found it interesting that people he had a high regard for in the venture capital world took an extreme interest in it (Marc Andreessen, etc).

He was convinced bitcoin had a future because it had already passed its biggest stage of risk in the early days.  "There really hasn't been any technological innovation in money... ever.  There's been stages... rocks, to jewels, to gold and silver ... by and large money was a tangible thing.  Governments began issuing fiat currency that was also backed by something tangible."

Miller says bitcoin is uncorrelated as a potential asset to anything else.  It doesn't matter what's going on in central banks or geopolitics.  Another book Miller mentioned was The Construction of Social Reality.  Miller said that the founder of Bitcoin likened the cryptocurrency to 'digital gold.'

Given the risk/reward, he mentioned advice he heard that you could put 1% of your net worth in it and that way if it goes to zero, your downside is limited but if it skyrockets, you've got exposure.

Miller says the problem with bitcoin is you have to store it, and if you store it on an exchange and that exchange gets hacked, then you lose it forever (there was a hack of a major exchange a few years ago).  He says the emergence of futures contracts for bitcoin is a big move and the next step will be exchange traded funds (ETFs).

He pointed out that right now there's about $7.5 trillion worth of gold while bitcoin's market cap is around $290 billion dollars.

If you consider it a currency, he says bitcoin would be the 17th largest in the world right now.  While it won't supplant the major currencies, there's a chance other volatile currencies could see people seek a store of value elsewhere.  The problem, however, is of course bitcoin itself has had wild fluctuations in value.  So it can't really be viewed as a major currency replacement at the moment.

While he has 50% of his hedge fund in bitcoin, he's never run that concentrated before... citing previous top holdings at around 20%.  That said, he's looking at hedging the exposure but isn't ready to disclose how he's going to do that, but he's not selling the long.  He started it as a 5% position and it's grown so much.

He also has some bitcoin cash, which is an offshoot, but he doesn't own any other crypto currencies.  He likened bitcoin to VHS tapes or Bluray, etc were one format became the defacto choice, so the others won't be as relevant.

When asked about risk, Miller quoted someone saying "I wouldn't have anymore money in bitcoin than I was willing to lose 100% of." He thinks the chance of it becoming worthless are far, far less than they were in the early days though.

Embedded below is the video of Bill Miller's appearance on Wealthtrack talking bitcoin:

For more on cryptocurrency, we've highlighted Bart Stephens' presentation on bitcoin from the Invest For Kids Chicago conference a few months back.  Back in 2013 we also posted the Winklevoss twins' presentation on bitcoin from the Value Investing Congress.

Starboard Value Takes Stake in

Jeff Smith's activist firm Starboard Value has filed a 13D with the SEC regarding shares of (CARS).  Per the filing, Starboard now owns 9.9% of the company with 7.1 million shares.

This is a new position for the firm and the filing was made due to activity in late November and early December.  They acquired shares primarily between $24 and $27 from November 22nd through December 18th.

The filing notes that Starboard feels that shares are undervalued and represent an attractive investment.

Per Yahoo Finance, "operates as an online research destination for car shoppers. It sells online subscription advertising products to car dealerships by its own direct sales force, as well as through its affiliate sales channel. The company also sells display advertising to national advertisers. In addition, it offers online automotive marketplace service that connects buyers and sellers in,,,, and Websites. The company’s Website hosts approximately 4.7 million vehicle listings at any given time and serves approximately 20,000 franchise and independent car dealers in 50 states. The company was founded in 1998 and is headquartered in Chicago, Illinois. Inc. is a subsidiary of TEGNA Inc."

Jim Chanos Bearish on Quick Service Industry, Pharmacy Benefit Management, Tesla

Short seller Jim Chanos of Kynikos Associates recently sat down with CNBC for an interview.  Here's a summary along with video and the transcript.

On healthcare:  He thinks the new tax bill will cause the healthcare industry to see deflation.  "We've been looking at the rent-seeking companies, companies that we think have existed on the periphery of the healthcare economy that basically have went after these pricing sort of gamesmanship models.  And we think that's over. We think as the pie shrinks, it's going to be tougher and tougher to justify the ability of companies to hike drug prices 1,000% or charge commercial insurers five times what you charge medicare and medicaid in the case of dialysis ... We're still very negative on the PBM (pharmacy benefit management) space, Express Scripts (ESRX) came out and reaffirmed guidance, raise it this morning.  There's not reason for independent PBMs to exist, for example."

On Tesla (TSLA):  He's still short.  He thinks the company's equity is worth zero and other competitors are ahead of them in terms of autonomy for self-driving cars (citing Waymo, Audi, and others).  Says the problem is that the company can just keep raising capital and if that train keeps going then it's an issue.  But he's still very bearish on the company and sees the CEO Elon Musk as a bit of a showman constantly using hype, press releases and product launches. 

On fast food:  "I'd be short pretty much anybody in the quick service industry besides McDonalds.  MCD still calls the tune.  They're the 6 billion pound gorilla, so to speak.  They just went to a new value menu a few weeks ago, which always impacts the industry.  It's a dog fight."

He points to the companies' transition to the asset light model in the space.  He singled out Restaurant Brands (QSR), the owner of Burger King and Tim Hortons, which has been a hedge fund favorite.  He says while these companies are getting higher multiples for running an asset light model, look at how the franchisee is doing because the restaurants themselves still have to perform.  These restaurants are being hit with higher royalty rates and rising costs, so they're starting to struggle. 

On retail:  Chanos said they had a lot of exposure to the "well known shorts" in the retail industry but has covered them so they only have small exposure in that sector right now.  They think it will be a decent Christmas holiday shopping season so he'll probably re-examine them as they bounce into 2018.

Embedded below is Jim Chanos' interview with CNBC:

Video 1:

Video 2:

Video 3:

You can also read the full transcript here.