David Einhorn | Full Q&A | Oxford Union

[Music] [Music] so thank you so much for joining us here this evening packed room everyone's very excited to see you I'm excited to see everyone great fantastic thank you so the Oxford Union is as you know the speaking and debating society at pair at the University of Oxford and when it was initially founded it was a platform for free speech and debate and to this day we host weekly show debates as I mentioned earlier on a range of topics your colleague Dan tipped me off earlier this week that you're in fact a huge fan of debate where does this passion stem from yeah I spent most of my high school doing debate it was my it was the team that I was on and I started freshman year and spent an incredible amount of time preparing for the annual topic and competing throughout the state and sometimes throughout the country and it was it was just my main activity in high school outside of my academics and do you ever use that in your career today do you find that skill useful it is it is a skill that is useful because the fundamental skill of debate is critical thinking and analysis and it's to hear something and to react to it relatively quickly and to assess the truthfulness of it and to question the validity of it and to be able to sometimes argue both sides of it because a lot of the debates you go to a tournament there be eight rounds and four times you'd be arguing one side and the other four times you would be arguing you know the other side so you had to see both sides and be able to advance an argument and that translates through to just so many things that you do you need to know in mind this business and investing you're buying a stock and someone else is selling a stock well right there that's like a debate right is this not going to go up or is it going to go down so being able to have a skill that you've honed on being able to argue both sides of that proposition allows you to sometimes be able to look at something and say okay this is the side that I'm pick on this particular argument yeah have you ever had that instance kind of widget where you're picking a stock and you've had a complete change of mind and a reversal in the approach that you initially took yeah we're wrong all the time okay I shouldn't say we're on all the time but we're wrong often and we have to constantly question whether we're wrong and so there's lots of times that come along where you buy a stock and then a certain amount of time happens or addition events happen and you have to look at it a different way and say no sorry that was it we should have done the opposite of what we did and then you change course okay so a slightly different question but you studied government as you mentioned earlier and then you went into the finance industry did you ever consider another career path yeah after my undergraduate I had written a thesis it was in the government department but it was largely it turned out to be almost an economics type of thesis and I was very interested in that and I wanted to go get a PhD in economics and I applied to several schools and they did me a huge favor by rejecting me which allowed me to go towards the career that I've gone to okay so never kind of a career in government or something related in that area yeah even though I studied it and and I could have gotten involved in the academic side of it I never really envisioned myself as truly like part of the government or part of the politics or process like that okay and then how did you get started with the business and how did you take green light from the two-man operation that you started with to the huge hedge fund that it is today you know a lot of it was due to really not having a lot of planning but being able to be in a particular situation in my case getting also then a fair amount of good fortune and then adjusting to the circumstances that were there and making what I think turned out to be good decisions and so you know I had the happenstance of you know being at a fund where I got some good training and then also at the same time realizing at a point relatively early in my career that I didn't really have a long-term future there and so the fellow who is in the office next to me kind of had the same view about his career and we went out for coffee one day and decided to walk out and start our own and you know three weeks after that we were in the snow in January in Manhattan looking for like a starbucks to sit in to like you know make some phone calls to people and get the business started and we did not have enormous aspirations but we felt that the the way the industry is set up there's very low barriers to entry and we felt that even with a small amount of money we could if we could do a good job with it we could make you know a good enough income stream that we would have a you know have a satisfactory life and I never in a mile in a million years would have guessed that the thing would have turned out the way that it has yeah yeah that was never an aspiration it just it just worked out that way very lucky yeah so if you had to say that was one sole reason for greenlight success what would you pin it down to you have to pick one if I had to pick one I think it's critical thinking skill and it's the it's the it's the ability to look at a situation and and see it for what it is which isn't necessarily what is presented to you and when something makes sense to figure out what makes sense and when something doesn't make sense to question it to challenge it to look at it from a different way and to often come to the opposite conclusion and you don't have to do that very often because most of the time when you someone tells you something it makes sense it just makes sense and that's that but sometimes it really doesn't make sense so there's another side to it and when you can come to a view you know maybe just a few times a year where you have a important difference of opinion with what everybody else is thinking about a particular situation if you can if you can figure that out and figure out that it's important we've been able to make a small number of large investments that the vast majority of the time have worked out very well because we really have had an important difference of opinion between what we think and whoever's on the other side of that transaction when we enter it okay and how would you say that's translated into green lights culture as a firm I mean the culture is