Anticipating Einhorn’s Book

If you want to be a successful investor, Warren Buffett and Charlie Munger have laid out the basic mechanism you need: read, and read all of the time. Now, under this mandate from Warren and Charlie there is a tremendous breadth of material that investors need to consume; magazines, newspapers, articles, annual reports, and importantly, books.

There are a few books that every investor needs to read, and I’ve added those that I put in said category in the box to the right entitled “Books All Investors Need to Read.” In my unqualified opinion, those are the essentials, the classics that every investor has to read and re-read. There are dozens more that also hold tremendous weight, but if I had to pick the most important investment books as it pertains to my own philosophy, those six do the job nicely. You start with Graham, move to Buffett & Munger, and end with Pabrai’s modern treatise. Of course, that all needs to be supplemented with other investment readings, financial history, general history, biographies, and other works to fill out your base of mental models, but those are the “Investing 101” books, in my opinion. I’d add to that Phil Fisher’s Common Stocks and Uncommon Profits.

I also find one type of book tremendously interesting: books written by former or current investment managers, detailing their experiences in the markets. Beating the Street, John Neff on Investing, Market Wizards, Reminisces of a Stock Operator, these are just some of the awesome examples of books that come straight from the source. Another class of books that I tend to read is those detailing financial events or periods in history that have some special importance. Two terrific examples of this class of financial literature come to mind: When Genius Failed, detailing the LTCM crisis; and Irrational Exuberance, detailing the tech stock bubble.

Thus, when I received a regular e-mail that I get from Whitney Tilson (of T2 Partners and Tilson Mutual Funds) that mentioned David Einhorn was releasing a book soon on his battles with Allied Capital, I was much intrigued. The book is entitled Fooling Some of the People, All of the Time. If you aren’t familiar with Einhorn or the situation, he manages a $5 billion hedge fund called Greenlight Capital, a tremendously successful long/short fund with value investing roots.

In 2002 Einhorn began shorting a company called Allied Capital with the belief that their shoddy accounting practices would soon come to light, causing the stock to plummet. He made a presentation at a local charity event on his favorite investment idea, Allied Capital. Since then, not only has the stock not plummeted, but Einhorn has been investigated by the SEC, threatened by the company, and generally put through the ringer. If this story sounds familiar, Bill Ackman’s more recently publicized battles with MBIA and Ambac roughly parallel the story; although his has turned out successful where Einhorn’s has not.

Here is Whitney’s review on Amazon:

"David Einhorn's new book about his long-running battle with Allied Capital is an amazing book. More than just an investing book, it's an investing novel, with good guys and bad guys and clueless, gullible and conflicted investors, regulators, Wall St. "analysts" and media. I stayed up all night to read it.

The review by George Anders in the Wall St. Journal recently missed the point. Anders focused on Einhorn, highlighting his tremendous track record and saying he's gutty, tenacious, patient and disciplined, but that's not the story! The real story is what Allied Capital has done and the utter failure of regulators, investors and the media to do anything about it. I don't see how it's possible to read this book and not come to the conclusion that this company has done -- and continues to do -- all sorts of terrible things, but rather than expressing an opinion on this, Anders makes it seem like a he-said-she-said tempest in a teapot and, reading between the lines, seems to be saying that because the stock hasn't plunged, that Einhorn's investment thesis has been proven wrong. It hasn't -- but it can sometimes take many years.

(Full disclosure: Funds I manage are short the stock of Allied Capital and I'm mentioned briefly in the book.)”

I don’t have to tell you that I have the book ordered and on the way when Amazon releases it. It seems to promise a story full of fear, greed, manipulation, and battling intellect. Not only does it give a look at Greenlight’s research process, interesting in and of itself, but it looks to give readers an inside look at the workings of Wall Street, and the dangers that can come with activist-style investing. Public crusades can hurt badly because companies do not like to made look like fools by some rich hedge fund manager.

To get a taste of David Einhorn's thinking, I'd highly recommend that you read his recent speech called Private Profits and Socialized Risks in which he condemns Wall Street investment banks for reaping profits during good times and asking for help during bad times. A fun fact there: Wall Street banks typically pay out over half of their revenues as compensation. That is a staggering figure.

Once I get through the book, I’ll be sure to post my impressions and a review; needless to say I don’t think I’ll come away disappointed. If anyone is interested, I’m currently reading a book called The Origination and Evolution of New Businesses by Amar Bhide. Mohnish Pabrai recommended the book some time back, and as I read it I see why; many of his investment theories come straight from Bhide's work on entrepreneurship. For instance, the concept of "heads I win, tails I don't lose," that constitutes such an important part of the Dhando Investor framework, comes straight from Bhide. I would recommend the book to those looking to learn more about how successful entrepreneurship defies the conventional nonsense of "risk-taking." In fact, most successful entrepreneurs take little personal financial risk, for a number of reasons. I always like a good slap to the face of conventional wisdom.


Quick Update 4/28/08: Check out WSJ's Article on Einhorn and the Allied Capital saga.