A friend pointed me to the book Fooling Some People All of the Time by David
Einhorn, president of the hedge fund Greenlight Capital. The book details Einhorn’s short position in
Allied Capital. At first I was hesitant to read it because most of my reading
is more macro than micro (as you could probably tell from this blog). However, it turned out to be a great read and
even read more like fiction.
Einhorn goes into detail why he took the position (egregious
accounting, loan fraud, ponzi scheme), how the position played out (longer than
he anticipated, same Allied practices continued), his struggles along the way
(SEC accusations, phone records stolen, ad hominem attacks), and what
ultimately happened (he was right, made a lot of money). Rather than write a book report, I figured I
would highlight some of my key takeaways:
- Trust Yourself. Executives, analysts, journalists, regulators all failed shareholders.
- Short Selling is Good. I always thought this, but if you have beef with it this book is worth the read to see why it's good. Essentially short sellers help uncover what everyone else (again, executives, analysts, journalists, regulators) fail to see. There are other reasons why short selling is good for markets, but won’t get into detail. Just know Spain banning short selling won’t work.
- When a Company Attacks Short Sellers, Bet on the Latter. Again, this is something I have thought for awhile. First, why would a company who has nothing to hide attack shorts? Ultimately they know the market price will reflect the value, if anything it gives executives a chance to load up on cheaper shares. Shorts don’t bankrupt a company or lead it to have bad business practices, the company does. It’d be like blaming the doctor for the diagnosis.
- Trading Stocks is Hard. The amount of research Einhorn did on this one company is astounding. Just know when you buy an individual stock, the person selling it you is probably very astute.
- Markets Aren’t Efficient. This is obvious. If markets were efficient Einhorn couldn’t have made any money as Allied would have been priced under $5.
Those were just the first five that came to mind. I have some more, but will leave it at
that. Anyway, it’s an entertaining,
although at times frustrating given the lack of concern against Allied’s
practices, story.
Here
is a link to the book. Also note,
Einhorn and Greenlight donated $7m to charity from trading profits on Allied.