affirmed it's very we're a lot of smart nice people we interact well I think there's a lot of humility I think that people respect one another people respect one another's views people respect me I respect them I respect their time which is in which I think is a is a I don't call it unique but it's an unusual management culture for senior people to truly respect the time of junior people and so forth and so you wind up with a group of people that are our critical thinkers that that that think in recent things out before that they speak that can adjust a new facts that can adjust to feedback you know and and it can work well within within a culture and that's what we have and say would you say that's in contrast to kind of the rest of the finance industry no I wouldn't contrast to the rest we we are our own and there's a whole continuum there's probably even people who've done what we're trying to do even in a better way so I don't want to say that we're unique but we do it our particular way and and it works pretty well for us much of the time and and from there there's a whole continuum of different types of work cultures and and traits that people are looking for and you said you worked in investment banking early yet how did you find the culture bad do you think the culture in that industry has changed do you ever see it changing yeah I worked in the investment banking for two years I was in the program where they kind of just owned you and and you you you I didn't realize I signed up for that which was one of the problems I didn't know anybody who'd done this and I grew up in in in the Midwest and that meant that like everybody's dad was home for dinner and certainly on the weekends and I didn't know from these kinds of work environments but the environment there was is you show up and you're in a division and there's 200 people in the division and by definition all 200 of them have been there at least one day longer than you and anybody who's been there one day longer than you as your boss and so you have 200 bosses and you know if you're not good at figuring out like how to like manage people's expectations if two people tell you to do opposite things at the same time for me this was something I was never able to really to wrestle to the ground in a way so I wound up not really succeeding within that culture and the other side of it was the culture therefore is very disrespectful of younger people because if you were the senior person it meant that you had once been the younger person and you'd had that experience and you were almost obligated to inflict upon them whatever had been inflicted on you sort of as a rite of passage as if this was like a growth thing and and I never really understood that and I kind of think from a management perspective I've looked at it said that's like a negative example and so sometimes the best lessons you have in life are when somebody does something and you say I would just do the opposite of that were I to be in that person's position and I've tried to do that as I've become a manager of people within my own firm okay so I guess leading on from talking about culture in the finance industry and we're coming up to ten years since the global financial crisis do you think we've learned our lesson do we think I've learned the lesson from the global financial crisis it depends on what one thinks that the lesson was unfortunately you know as I looked at the global financial crisis as it happened I thought that there were three or four or five really obvious problems structural problems that were exposed you had institutions that were that were thought to be able to fail but in fact they were deemed to be too big to fail you had some of so-called structured credit where risk was being transferred but it wasn't really being transferred and it wasn't being properly evaluated you had the problem of these credit rating agencies which were being that there's really only two or three major ones what you wind up with is a centralized decision maker as to who's creditworthy and who is not credit worthy and that's a really bad way to allocate credit what you really want is a large number of people evaluating each credit to determine the credit worthiness rather than having one or two because if you've one or two you create crises of confidence when the one or two changed their mind and you lose the opportunity to go out into the market and find other people who might look at it differently from that from the credit rating agencies and that's separate and apart from the corruption that was involved there relating to the that the triple-a ratings and and the structured a product like that I think there was a lesson that was learned about derivatives and and and derivatives could have been dealt with differently and what we've done instead is we've created a clearinghouse for derivatives which essentially has created yet another too-big-to-fail institution where all the credit is on an under capitalized entity that everybody assumes you know will perform under all circumstances when of course it can't as counterparties begin to actually have problems and so from my perspective if you took like all of the obvious problems from the financial crisis we really kind of solved none of them and we went a different way and we basically went the bailout route and said we're gonna create a whole lot of moral hazard and we're gonna sweep as much of this stuff as in the rough under the rug as we can and we're gonna move on as quickly as we can and so and that solved some things in some ways but 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 event or series of events sometime in the future when you say sometime in the future would you put a number on that whenever the next down cycle occurs ok so growth is done very well against value in recent years and you recently appeared in financial news headlines when you told your investors that green lights reliance on value may have been wrong do you think that this trend will reverse and how have you coped with adjusting your own investment philosophy after so many years ok this is this is the problem with communications sometimes when you do what is called rhetorical writing or ironic writing or maybe even slightly sarcastic writing and so I wrote a missive to our letters our investors in our quarterly letter and I was a little bit sarcastic and I think many people understood what I was trying to say and some people took it