All right, welcome back. Finding the best opportunities on both the long and short side of the stock market has been David Einhorn's forte for the past three decades. He's also been a fixture at Zone from its inception. The Greenlight Capital president joins us now live. It's good to have you back.
It's great to be here. Thanks.
Speaking of having you back, you keep coming back. And you've been here for, if not all, 31 years, certainly the majority of them. Why?
Why? I missed the first five.
Why is this so important to you?
I've always enjoyed it. I enjoy feeling like I can pitch an idea. It forces me to organize my thoughts, figure out what I really want to talk about. I enjoy the presentation. I enjoy the cause. This home foundation has just been absolutely amazing and I feel very lucky to be invited every year.
So, we just got you off stage in which we watched your presentation in which you talked about a handful of stocks. None of them are first reveals, let's say that here, but why did you choose Acadia, Centene, Floor & Decor, our parent company Verisk, which you're a new shareholder which you revealed in your prior letter, it's good to have you on board, and Victoria's Secret? Why those chosen to talk about here?
It was kind of a theme within our portfolio where all five of these companies are companies that have sort of underperformed or there's a lot of problems with or thought to be problems, and there's an affirmative plan by the management teams to improve and transform them into something a bit different than what they are today. So, it's five stocks really with a similar theme.
Put me inside of your psyche, I guess, when you do what you do. Is that a central theme that drives you as a stock picker? You're looking for dislocated situations, things that you feel are underappreciated and undervalued in an industry, by the way, as you've talked about in the past, in terms of value investing is all but gone away.
Yes. And we're looking for misunderstood. So where we can have a difference of opinion from what we consider most other people's opinion to be.
So, in your April letter to investors, you said that you were quote putting capital preservation at the top of our priorities. And you wrote the following: With so little downside priced in, we're willing to risk missing out on a possible recovery to position ourselves to play more offense should one of the downside scenarios materialize. I mean, is that you saying that you think this market's wildly overvalued?
Well, I have thought the market is very highly valued for a few years honestly and certainly playing defense over the last six weeks has not been the best position and we have not really participated in the V-shaped like recovery that has happened. I think the market as a whole though when you look at on any sort of historical measure it's very very pricey and sooner or later I think we'll wind up with a better opportunity.
You spent several pages, by the way, of that letter talking about the war and oil prices, the president's negotiating strategy. It was pretty clear that you thought when the war broke out and oil spiked that the stock market was going to have a much bigger decline and it hasn't. Why do you think that is?
Well, actually, I thought I tried to explain in the letter why it didn't. And the reason is investors have been so conditioned over the last number of years that every decline is always met with a rapid and aggressive response by the authorities and you wind up with sort of a checkmate or V-shaped recovery. And so people are conditioned to not sell when things seem troubled. So if you sold during COVID that turned out not to be a great thing. If you sold in 2022 or 2023 those were not such great things. If you sold over the tariffs last year, that turned out not to be a great thing. And so people who were inclined to make those kinds of sales, they're mostly not managing money anymore. And so people who are remaining in the business, they're very anxious to not sell into panics or negative news. And so when the war came, the market fell much less than one would have thought if you said, gee, oil's going to do this, and this is what's going to happen geopolitically in the world. And so far, that seems to be working yet again.
It seems to be the case because investors seem to be focused on the bigger picture, if you will. The fact that earnings are much stronger than people thought they would be, that the economy appears to be hanging in there and even the labor market by virtue of the most recent jobs report seems to be better than a lot of people had expected. Are you saying that are people wrong to focus away from the spike in oil, the fact that inflation is still elevated and focus on earnings which have been historically amazing?
Well, some of the earnings have been more historically amazing than others. There's been a big boom in like semiconductors, right? And it's a really weird dynamic because you have like the price of a DRAM goes up a lot. So, Micron makes a lot more money. And you think for a minute, well, who bears the burden of that cost? Well, it's the people buying from Micron and that's like Meta, Apple, and people like that and those stocks aren't going down. And the reason I think is because when they're buying that DRAM at the higher price to build their AI data centers or whatever, that doesn't hit their P&L anytime soon. They amortize that cost over many years. So, you have a thing where no economics has been created. Micron makes extra money. Meta or Amazon spends more money. So, it's just a transfer from one to the other. And yet, right now, both stocks go up.
So how does that work into the context of how you think about what's happened with the AI trade? I mean there was a period of time.
Yeah. Well, you know, it's almost irrelevant to us. You heard the types of stocks we're involved with today in the presentation and none of them are sensitive to this kind of a dynamic.
Sure. But I'm thinking about, you know, there was a time where you were writing about a bubble basket, right, within the market. And I'm thinking to myself, like Einhorn must be looking at this market right now and assembling a bubble dump truck to fill. Are you doing that?
We don't really talk about our individual shorts, but I will even say the bubble basket we got out of about four or five years ago now, and I don't have a bubble basket or anything resembling that in the portfolio.
Do you feel like this period of time is any way like the late '90s? How would you assess that?
