 David Einhorn went from superstar to loser. This video will be about value investing, long-term investing, performance, volatility and we'll look into his portfolio, his current holdings, his mistakes, his strategy, his future outlook and his great past performance. Good day, fellow investors. My name is Venkarlin. For those who don't know me, I manage the stock market research platform. I have a small investment fund. I'm a book author and today I want to share my views. I want to learn from David Einhorn. He is a great investor who has beaten the S&P 500 for the first two decades of his track record but has been struggling lately and hasn't really beaten the S&P 500 since 2010, I think. So let's look into what went wrong in the last few years. Why are investors pulling out funds? What were his wrong ideas? His short Tesla, he was short Netflix, things like that. How does he approach value investing? What's the core to value investing and should you be a value investor or should you follow the herd? Something else. So just the topics, returns, what went wrong, current portfolio, strategy, history and future. Things are not that good lately. His fund is down 18.3% year to date from the second quarter report. So they experienced a loss of 18.3% while the S&P 500 returned 2.6%. That's a terrible, terrible performance. However, over the long term, two decades, he has really beaten the S&P 500. From 1996, his annualized return was 16.5% up till 2016. However, since then, things have changed. 2015 was very negative, 20% down. The return in 2016 was a positive 8.4%. 2017 was just 1.6% positive and 2018 started terribly with a loss of 18.3%. So he is lowering his annualized performance, but he is still very, very positive. He is still one of the best investors out there and he is still destroying the S&P 500 over a long term. However, investors, markets always focus on the short term and everybody is writing off David Einhorn. Should we write him off too or there is still so much to learn from him? Let's see. What went wrong? Everything started to go wrong in 2015 when he was convinced of Sun Edison, but that turned down to be a fraud, which eventually went bust and shareholders, Einhorn, being one of them, lost money. Another example is Brighthouse Financial, a company that is a spin-off from MetLife. If you have read The Margin of Safety, you know that spin-offs are an excellent investment for value investors because there is usually a lot of value, but the market needs time to adjust to spin-offs. They don't like spin-offs because then it's a new company. It's not the old company anymore and there is always great hunting territory for value investors in spin-offs. However, this Brighthouse spin-off from MetLife and Einhorn saw earnings of $8 per share, $9 per share, so he was happy with the buying price of around $67 he bought in. However, the stock is now at $41, which didn't work really well. That's a big loss. Buffett's investment in a spin-off and also Klarman's investment in a synchrony financial worked much, much better and they are up 20% since the spin-off. Now, the stock Brighthouse finished the quarter at $47 and that has been the biggest loser in 2018-4. Einhorn, the key is that it trades at 37% of book, five times earnings and they think that the market sees it that there is either a large capital hole or an enormous reserving problem. They don't see evidence of that. However, the company would suffer in large equity sell-off, but so would almost every stock in the market, according to Einhorn. The trigger that separates this company from other insurer companies that this company doesn't yet pay a dividend. When they start paying dividends, buying back stock as everybody else is doing, that might be the catalyst that triggers the stock price up eventually in the future. Einhorn is waiting. For now, it's 20% earnings yield, which becomes impossible to ignore once the earnings returns to shareholders in the form of cash dividends and buybacks. He is also a long general motors, his biggest position. He based that on soft banks investment in their technology, in their growth and he thinks that the company is undervalued in comparison to other companies. I personally wouldn't invest in any car maker in the late part of the economic cycle because there might be a lot of pain ahead in the short term, but markets always look short term, even if there is long term value. We'll see how that ends up. But speaking of car makers, on a personal note from Einhorn, David is happy that his model as Lee's ended. There were growing problems with the touch screen and the power windows, and he is excited to get the Jaguar i-Pace. However, they don't like Musk and I'm sure Elon Musk doesn't like Einhorn. He's calling Musk as erratic and desperate, as bravados that push up the stock price. He is short Tesla, which is another big loser for him. But fortunately for Einhorn, Tesla is down from the 420 that Musk announced. If it becomes the 420, that will be even more pain for Einhorn, even if from a fundamental perspective, he's completely right. More bad news. Einhorn has been short also on Netflix for a while, but he covered his position at 281. His strategy might have been right, but his timing was definitely wrong. And we have seen Netflix go down from above 400 to 322. Further, they made an investment in Altis Europe that is a Dutch company. They bought in at 3.49, so for my Dutch viewers, he's also investing in Europe. And now the stock price is at 2.4, another bad investment. So when some things happen, investors pull their money out from their funds. Einhorn