So David Einhorn is the Dumb Money on Apple

EconMatters's picture

By EconMatters


Think before going on CNBC


This was the more revealing takeaway from David Einhorn`s whining on CNBC over his stuck Apple position, and throwing Amazon under the bus in the process. The more these guys go on air, whether it is Carl Icahn, Bill Ackman, or David Einhorn the less attractive these guys appear for managing money. 


Can`t beat the S&P 500


Any investor in these funds would be better off just pegging to the S&P 500 via some instrument, and avoiding the extra drama, fees and headaches that go along with these investment queens. Augment this strategy with a little common sense market timing by going to cash at obvious overbought conditions, change in monetary policy, Geo-political events, or macro-economic sea changes and you will probably outperform these guys as well.



A classic short setup


For an activist that is so fond of finding good short ideas, the fact that David Einhorn and Greenlight Capital happened to miss the best short setup of the year is hilarious, and it is not something I would want to advertise on CNBC.


Further Reading - Yen, Apple, Netflix and VIX 

At $700 a share, was that a growth or value play?


The bigger question to come out of all of this Apple Cash nonsense is why didn`t Greenlight Capital sell out of their entire position at $700 a share? The next question is why wasn`t GreenLight Capital shorting Apple at $700 a share? Did they view Apple as a Growth or value opportunity at over $700 a share? 



Positional bias always clouds judgment


Under any analysis, even the most glowing of circumstances, Apple was going to pullback at least $80 a share from $705? As the “Smart Money” on Wall Street, and an opportunistic short player why didn`t Apple at $705 a share scream to your team at GreenLight “this is free money” like the rest of hedge funds the last four months? Did the phrase ‘Never fall in love with your investments’ come to mind? 


The final question for GreenLight: Where was your stop loss on the position? Seems like if anything you added to your original position on the way down in price versus protecting profits via a proper stop loss. This isn`t amateur hour at the local investing club, you`re supposed to be smarter than that strategy! It is a sub optimal strategy from an investment and trading theory standpoint, and GreenLight is a hedge fund, right?


Finally, GreenLight cannot point to the fact that they have owned Apple since 2010, and their 3 year returns are great, Hedge Funds are judged upon annual returns. The accounting books close each year, and 2012 returns are one accounting period, and 2013 is an entirely different starting point for analysis. The question for investors is could Greenlight have protected their capital better in 2012?


It should have been cause for alarm that so many Institutions and Hedge Funds were involved on the same side of the trade for such an extended period. The prototypical ‘Over-Crowded’ trade scenario.



Group Think at GreenLight Capital


It is obvious that there is too much group think at GreenLight Capital, and they need to broaden their investment spectrum with a healthy dose of diversity with some new analysts to fully vet and question trading themes and ideas. 


All Tech firms become value plays or they go out of business


GreenLight Capital as an investor in Apple since 2010 should have seen the natural progression from a high flying growth machine to a slower growing mature value tech company a mile away. This is a natural occurrence and inevitable in the tech industry. 


It is going to take more than 4 months to re-price Apple after 10 years of Mega-Growth


Yeah Apple is sitting on a pile of cash, but they also were being valued like a momentum growth stock prior to four months ago. Good luck figuring at what price Apple should become a “value stock”! If there is one thing that in not rewarded on Wall Street it is value, see GE, MSFT, INTC and a graveyard of much cheaper “value stocks”. 



Turning a ‘Growth Trade’ into a ‘Value Trade’


David be honest with yourself you were not investing in Apple because they were a value stock, you were on that growth gravy train from 2010, and you didn`t know when to get off. Now you’re turning your growth trade into a value trade, the quintessential sign of a losing trader on Wall Street. 



Does GreenLight have a Technical Analyst on staff?


That is not something I would want to advertise on Wall Street, that I fail to read a technical sell signal on a chart, and let a huge profit just slip away for my investors. 


Blame Shifting


But I know it is all about the money, you screwed up, and you would rather embarrass yourself, but somehow get that money back for investors instead of asking yourself the hard question: why did we make the mistake in the first place, learn from it, and quietly move on to other investment ideas.


Falling into the classic bag holder category for a Hedge Fund wanting to attract future assets under management where reputation is everything; weighing near-term profits versus long-term reputational damage from a cost benefit standpoint should probably have overridden any decision to go public with this Apple Cash issue. 


Diversity of Analysts


That is the problem with a small shop like GreenLight, they often lack enough diverse views within the fund to properly question trading ideas, and often fall into group think on trading themes. 


Is Publicity always Good?


Did they even consider the negative ramifications of going the public route on this issue? In the end it is all about raising capital in this business not whether you are right or wrong on a single investment idea. 


GreenLight just advertised to the entire investment world that the core of their analytical expertise is flawed, and no better than the Gene Munsters of the world. A cab driver could have made money in Apple on the way up, the smart money knows when to get out, and make money on the way down. 


