David Einhorn hedge fund investors and founder of Greenlight Capital, a “long-short value-oriented hedge fund” reckons that value investing could have lost its mojo.
David Einhorn believes that these are challenging conditions for value investing, as growth stocks have continued to outperform value stocks.
David Einhorn writes in a recent investor’s letter to clients that “the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns’.”
“the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks”
Maybe the cycle will never turn?
David Einhorn asks that very question, “Might the cycle never turn?” In other words, is the market now permanently broken. If so David Einhorn believes challenging conditions for value investing could prevail going forward.
But perhaps this is due to the fallout following excessive monetary policy which has created asset bubbles. It could also (partly) explain what David Einhorn means when he talks about challenging conditions for value investing.
David Einhorn recent speech at The Oxford Union in England also confirmed what many investors already know; that the problems that caused the global financial crisis in 2008 have still not been resolved.
“Do I think we’ve learned a lesson from the global financial crisis? It depends on what one thinks that the lesson was, unfortunately” Einhorn says 9’40” into the speech.
“Might the cycle never turns?”
Challenging conditions for value investing prevail, according to David Einhorn because the culture of too big to fail continues, credit-rating agencies are too cosy, problems in the derivative market “could have been dealt with differently,” and in the “so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued,” said David Einhorn.
“If you look at all the obvious problems from the financial crisis, we really kind of solved none of them. And we went on a different way, and we basically, went the bailout route. And said we are going to create a whole lot of moral hazard, and we’re going to sweep as much of this stuff as in the rough under the rug as we can, and we are going to move on as quickly as we can. And so, that solved some things in some ways,” said David Einhorn.
“If you look at all the obvious problems from the financial crisis, we really kind of solved none of them” – David Einhorn
So the conditions are ripe for another crisis?
I think it is left the basic structure, more or less, as it was. And I think that it is susceptible to the same type of events or series of events sometime in the future” said David Einhorn.
But David Einhorn fund has performed below par. Several fail bets include shorting Amazon, Tesla, and Netflix. “Our view is that just because AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.
David Einhorn basket of short stocks have underperformed and that is no surprise, bearing in mind that 2017 was the year of a stock bull market by default.
Moreover, when David Einhorn was asked where do you think the next disruptive technologies will come from he doesn’t have a clue. Not impressed!
David Einhorn challenging conditions for value investing could continue going forward with growth stock, particular companies in blockchain technology, biotech, and AI and robotics all outperforming value stocks.
Could another sub-par performance for David Einhorn’s fund lie ahead?