David Einhorn interview notes

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Tuesday, February 28, 2012 by

CSIMA Conference : Value Investing Conference at Columbia (Feb 2012) : Notes 5 of 5

Rare interview with David Einhorn
  • At Greenlight, we don't start with what is cheap? We start with the what is mispriced/misunderstood (Note - This was a big revelation to me about his investing approach.)
  • If it is mispriced or misunderstood, we will see if it is cheap too.
  • Insights about investment process
    • When you are screening for stocks that may be misunderstood, it is important to rule out the false positives quickly.
    • The main thing is to figure out what may be mispriced.
    • We want to understand 
      • what world thinks about the stock. 
      • Then see what we think about the stock is different from it.
      • If it is different, go out and test it.
    • You have to read stuff, think about it and then talk to people.
  • Wisdom
    • Each investment is like a puzzle.
    • Additional quote from another interview with David Einhorn-  “Investing is like solving the puzzles. I think that what you are dealing with here is incomplete information. You’ve got little bits of things. You have facts. You have analysis. You have numbers. You have people’s motivations. And you try to put this together into a puzzle — or decode the puzzle in a way that allows you to have a way better than average opportunity to do well if you solve on the puzzle correctly, and that’s the best part of the business.”
    • In investing you are trying to solve the puzzle. Future is the range of possible outcomes.
  • Sometimes people have agenda in misinforming you, so you have to be careful about it.
  • AAPL - Apple
    • Largest position for the fund.
    • Given the consistent outperformance of APPL stock, I have come to believe that even large caps are inefficient.
    • Ex-cash, stock trades at 8x earnings. AAPL will earn close to $45-50 per share next year (using a very conservative estimate). It has close to $100 on it's books.
    • Market assigns a low multiple on it. (At the time of the discourse, AAPL stock was trading at around $490 per share)
    • People think it is a hardware company. Market has bad experience with hardware companies. Think RIMM, Motorola
    • According to him, AAPL is a recurring revenue business.
    • When people buy one product, they tend to go out and buy multiple Apple products.
    • iPhone
      • 95% of the customers upgrade to the next version of iPhone. Very high loyalty.
      • People are not going to abandon iPhone because the other phone has better feature (say camera or screen size).
      • The competition will have to come up with a lot better phone to cause iPhone customers to switch out of iPhone. Marginal and few feature improvements wont cut it.
      • Phones wear out in 2 years. There is a natural upgrade cycle.
    • Apple has a history of low capex, low R&D and no crazy acquisitions. So, you know wont blow away the cash some day.
    • APPL is really an annuity business.
    • Lot of optionality with TV business. AAPL went through three revolutionary products : iPod, iPhone and iPad. They will do TV, only if they can revolutionize it.
    • You can do lot of things with Siri on Apple TV. Think about it. You can talk to your TV - "Play the last 2 mins of Superbowl". You can watch the Manningham catch (link) as many times as you like. (Very compelling)
  • Japan
    • Loosing money on short yen position.
    • It is a negative carry investment. So, you loose money every year. Everyone hates it. But, it has a potential off paying of big time.
    • He thinks the Japan situation is a stable dis-equillibrium.
  • WAG - Wallgreen (Is Walgreen misunderstood?)
    • David was asked about an example of the company that his fund studied but passed the opportunity to invest in it.
    • Wallgreen's may loose customers permanently. When the ExpressScript customers cannot buy from Walgreen, they will take their business to another pharmacy. When the dispute is resolved, these customers may not come back to Walgreen. They may continue doing business at the other pharmacy. People don't switch pharmacies easily. It's a habit. It means the permanent loss of customer.
    • Eventually the dispute with Express Scripts will be settled.
    • Other may want the same treatment as ExpressScript. WAG may be forced to renegotiate the terms with other providers too.
  • RIMM
    • It has a critical mass problem.
    • It has a reasonable balance sheet.
    • It may not evaporate as fast as anticipated.
    • Negative bet (Shorting) on RIMM does not make sense at current valuation.
  • Advise
    • Avoid what may hurt you while you are waiting on your thesis to play out.
    • Have a basket of bets.
  • JOE
    • It's a concept stock that has run into a math problem.
    • Book value is approx. $7 per share.
    • Assume 9% growth in real estate values. There will be 2% carrying cost. It will take 10 years for the book value to double (which is close to the stock's price of close to $14.50 at the time of interview)
  • Another example of inefficiency in the large cap : Coca-Cola in late 90s
    • Coca cola was showing consistent earnings growth and the stock had a very high multiple.
    • But the earnings were coming from selling the bottling units. It cannot last forever.
    • It was a non-recurring revenue.

Note - My big thank you to Columbia Business School. The comments made by speaker are off the record. I tremendously benefited from this event. This event is very unique in terms of the highest quality of speakers that it attracts while charging a negligible fee to the attendees. This conference is perhaps one of the best learning forum for students interested in value investing. The purpose of this post is to share the knowledge and increase the awareness about this great annual event organized by CISMA (Columbia Investment Student Management Association). I hope this post will encourage more and more students and practitioners to benefit from this great annual conference. The accuracy and accurate attribution to the speaker is not a guarantee.


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