Cost/Benefit Analysis of Reputational Damage


Those are the firms that the institutional and feeder funds want to manage their money. This is why SAC Capital has been so successful over the years raising money because they were viewed reputationally as the ‘smart money’. No wonder most of the hedge funds when accounting for fees vastly underperformed the S&P 500 last year; there is a lot of ‘Dumb Money’ on Wall Street!


Maybe RedLight Capital is a more apt description 


From a reputational and branding standpoint GreenLight Capital sure looks like the “Dumb Money” in Apple, and I would think twice about sending any money their way in the future!


Further Reading - Apple Price Target: $50 Stock By 2016


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WTFUD's picture

A couple of points from someone with no skin or real expertise in the game;
Apple, never purchased one and not because i thought there was a better phone/ ipad but just felt that having to upgrade every 6 month (maybe slight exaggeration ) is not customer friendly plus with some serious shit going on in this world over the years seeing people sleep outside the stores all night to must get one or die was stupid!

Apple came back from the dead to achieve huge success and nobody can begrudge that! Maybe with the sitting cash they will be able to regain ( not that they need status ) innovation leadership. Loyalty i admire; would rather lose 10% with someone i liked and was straight with me than make 10% with a dick like Einhorn. His conduct is for me All that's wrong with leadership today top to bottom; ego. Success is not all about the greatest return but sharing the moment with the team or gang even in a small start up.

ebworthen's picture

Apple is done; it will be a slow decline from here.

The Copernicus of Cupertino is gone, and with him the soul of Apple.

Penny Pincher's picture

Did y'all know Einhorn means Unicorn in German?

Atlantis Consigliore's picture

Lets see Hedge Funds massive long Apple;  collapse

Hedge funds massive long Gold;  is Gold the next crowd collapse investment.

Gold Overbought  (long with the central banks, they re always right. )  

Silver Overbought

What do you guys think too many on air tv commericals with washed up actors flying in planes saying Gold, whats in your wallet. ?   LOL



Lets Hang Parliament's picture

" a little common sense market timing by going to cash at obvious overbought conditions"

And your re-entry point please?

Shipwrecked on the laughter of the Gods comes to mind...if only it were that easy

Bam_Man's picture

they were being valued like a momentum growth stock until four months ago

You mean when the trailing P/E ratio was 15 instead of 10? Please....


e1618978's picture

Even at $700, Apple was priced as a value play rather than a growth company.  At $700, Apple had a P/E of 13 ex-cash.

There isn't any other stock market investment that I can find that is *more* of a good value than Apple, tbh.

WTF_247's picture

If you have been around the markets for any period of time you would know that PE can be deceiving.

Stocks that are in multi-year uptrends, repeatedly making new highs and trading with a very low PE vs others are a huge warning sign.

In 2007 the PE of most of the homebuilders were between 5 and 10.  They were monsterously crushing it quarter after quarter on earnings ... until the housing market crashed.  There was a reason the PE's were so low.

The market is very astute at pricing stuff based on perceived future risk, both in execution and in competition.  

As Apple grew its market share and expanded globally, at some point they start to run out of new customers.  It gets harder and harder to repeatedly increase sales every quarter - the market gets saturated. They also get very, very determined competitors who want a piece of the action. After all - Apple did not "invent" the cell phone - thier success came on the backs of other, less nimble competitors whom they stole sales and market share.  Nothing wrong with that, but it is foolish to ever believe that is a one way street.

APPL longs got a taste of that now.


greensnacks's picture

Homebuilders didn't have that same pile of cash to go with their low PE. And while Google and Samsung look to be better bets moving forward, there should still be plenty of opportunities for Apple to grow via China Mobile and their 700 million customers.

NotApplicable's picture

Isn't 70% of that cash sitting outside of the US?

e1618978's picture

Also, stop losses and technical analysis are both a steaming load.  With stop losses you end up with a loss most of the time.

monopoly's picture

Hindsight is always perfect. Lets move on.

williambanzai7's picture

Carl Icahn has been making chumps of the rest of Wall Street for decades and theater is part of his modus operandi. He wouldn't manage your money if you begged him.

Jumbotron's picture

Fuck you Einhorn.....crybaby Capitalist.

Mercury's picture

There probably isn't anyone currently on Wall St. whom I have more respect for than Einhorn but this business just smacks of yesterday's-trade-is-today's-"investment". And to then try and talk your way out of it in public (*cringe*). Bad form.

Take your lumps, go home and try again.

Moe Hamhead's picture

Even sheep get there just dessert.

pemdas's picture

I would put my money on David Einhorn over EconMatters.

CheapBastard's picture

It stinks to be the last one standing when the music stops.

Hedgetard55's picture

Goes to show there is no real "smart money", only people with inside information beat the market.