David Einhorn started his hedge fund Greenlight Capital in 1996 with $900,000 and returned 16.5% annualized on investor capital for 20 years from 1996 to 2016. The funds assets under management dropped from about $12 billion at its peak in 2014 to approximately $5.5 billion by July 2018 and the fund was down -11.3% from 2014 through the end of 2017, and down another -34% in 2018. Greenlight Capital has returned an annual average of 12.6% net of fees from 1996-2018. Green Light Capital had gains of +18% for the first half of 2019.
After the 2008 crisis and his big trade short Lehman Brothers he was one of Wall Street’s best performing hedge fund managers as a billionaire but his net worth peaked at $1.9 billion at the end of 2014 and after a few bad years and in 2018 losing money both when he was short and long his net worth has fallen to $700 million.
I think it is important to learn from the world’s greatest traders and investors that have had great winning streaks through multiple market environments on both what to do and what not to do as you see their performance deteriorates during losing streaks.
Here are the Top Ten David Einhorn Trading Quotes:
“Texas hold ’em is all about folding and waiting for that time that comes up every hour or two where you actually have an advantage and you can press it.” – David Einhorn
Poker is a lot like trading as you should cut your losses fast on losing positions and risk more when the odds are in your favor and you are holding a good position.
“Both poker and investing are games of incomplete information. You have a certain set of facts and you are looking for situations where you have an edge, whether the edge is psychological or statistical.” – David Einhorn
In trading and poker you are making decisions in the present with an uncertain future. You have to create a system that gives you an edge over the psychology of your opponents or a statistical edge using the math of probabilities of outcomes.
“We take the traditional value investor’s process and just flip it around a little bit. The traditional value investor asks ‘Is this cheap?’ and then ‘Why is it cheap?’ We start by identifying a reason something might be mispriced, and then if we find a reason why something is likely mispriced, then we make a determination whether it’s cheap.” – David Einhorn
Einhorn looks for stocks that have a price far removed from the fundamental value and then identifies why it is priced too cheap or too high, stocks tend to revert to the mean of their fundamental value over the long term and he bets against extremes.
“In my business investing, you are buying a stock, and someone else is selling the stock. Right there, that’s like a debate. Is the stock going up, or is it going to go down?” – David Einhorn
Every time you buy or sell a stock their is someone on the other side of your trade. You are always trading against another person’s position. Buyers and sellers are always equal in a market for each transaction it is the price that changes.
“Investing in a poker game and investing in stocks, at least the way I do it, it’s a very similar skill set.” – David Einhorn
Poker and the stock market have many similarities as you try to take others people’s money by betting bigger when you think you have a better hand and folding fast during losing hands.
“The investing world is a little bit more multidimensional than poker.” – David Einhorn
In investing your not playing against a table of people you are playing against all the market professionals. The math and probabilities are set in poker but anything can happen in the markets at any time.
“With poker, you have a resolution of the hand within a couple of minutes. Whereas, even if the thought process in investing is very much the same, you’re looking at an outcome that could be 2, 3, 4, 5 years from when you make the original decision. And the mindset related to that is very different.” – David Einhorn
Einhorn is a long term investor and trader placing trades and investments with holding periods of years. The longer your holding period when you are one the right side of a trend the bigger your win. Conversely the longer your holding period when you are one the wrong side of a trend the bigger your loss.
“We believe in constructing the portfolio so that we put our biggest amount of money in our highest-conviction idea, and then we view the other ideas relative to that.” – David Einhorn
Einhorn believes in trading the biggest position size in his best idea and then sizing other positions around his biggest bet.
“One of the best investors around, Joel Greenblatt, has written a popular, charming and funny book about investing in great companies at low P/E multiples. To simplify an already simple book, great companies are generally measured as companies that can generate lots of profit without requiring a lot of capital. This means that they have high ROEs.” – David Einhorn
A stock with a low price to earnings ratio and a high return on equity is a great value for investors.
“A 99% Value-at-Risk calculation does not evaluate what happens in the last one percent… This is like an airbag that works all the time, except when you have a car accident.” – David Einhorn
If you have a 1% risk of ruin it is still far too high, as you will eventually blow up your account. You have to reduce your risk of ruin to zero for your trading or investing model.
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