Fooling Some of the People All of the Time, A Long Short Story, by David Einhorn. Hoboken, NJ: Wiley, 2008. 380 pp. $29.95 (cloth).
The scene is the offices of Donaldson, Lufkin & Jenrette (DLJ) in late 1991. Analysts here are regularly given deadlines requiring them to work through the night; hundred-hour workweeks are the norm, and the environment is extremely hectic—even by Wall Street standards. It is three o’clock on a Sunday morning, and a young David Einhorn sits at his desk trying to finish the job he was given. A few months into this position, he has lost fifteen pounds due to the stress (p. 12).
Two years later, Einhorn takes a job working for Siegler, Collery & Company, a mid-sized hedge fund with about $150 million under management. He learns “how to invest and perform investment research from Peter [Collery], a patient and dedicated mentor” (p. 12). He spends weeks “researching a company, reading the SEC filings, building spreadsheets and talking to management and analysts.” He then turns in his work to Peter—who, having read everything, makes a detailed list of questions that Einhorn wishes he had asked (p. 12).
In 1996, confident in his own abilities, Einhorn resigns from the firm to start his own. The original business plan is written on the back of a napkin. The original office is a 130-square-foot, windowless room. He names the firm Greenlight Capital, as suggested by his wife, who also gave him the green light. As Einhorn explains, “When you leave a good job to go off on your own and don’t expect to make money for a while, you name the firm whatever your wife says you should” (p. 12).
Greenlight Capital is a “long-short” hedge fund—which means a fund that “goes long” on investment opportunities that it thinks are substantially undervalued and “short” on those it regards as substantially overvalued. Einhorn succinctly explains these terms:
Short selling is the opposite of owning, or being long a stock. When you are long, the idea is to buy low and sell high. In a short sale, you still want to buy low and sell high, but in this case the sale comes before the purchase. It works this way: Your broker borrows shares from a stockholder who lends them to you, and you sell them in the market to a new buyer, thus establishing a short position. To close out the position at a later date, you buy shares in the market and return them to your broker to “cover” your short, and the broker returns them to the owner. Your profit or loss is the difference between the price you receive when you sell the shares short and the price you pay to buy them back. The more the stock falls, the more money you make—and vice versa (p. 5).
For instance, on the long side, Greenlight invests 15 percent of the fund in C. R. Anthony, “a small retailer that had recently emerged from bankruptcy and returned to profitability. The market valued the company at $18 million despite its having twice that in net working capital (current assets less all liabilities).” When other investors (finally) notice the discount at which it is selling relative to net working capital, the stock increases substantially. And when they start to value the company based on its future earnings potential, the stock shoots up 500 percent from Greenlight’s initial investment (page 19–20). . . .