Break the Playbook with David Einhorn

Well, thanks for having me. It should be exciting.

The hat. The hat. Well, this is what I wear when I play in a poker tournament. And the hat is every time I play, I play for a different charity that we already support. And the hat I'm wearing right now is the Citizens and Scholars hat, which I wore when I just played in the super high limit, super high roller event of the World Series, finished third and won $1,700,000 for them.

I thought third was great.

They are my children's hands. Okay. They are not. So you decide what that is. They're not psychological warfare. I think in poker, it's a game of hands and you want to bring your best hands. So I'm wearing my children's hands. And as I've noticed, they've gotten older and they've made me updated sweatshirts, the hands have gotten bigger. So now I want to have more big hands when I play poker.

Well, I'm getting older and I like to be able to see everything.

I don't know. I think what I do is pretty simple. I don't think I'm spotting things before. I think I'm seeing the same things and maybe just interpreting them different.

You know, when you sit down, the first thing you start doing is you start trying to identify patterns and you try to figure out how people are playing certain hands, how frequently they're playing. And as the information gets revealed, when you sit down, you don't know anything. But after playing with them in these poker tournaments, we'll often play 8 or 10 hours a day with the same people, by the middle of it, you should have a pretty good idea what everybody is up to.

Well, you begin trying to identify patterns in the first two minutes.

But because, you know, somebody plays the first three hands, the person, you know, somebody folds the first 20 hands, you're beginning to already figure out a pattern, and you'll begin to start seeing this sort of stuff in half an hour. But the thing is, is maybe they just got bad cards for 20 hands in a row, and they were planning to play lots of hands. So you have to adjust your thinking as new information kind of comes.

Yes. It's important. It's just as important in trying to figure out what everybody else is doing, to have a self-awareness as to how other people are perceiving you.

Well, I think you'd be surprised how few decisions I actually make. Like, my ratio between trading decisions and naps is much higher towards naps, I think, than people would expect.

Yeah, probably. I mean, I think sense of humor is a lot about just seeing things and interpreting them a little bit different and creating maybe a bit of an element of surprise.

By making the more conservative decision.

Again, I'll choose the more conservative decision, whichever that is. If I'm conflicted.

I tend not to. My instinct is, is if we've lost 30% in something, we must be wrong about it. So we tend to redo the work. Think about it some more. Usually the choice is deciding that we actually did find something wrong and to exit. Or maybe to keep it. Once in a while we will add to it and say, all right, we really did the work here and we really do think we're right and our timing just wasn't perfect and we should size this up more. But I don't want to be in a habit of just presuming that the previous work was right. And now it's the stock price that it's changed. Because if you do that, you're going to create a portfolio where your biggest ideas are the things where you're the most wrong in. And I don't want to do that.

I think the trait of just being very even keeled.

Actually both. That being very even keeled helps make money when things aren't going our way, when things are emotional and the rest of it. I tend to not get too excited when things are going well. I tend to not get too upset when things are going badly, and kind of keeps me a clear head. And I think that that over time has helped. On the other side of that, is sometimes things are really going wrong, and maybe I'm a little too complacent and too patient and too willing to let the noise settle when I should be taking action. So it probably sometimes it helps and sometimes it hurts.

Yeah, we do both. We do both. We don't grade every decision, you know, shortly thereafter. But we get to the year end and we look at what's happened in the portfolio and we look at the results that we've had. And I work with the analysts because compensation comes in. And so there's questions of who did what. And so yeah then you're looking both at, you know, ultimately we're in a scoreboard business. And so we do want to have good results. But we also do want to look at the quality of the decisions and in calculating compensation and stuff like that. It's a subjective thing. We look at it objectively, the numbers and then we subjectively try to see, well, you know what actually happened here.

I mean, I think one of our worst decisions, in terms of outcome, was selling Apple stock. Apple was a very large holding for us for a good number of years. And in fact, it was probably like the most profitable investment that we've ever had at Greenlight. I spent a lot of time owning Apple. It was at six times earnings, net of the cash, eight times earnings, net of the cash, while it was growing 15, 20, 25, 30% and stuff like that and thinking, look at this, we have, I think, the best company in the world. And it's trading at, you know, a half or a third of the market multiple or something like this. And thinking what a wonderful thing this was. And we held it for a number of years, and eventually it began to re-rate. And we also saw the business slowing down at the same time it was rerating. And so when it got to 15 or 16 times earnings, we sold our Apple. We probably sold it right about the same time that Warren Buffett was buying it. So maybe we sold the stock to him for all I know. I mean, he didn't actually show up and say, you're selling to me now, but that may have been the timing seems to make sense. And we know how awesome that has worked out for him. And so Apple was a tremendous investment for us. And we were probably more right than we realized. It really was maybe one of the best companies in the world. And it probably did deserve a consumer brand multiple, like I always argued, I just didn't have the patience to stick around to, you know, to watch that materialize.

