10 Brilliant David Einhorn Quotes | Investing Strategy

David Einhorn is one of the worlds most successful Long/Short Hedge Fund Managers. 

As of 2013, David Einhorn’s Greenlight Capital returned an incredible 19.5% since its inception in 1996. With a market volatility beta of around 0.5, this means many of those returns were uncorrelated with the general stock market.

In this post i’m going to reveal the investing strategy of David Einhorn by diving into his top 10 quotes. Enjoy! 

Investing Strategy: Short Seller, Hedge Fund

10. Investing is like Poker

“Texas Hold’em is about folding & waiting for that time every couple of hours when you have an advantage & can press it” – David Einhorn (Legendary Investor). David Einhorn is a big poker player as you can tell from this quote. There are many similarities between Poker and investing.

You are playing against the odds, against other people and emotions play a big part. Einhorn suggests folding until you have a great opportunity.

The Legendary Investor Warren Buffett often states In Investing there are “no called strikes” (baseball), thus you can sit and watch pitch after pitch go by, until one is in your “Sweet Spot”. 

9. Look for High Return on Equity

“Great Companies can generate alot of profit without requiring alot of capital, high Return on Equity (ROE)” – David Einhorn (Legendary Investor). For every dollar a company invests you want to ensure they will likely get more dollars back in the future. Thus investing into companies with high Return on Equity (ROC) or Return on Capital (ROC) is usually a good idea.

Legendary Growth Stock investor Nick Sleep suggests putting your investment into the hands of a “Great Capital allocator” .

Examples include Jeff Bezos (Amazon) who is known for doing a variety of “bets” , not all pay off (Fire Phone!) but the ones that do can increase the companies value massively (Amazon Web Services, AWS). 

8. Analysis is the key to success

“The loss was not bad luck, but bad analysis” – David Einhorn (Legendary Investor)

Starting with a solid analysis of the business fundamentals is the key to developing a high conviction investing thesis. A Great investor once suggested if the money you invested was going to support your family, what questions would you ask? 

7. Bubbles & Crashes

“What is uncertain is how much further the bubble will expand & what will pop it!  – David Einhorn (Legendary Investor). Bubbles are born out of greed, speculation, FOMO and herd mentality. Asset prices rise to astronomical values before crashing back to earth. From the Tech Bubble  (late 90’s) to the 2008 (Housing Bubble) and even Crypto bubbles previously.

The difficult part is timing the top of these bubbles, As the Legendary Investor Howard Marks states “Tree’s don’t grow to the sky”. 

6. Being Rational

“As an Investor my job is to figure out what will happen, not what should happen” – David Einhorn (Legendary Investor).

Anything can happen in the stock market, a smart strategy is to do a scenario analysis, think about the best case, worst case and most likely case. As the great investor Howard Marks states “Just because something can happen doesn’t mean it will happen”.

5. Have an Edge

“You are looking for situations where you have an edge either psychological or statistical” – David Einhorn (Legendary Investor). The key to success in the stock market is having an “Information edge”, this could be a unique insight from your own job, experience or just a different perspective.

The Legendary Investor Peter Lynch believes the average person can beat the guys on Wall Street using their “Edge”. For example, a Mother may no more about a certain baby product selling out rapidly and then could decide to research the stock. 

4. Cut your Losses

“If we decide we’re wrong about something in terms of why we did it, we exit period” – David Einhorn (Legendary Investor).

Cutting your losses can be difficult to do, due to “sunk cost fallacy”. This can result in investors pouring more into a poor position rather than cutting losses sooner. 

3. Poker & Investing 

“Poker and Investing are both games of incomplete information. You have a set of facts & are looking for situations where you have an edge” – David Einhorn (Legendary Investor)

2. High Conviction Bets

 

“We put the biggest amount of money into our highest conviction idea and then view others relative to that” – David Einhorn (Legendary Investor)

Although diversification is heavily touted as the best investment strategy by business school’s, many legendary investors believe the opposite.

Warren Buffett, Bill Ackman, David Einhorn and many more both would prefer to put more money into their best idea where they have real conviction, than in their 2nd and 3rd best.

This goes against conventional wisdom but actually makes sense as your “circle of competence” can only be so large. It is close to impossible to know everything about everything. 

1. Know When to Sell Stocks

“Never invent new reasons to continue with a position when the old reasons are no longer valid” – David Einhorn (Legendary Investor). Choosing when to sell a stock is a hard decision & unique to every situation.

Here are the only four reasons i sell a stock:

1. When the Business Fundamentals Change
2. Opportunity Cost (Better Investment opportunity)
3. Trim Position for Risk Mitigation. 
4. Stock is Hugely Overvalued

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