Tuesday, October 20, 2009

David Einhorn's Speech at Value Investing Congress (VIC)

One of the nice aspects of trying to solve investment puzzles is recognizing that even
though I am not always going to be right, I don’t have to be. Decent portfolio management
allows for some bad luck and some bad decisions. When something does go wrong, I like to
think about the bad decisions and learn from them so that hopefully I don’t repeat the same
mistakes. This leaves me plenty of room to make fresh mistakes going forward. I’d like to
start today by reviewing a bad decision I made and share with you what I’ve learned from that
error and how I am attempting to apply the lessons to improve our funds’ prospects.

At the May 2005 Ira Sohn Investment Research Conference in New York, I
recommended MDC Holdings, a homebuilder, at $67 per share. Two months later MDC
reached $89 a share, a nice quick return if you timed your sale perfectly. Then the stock
collapsed with the rest of the sector. Some of my MDC analysis was correct: it was less risky
than its peers and would hold-up better in a down cycle because it had less leverage and held
less land. But this just meant that almost half a decade later, anyone who listened to me
would have lost about forty percent of his investment, instead of the seventy percent that the
homebuilding sector lost.

I want to revisit this because the loss was not bad luck; it was bad analysis. I down
played the importance of what was then an ongoing housing bubble. On the very same day, at
the very same conference, a more experienced and wiser investor, Stanley Druckenmiller,
explained in gory detail the big picture problem the country faced from a growing housing
bubble fueled by a growing debt bubble. At the time, I wondered whether even if he were
correct, would it be possible to convert such big picture macro-thinking into successful
portfolio management? I thought this was particularly tricky since getting both the timing of
big macro changes as well as the market’s recognition of them correct has proven at best a
difficult proposition. Smart investors had been complaining about the housing bubble since at
least 2001. I ignored Stan, rationalizing that even if he were right, there was no way to know
when he would be right. This was an expensive error.

Full Speech

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