under pressure as green light shrinks by 3.2 billion. This was in 2016 and there have been more money pullouts since then. So really, really a bad time for Einhorn. What are the reasons? Of course, the mistake that we just discussed, but other theories include getting older, changing lifestyles and an unwillingness to adapt to new market environments. That is what everybody has been criticizing Einhorn for. And then value investing has been tough over the last few years. And this is exactly what makes this debate very, very interesting. If you look at the portfolio set Klarman in the 1990s for six years, he has cumulatively underperformed the SAP 500 by 50%. SAP went up 120%, Klarman went up 60%. That's terrible performance. However, 2003-2004, Klarman was the winner. Walter Schloss also, 10 years he underperformed the SAP 500, 10 years only to come out ahead over the long term, beating the SAP 500 over his 50 year career by 5 percentage points per year. So value investors have to accept underperformance over a few years. They don't beat the market always, but over the long term, they might beat the market. They probably will. I don't know if Einhorn will, I don't agree with some of his thesis, but on average, value usually beats growth. And Einhorn describes this perfectly as value investing strategies are performing in the bottom one percentile since 1990. So over the last 30 years, this has been the worst year for value investing. I'm happy. I'm ahead over the last three years. I've done, of course, much, much better over the past 16 years. But I hope that over the long term, when the real returns will be measured, I will be ahead of the market, especially of this market. So let's be patient, continue to invest with a margin of safety, with the value approach. And I think that whenever you buy value over the long term, you do good. Let's look at the current portfolio, top holding, general motors. These are only U.S. holding, so the ratios are not that correct, but a good overview. Brighthouse, financial, the second Milan, the pharmaceutical company, Greenbrick Partners, a localized home builder in the States, and then RCAP Holdings. There is a video about RCAP that I made last year, if you're interested in airline exposure. So the keys here are that it is a very, very concentrated portfolio. The first five positions make 57% of the portfolio. The first 10 positions make 80% of the portfolio. The rest you can call noise. Also on the short side, there should also be concentrated bets like Tesla in this case. Now, with such a concentrated portfolio, you should not expect linearity. You should not expect slow volatility. You should expect high volatility. And that's exactly what has been going on with Einhorn. Buffett has had the privilege not to have investors that can pull out funds. That's why he has Berkshire. Einhorn has investors that in a limited way can pull out funds and that is another disadvantage to him. A few bad years and everybody condemns you as a loser. We'll see how he'll end up in the future. Just to touch on some history, which will give you even a better perspective, Einhorn started his fund in 1996 with $900,000, then became famous for shorting allied capital at the SON conference in 2002. That led into a six-year fight with the company itself that was won, but brought only 35 million in profits. Talking about Piric victories. Then he became even more famous for shorting Lehman Brothers in 2007. That was a big win. However, since then he shorted Green Mountain coffee rotors, Chipolte, Athena Held, Martin Marietta Materials, Pioneer Natural Resources, Caterpillar, Core Laboratories, Netflix, Amazon and Tesla. And that's not all of it. The last short was a short guarantee. He presented that in April at the SON conference. However, the stock didn't do that well. The stock is up since then, so another loser for him. So he doesn't really get one right in the last few years. However, the message here is Einhorn has still a track record that has beaten the market over the past 22 years. And I bet you 99% of investors would love to go back there in 1996 and give all of their money to Einhorn and forget about it. So that's one. Number two. Value investing is not linear. Value investing is not stable. Value investing takes advantage of other people's irrationalities and of the volatility. When other people party, value investors get scared. But when other people sell in panic, value investors take advantage. As we haven't seen real panics over the last nine years, value investors couldn't really go for those bargains. So that's one. However, CIA ETFs, CIA index funds in 10 to 20 years. I bet your value investing will be again ahead. However, message number three. Value investing doesn't work all the time and in all circumstances. If it would be like that, then everybody would be a value investor. Value investing really works in a contrarian way and works against what is normal human psychology, herd behavior and chasing what has been doing well. Prospect theory, you buy what did well, not what is the best buy. So it's really against human nature and that's why very few people are value investors. Over the past 90 years, since 1926, academic value investing, not even common sense value investing has beaten growth investing in 94% of 10 years analyzed consequent returns. That's anything, that's all I need to know when it comes to investing. So number four, be patient, be value investor, margin of safety, common sense, be smart about investing and you'll do well over decades. That's the key. 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