You know, there have been a couple of major changes, one of which is, you know, we started out just as a long, short value fund, and it was pretty much all equities. And our view was to focus on micro analysis and just ignore the big picture. And we said if we buy stuff that's cheap enough and misunderstood enough, and we sell short stuff that's overvalued or has other problems, that goes along with the overvaluation, we should do fine over time. And sometimes macro will be a tailwind and we'll just catch an extra boost. And sometimes macro will go against us and it'll be a headwind and it'll just kind of all even out over time. And then we ran into 2008, and I had to just completely redo that thinking, because we did a good job of understanding the first level of the financial crisis, by which I mean what was happening in the financial institutions. And we were short all of them, everybody knows this, but we still lost 18%. And it was because I didn't incorporate a macro view into, so what happens if we have this kind of financial distress within the financial institutions? What does that mean for our industrials and commodity companies and the things we had in the long part of our book? So even though we made a ton on our shorts, we lost even more on our longs. We finished the year down 18%, and I just thought that was completely unacceptable considering we had such a front row seat and so much good insight into what the problems were. So since then, we've had to change the portfolio construction, and I think about both the portfolio as a whole from a macro perspective. And I think about each position also from a macro position. Not everything has to fit in. But sometimes we'll say, all right, well, so let's see if we have some things that are hedging each other. If there's a particular macro risk that we're concerned about like do we already own something that's very similar. So it's not a big quantitative analysis. We're not running like computer programs figuring out factor analysis and stuff like that. But we are trying to just think qualitatively. How is the portfolio positioned for different types of macro outcomes, and what type of macro outcome do we actually expect? And one of the things that made me think that we could actually analyze the macro, was two years before the housing crisis, Stan Druckenmiller stood up at the Sohn conference and talked about exactly what was going to happen in the housing. And I heard this speech and it made completely perfect sense to me in terms of what he was saying. Like, I thought it was all true, but I didn't have any sense that it mattered or could matter in any kind of a timely way that you could implement. So like, if this housing thing was going to go on for another five years, ten years, like Stan could be like completely right. But why miss out on all these great bottom up opportunities? We were long homebuilders and stuff like this at the time. And in hindsight, when I saw what happened, I said, you know, I really should have listened to him and I can try to do that. Like, this is knowable. It's like he wasn't doing voodoo. He was looking at big picture things that were going on and drawing logical conclusions. And so I've just tried to emulate that in my own way.

Well, there's a few things. I think the overwhelming long term issue in macro is the US fiscal situation, which I think is completely not yet under control. The Treasury Secretary says we're going to get to 3% deficit to GDP. That's his plan. And I don't really see how he's going to do that. So far, it doesn't seem like he's made a lot of progress. And I think ultimately everyone agrees that this is not sustainable. So then the question becomes how do you deal with that and when? And we just taken a very long term view. And so this is a long term problem. It doesn't appear to be under control. And so our largest long position in macro, unsurprisingly, is gold. Many people may not know that.

I'm the chairman of Green Brick Partners.

You know, I think the big debate in homebuilding, at least among the home builder companies, is how to structure the balance sheet. And there's been a huge trend towards what they call land-light. So basically, you have all of this land that you're going to put houses on over three years, five years, eight years, whatever it is. And if you can get that land off your balance sheet, it looks like you have fewer assets. And so then you can earn a higher return on asset. And what this has done is I think it's led to a lot of nonsensical economic decision making by our peers because they could borrow money, they've got good credit ratings, they could borrow money at 5% or something like that, maybe 6% unsecured, and hold all this land on their balance sheet and have control over the land and not be worried about the schedules and the rest of it. And instead they go to land banks and they pay 10 to 15% interest, and they put a 10 or 15% down payment down, and they have a takedown schedule. And if it takes longer than expected, there's escalators involved. So it's probably costing them, I don't know, 6 to 8% extra per year to hide this land off of their balance sheet. And if you have an average holding period of, I don't know, two years, when something is in the land bank that's, you know, that's 15%. And if 15% cost increase on the land, which is 25% of your sales price, you know, that's 3-4% of margin that's being sacrificed by inefficiently financing to try to create this notion for Wall Street. And as things slow down, it gets worse because these things have escalators. So if something you thought you were going to take in two years takes you four years because there's less demand and your community didn't build out as fast, then effectively there's penalties. So it gets worse and it adds sort of a pro cyclical component to the problem. You don't like to structure yourself in a spot where things get worse for you when your business gets worse. That's not an optimal way to finance yourself.

Well, it just seems like the younger generation is somewhat less interested in owning a house. There's the view that I was brought up with that I think my parents experienced and maybe even my grandparents experienced - you buy a house sometime in your late 20s, you raise a family there, you get a mortgage, you pay the mortgage every month. By the time you're ready to retire, the mortgage is paid off. You own the house free and clear, you have equity. You can use that to fund your retirement. In the meantime, there's maybe some appreciation in the value. And so this is a savings vehicle in addition to a living vehicle. And I think the younger generation doesn't view it that way. They look at the monthly payment for the mortgage, assuming they have one, and they compare it to the rental payment. And it's like, well, why? Why pay more? Why waste money on a mortgage? And it's just a change, I think, in philosophy. And it's leading probably to more demand for rentals and less demand for ownership.

No, the math still works. Like if you were 28 and you did this, when you're 58, you'll have paid off your 30 year mortgage and you'll own your property, you know, free and clear. So it's totally a behavioral kind of thing. But, you know, I sense the younger generation is just more impatient. They'd rather, you know, speculate in crypto or speculate in stocks or speculate on sporting events and try to build wealth by guessing those things correctly. And some of them will have some success with that, and others will have less success. Buying a house and paying off your mortgage over 30 years, you know, that requires long term patience and discipline, and that might be in short supply.

Well, we do derivatives when we think the derivatives is mispriced or we think the correlation is wrong or we think the tails are unusually wide, or we really want to just limit risk in something. So there's different reasons to use derivatives.