David Einhorn Tells His Clients: "This Must Be Frustrating To You" - Full Greenlight Letter

In his latest quarterly letter to clients, Greenlight Capital’s David Einhorn reported that the funds declined 1.6 percent in Q4, bringing the total 2017 return to 1.6%, far below the S&P's 21.8% and does something few hedge fund managers do: apologize to his clients, saying "this must be frustrating to you, our Partners. It is certainly frustrating to us."

As he often, Einhorn begins his letter with a sports reference, only instead of his preferred pastime, poker, this time he uses fantasy baseball:

David began playing fantasy baseball in 1985. In fantasy baseball you draft a “team” of individual players from different real-life major league teams at the beginning of the season and compete against teams picked by your friends. The player whose team does the best across a variety of statistical areas wins. In the pre-internet and even pre-ESPN Baseball Tonight days, you tracked players using newspaper box scores. Unless you saw the game, there was no other easy way to find out how your players did. To get a clue, you might get the scores from the local TV news. If you owned the best hitter on the Blue Jays and you saw the Blue Jays scored 10 runs, there was a good chance that the next day’s box scores would bring good news for your team. A teenager could fall asleep to that kind of happy thought.

However, once in a while the morning box score would reveal that despite the Blue Jays scoring 10 runs, your slugger had an uneventful and useless 1 for 5 game. It’s disappointing and feels worse than if your player had the same result in a game where the Blue Jays were shut out (unless you are also a Blue Jays fan). And, it doesn’t matter if  your player was swinging well and hitting the ball hard every time or whether his evening was marred by ugly strikeouts, pop-ups and double plays. 1 for 5 is 1 for 5. Fantasy baseball only counts the statistical results.

Why the analogy? Well, because as Einhorn admits, "Our quarter and year felt just like that" and explains:  "We had a non-descript result in a period where it seems like most around us did much better. This must be frustrating to you, our Partners. It is certainly frustrating to us."

And, yet, as we were in the batter’s box so to speak, it felt like we were swinging well and hitting the ball hard. We just didn’t deliver a satisfactory result on the scoreboard. There were plenty of nights we happily went to sleep with company results that matched our non-consensus expectations, but it didn’t translate into a win the following day."

What kept a lid on gains? Well, when you are short some of the biggest "bubble stocks" - which crushed it in 2017 - there will be several. He explains:

The biggest losers for the year were our short positions on the “bubble basket” and Caterpillar (CAT). It’s tough to look at full year losses on Amazon (+56%), athenahealth (+26%), Netflix (+55%) and Tesla (+46%) when we believe all those stocks appeared priced with little margin for error entering the year, and none executed well or met fundamental expectations in 2017. CAT did reduce its cost structure and benefitted from a modest improvement in demand, which led to a series of quarters that exceeded expectations. However, CAT’s current stock price projects a rebound in sales and earnings that is unlikely to occur given the end-market conditions in mining and energy.

So now what? Well, it's time to look forward according to Einhorn, who says that "it’s a long season and we are ready for the next game. Let’s see what happens."

But before that, one more mea culpa from the hedge fund manager who recently warned  that  "None Of The Problems From The Crisis Have Been Solved." Of note: the ongoing hurdles that value investors everywhere have to face:

Despite it being a good year in the market, it was a challenging environment for our investment style. We do not mimic any index and we can think “outside the box.” We have a value orientation and we take comfort from the margin of safety afforded by the low valuations of our long investments. Though most people understood our last quarterly letter as tongue-in-cheek and while we certainly don’t believe value investing is dead, it is clearly out of favor at the moment. Last year the Russell 1000 Pure Growth Index outperformed the Russell 1000 Pure Value Index 38% to 4%.

That said, Einhorn hopes to stick it out, and "while it feels like we have been running face first into the wind, we don’t intend to capitulate and are sticking to our strategy of being long misunderstood value and shorting 'not value.'"

Some other highlights from the latest Greenlight letter:

  • Took small position in Twitter in the fourth quarter on the potential for future revenue growth; Shares of Twitter briefly erased losses on the news
  • Took small position in Ensco as shale oil supply growth will unlikely be able to meet global demand, leaving offshore drilling to fill the gap
  • Initiated large long position in Brighthouse Financial with shares trading at 40%-50% discount to similar companies with normal capital return policies
  • Repurchased stake in Time Warner when the stock fell in response to the U.S. government opposing sale to AT&T; "we think that the Department of Justice has a weak anti-trust case and the merger is likely to go through"
  • Exited positions in Hewlett Packard Enterprise, Rite Aid, VanEck Vectors Gold Miners ETF, ISS A/S and "closed an unsuccessful short in Deere"
  • Biggest losers on the year were short positions on "bubble basket" and Caterpillar; says General Motors remains significantly undervalued
  • At year-end, the largest disclosed long positions in the Partnerships were AerCap, Bayer, Brighthouse Financial, General Motors and gold. The hedge fund had an average exposure of 107% long and 66% short.

