Greenlight: History Behind the Name

I previously posted the somewhat complicated history behind Leucadia's name. For the curious, the history of how Greenlight Capital got it's name is pretty simple. It was given by Einhorn's wife.

As he explains it in Fooling Some of the People All The Time:

"In early 1996 ... Cheryl named the firm, giving me the green light. 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."

Greenlight's Q1 2009 Letter

Greenlight's 2009 Q1 Letter detailed his holdings of Ford debt, as well as the common stock of Pfizer, Harman, and EMC. For example, Einhorn explains why Greenlight invested in Ford debt:

Ford is the third largest auto manufacturer in the world. We bought a large amount of secured bank debt (term loan and revolver), of which there is $14.7 billion outstanding, at an average price of 37% of par, starting in the fourth quarter of 2008.

The bank debt is secured by almost all of Ford’s assets including most of Ford’s manufacturing plants, inventory and accounts receivable, working capital, its investment in Ford Credit, most of Ford’s foreign subsidiaries including intercompany debt to Volvo, 66% to 100% of the stock of all major first tier foreign subsidiaries (including Volvo and Grupo Ford S. de R.L. de C.V., a Mexican subsidiary), and certain domestic intellectual property, including trademarks (i.e. the famous blue logo). In addition, Ford has over $20 billion of cash, which it had been burning at a good clip (we expect cash burn to fall). Even so, the collateral pool is worth many times the implied $5 billion valuation of the secured debt.

We observed that when the U.S. Government invested in General Motors, it put its money in junior to the secured bank debt. Even so, it does not appear that Ford will need a government loan any time soon, if ever.

Ford had the foresight to borrow money when the debt markets were accommodating. Ford reacted faster than its competitors to the slowdown by cutting production and other costs, improving manufacturing efficiency and vehicle quality. If auto sales stabilize at these low levels, Ford should reach cash flow breakeven in 2010 and generate $4 to $5 billion of automotive operating income in the next mid-cycle of automobile sales.

We also bought a smaller amount of various bond issues at Ford’s credit subsidiary at very large annualized yields to near-term maturities. The secured bank debt ended the quarter at 45% of par.

The letter, which ends with a quote by JFK--saying that "a nation that is afraid to let its people judge the truth or falsehood in an open market is a nation that is afraid of its people"--can be read in its entirety at Todd Sullivan's Value Plays.

Einhorn Doesn't Like Bugs

At least not of the Volkswagen variety. A recent article in the Wall Street Journal explains why:

Numbers normally speak for themselves with investment returns. It is a rare case when no figure can portray the full impact.

Hedge-fund manager David Einhorn (left), of New York’s Greenlight Capital, in a recent investor letter listed in a table the internal rate of return of 14 positions he closed in the first quarter. A bearish bet on jewelry retailer Zale generated a return of 92% and another on U.S. Bancorp returned 78%, Greenlight said in the May 1 letter. Then there were investments in companies such as Dr Pepper Snapple Group and Aldar Properties that generated losses of 46% and 91%, respectively, it continued.

But for the by now infamous Volkswagen trade, which dealt a punishing blow to hedge-fund managers around the world last year, Greenlight didn’t list a figure. It simply said, “bad.”

The only additional explanation it gave: “a relatively small position that caused a large loss.”

The article goes on to say that the position ending up costing Greenlight over one percent of its performance for the year.

Einhorn (and Buffett) on Position Size

Here, from page 19 of Fooling Some of the People All the Time, is Einhorn sharing how he sizes both longs and shorts within Greenlight's portfolio--and why:

It is hard to find long ideas that are ones and twos or shorts that are nines and tens, so when we find them, it is important to invest enough to be rewarded.

Based on this concept, we decided that Greenlight would have a concentrated portfolio with up to 20 percent of capital in a single long idea (so it had better be a [good] one!) and generally would have 30 percent to 60 percent of capital in our five largest longs.

We would size the shorts half as long as we would longs of the same quality, because when shorts move against us, they become a bigger portion of the portfolio and to give us the ability to endure initial losses and maintain or even increase the investment.

Like reading about a company he's invested in, knowing why Einhorn has done something is as (if not more) important than following it without further thought.

Here, he takes big bets on the best ideas he can find. And, as the book from which this quote is taken shows, he knows these companies inside out.

Do you know the companies in your portfolio well enough to write more than a one page introductory statement on them? How about a book? Can you name their top five suppliers, salespeople, or customers with ease?

If not, you may well choose to size your bets differently. And you should. Warren Buffett states both points here better than I, so I'll give him the rest of the post to do so:

We think diversification, as practiced generally, makes very little sense for anyone who knows what they're doing. Diversification serves as protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There's nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses.

But if you know how to value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably because there aren't that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money into #30 or #35 on your list of attractiveness just strikes Charlie and me as madness.

Einhorn on Investing Benchmarks

I've said it before, and I'm sure to say it again, understanding how great investors think about investing is much more valuable than discovering their latest pick.

Here, from page 17 of Fooling Some of the People All the Time, is Einhorn sharing what he thinks an appropriate investing benchmark is--and why:

"We consider ourselves to be absolute-return investors, and do not compare our results to long-only indices. That means our goal is to try to achieve positive results over time regardless of the environment.

I believe the enormous attraction of hedge funds comes from their absolute-return orientation. Most long-only investors, including mutual funds, are relative-return investors; their goal is to outperform a benchmark, generally the S&P 500.

In assessing an investment opportunity, a relative-return investor asks, 'Will this investment outperform my benchmark?' In contrast, an absolute-return investor asks, 'Does the reward of this investment outweigh the risk?'

This leads to a completely different analytical framework. As a result, both investors might look at the same situation and come to opposite investment conclusions."

That excerpt is worth reading (at least) twice. Notice how the benchmark Einhorn uses focuses his attention on the nature of an investment itself and in particular its risk-reward profile.

Some questions to leave you with:

Is this focus on the facts of a particular investment (and how one comes to conclusions based on them) peculiar to Einhorn--or is it a method shared by other great investors?

What is your benchmark? For instance, are you primarily focused on specific companies and on learning everything about them, or on what others as a whole are doing and the returns they've earned year-to-date?

Einhorn Buys Ticketmaster

From BusinessInsider:

Hedge fund manager David Einhorn's Greenlight Capital recently took a 5.2% stake in Ticketmaster, according to regulatory filings.

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"Einhorn is a very sharp, value-oriented manager," Gould notes, suggesting that Einhorn chose to pick up his nearly 3 million shares because he thinks Ticketmaster's stock is at a good price. Currently trading at around $4 a share, TKTM has likely been bogged down by concerns that its proposed merger with Live Nation wouldn't be approved for antitrust reasons.

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