Full letter below:

 

Comments

HUGE_Gamma Tue, 01/16/2018 - 12:34 Permalink

Don't worry.. when this fund goes under he'll start a new one with the new and improved 3/30 fee model.. he's a "Superstar!" and investors will flock into it for superior returns.

YUNOSELL HUGE_Gamma Tue, 01/16/2018 - 12:37 Permalink

Those are some LTCM fee structures there, so they better be worth it until their not (ie. going from too-good-to-be true profit returns to where it's discovered they really are too good to be true)

 

They should use the best excuse ever -- We believe we are still correct in our fundamentals, we were only incorrect in our timing!

In reply to by HUGE_Gamma

LawsofPhysics Tue, 01/16/2018 - 12:36 Permalink

LOL!  Whatever.  When all fiat money dies, all these useless paper-pushing middlemen better have some tradable skills or they will be turned into fertilizer.

In the meantime...

"Full Faith and Credit"

eclectic syncretist LawsofPhysics Tue, 01/16/2018 - 13:17 Permalink

Let me tell you a little somethin-somethin about valuations davey boy. Ain't none of these stocks really worth a shit. It all comes down to what the Banksters have fooled people into believing what they are worth. So what you have to do is figure out how much does the Federal Reserve have the investors fooled, and then you'll be able to estimate what the populace is willing to pony up at that time. The rest is just smoke, mirrors, and printing presses.

In reply to by LawsofPhysics

khakuda Tue, 01/16/2018 - 12:39 Permalink

This is a central bank traders/speculators market where the weak stuff gets weaker as people keep folding their hands to put it into the hot stuff at ever higher valuations.  Valuations don't matter until they do.  If he is still in business, he will have a good year...eventually.

Soul Glow Tue, 01/16/2018 - 12:40 Permalink

Unfortunately there are still people who don't understand the dollar is hyperinflating.  It should be obvious but people can't wrap their head around the reserve currency returning to the trash bin of history like so many before it. Those who have made their wealth using the dollar fiat system dare not bite the hand that has fed them  The history of the hyperinflation is lengthy, beginning with JP Morgan creating bank runs to usher in the Federal Reserve banking system, FDR stealing gold from US citizens, then a long run of strength while the MIC built up across the world, finally going into full fiat mode when Nixon closed the gold window.

Since then it has gotten worse as debt has been leveraged on the head of people via governments and corporations.  Now the dollar as a funding mechanism is digging a grave more than it is supplying funding.  It is no longer the backbone of wealth but the ass of debt.

If it isn't obvious then look at gold since 9/11, or stocks since banks lost and then were given trillions from the central banks in 2009, to bitcoin going hyperbolic in the last few years.  Everything is hyper inflating, and investing in anything is better than holding the dollar.  The King is dead and has been for years.

DipshitMiddleC… Tue, 01/16/2018 - 12:43 Permalink

hes stuck in the past when the price action was determined by buyers and sellers (participants) and not by the plunge protection team

 

dude should just return his $$ to investors and turn his shop into a prop shop

 

 

small axe Tue, 01/16/2018 - 13:33 Permalink

so it's either bad breaks in baseball or the dollar joining history's trash heap of fiat and the US beginning to assume its rightful place as hyperinflating investment shithole, that's my excuse.

 

nuerocaster Tue, 01/16/2018 - 14:10 Permalink

Translation: Either drop the aspergers and hire full blown sociopaths or do it yourself.

Einsteinhorn shorted the British Empire after Yorktown. But that was back in his days of fantasy Croquet.

TrustbutVerify Tue, 01/16/2018 - 15:58 Permalink

The reality is valuations are moving through a long period when time has slowed down - like swimming in cold molasses - caused by QE, phony non-market low interest rates, and the now, following the previous precedent, that the government will bail out another calamity.   

Prices based on quality and valuation will be back, likely with a vengeance.  Patience.  

Everyone feels they must dance while the music plays.  (Par-tay!)  But there will be more than a one chair shortage when the music stops.