absolutely stone-cold Amelia Bedelia literal and came to the opposite conclusion of what I was saying so what I was basically saying is his look value investing or time has worked we think that this is the best and right way to invest it's not going to be true every day in every environment we are in an environment right now where it doesn't seem to be working at all and in fact the opposite seems to be working because people are looking at things and saying the ownership of a company is something other than the risk adjusted future profits of the company maybe it's the social disruption maybe it's the social desirability maybe it's the charismatic value of the CEO or whatever it is that that you get you have that is contributing in the markets mind to the equity value these companies I would equate this sort of from a decade ago when people thought that company should be valued based on how many eyeballs were watching on their screen and so I think that these are this is a cyclical phenomenon and people would like to say it is different this time our our philosophy is that it's not different this time and at some point this will revert but nonetheless sitting watching the portfolio trade every day and watching companies that don't make profits don't have real prospects of making profits may not even exist for the purpose of making profits you know have the values of those stocks going up a lot while other companies that have the misfortune of actually trying to earn a return on capital and pass some of that on to their shareholders see their stocks you know d-rated and devalued in the present environment it's a challenge to our strategy in as long as that persists and and and our results over the most recent period have certainly suffered because we've been you know investing the more traditional way at least that's the way I would describe it okay I mean speaking of kind of disruptions to the market and kind of new funds coming along disrupting what currently exists what do you think is the next big technology that will just disrupt the landscape that we may not even be aware of I have no idea it's not really my field of expertise and I I certainly would not be the first person to tell you about a technology that all of the scientists data scientists material scientists engineers physicists computer scientists they're sitting in room you know are spending all your time on you know what technology is more likely to be changing the world than I do that's for certain okay so moving quickly on then you're an avid poker player and say what's your approach to risk both when dealing with cards and chips and then when dealing with stocks yeah investing in a poker game and investing in stocks at least the way I do it it's a very similar skillset you are having certain facts that you know in in in in stock investing it is whatever objective information you know about a company or a situation you know what is the stock price is a good one but also what the company does what their sales are so forth these are objective things that you know and then there are things that you can surmise but you don't really know you're mere making an implication so that would be you know what is the motivation of the CEO what is the strategy what are the various interests that are there what does the competition look like these are not objective these are things that through work and you can make an educated guess about but you don't really know right and then you have a range of things that you don't know that are gonna come in the future rich or which are future events that are fundamentally unpredictable but they live within a range of possible future events and so you combine what you know with what you think you can surmise combined with understanding the range of outcomes relating to the uncertain things and saying is this a good place to commit a fraction of my capital and then you could translate to poker there's what is it that you know you know how many chips you have you know what the cards you're holding in your hand if there's cards that are displayed face up on the table you can see what those are right then there's things that you can surmise what are my opponents cards likely to be is it how he is betting the hand I can get information that way or by sitting at a table and playing with him for a while I can see what his personality is what his style is what his skill is and I can make inferences about the present hand based upon his past behaviors so those are things that your trying to deduce and then there's the uncertainty which is the range of future cards that are concealed in the deck that are yet to be displayed that are important right and there's a range of those possible outcomes and you take a look at all of those things what you know what you can surmise and the range of outcomes and say do I want to you know play this hand do I want to bet chips into this hand and so forth okay sure yeah and then kind of leading on from taking risks through playing poker you also known for donating your winnings to charity so you founded the home family Charitable Foundation do you want to tell me a bit more about this and the causes that you've chosen to raise awareness for and why you're passionate about those causes sure our charitable foundation it has a professional staff of seven at this point helping me make good decisions and allocating philanthropically we have one theme the theme is helping people get along better and we define that very broadly I would say when you think about what that means from our perspective we are not in we'd like to say we are in the fire prevention business not the firefighting business so you don't go into the middle of a war somewhere where people are shooting each other and say hey everybody we're going to help you get along better it's kind of a little bit too late for philanthropic interest but there's things that you can do that make those kinds of things less likely so you can build understandings between people's and and shared experiences and bridging differences and creating pro-social skills and social-emotional learning and parents bonding well with their children and in people bonding well within the community and welcoming immigrants and things like this and so we basically break the philanthropic interest into three different areas which we basically call you know from birth up through you know schooling and then there's school-age people and then there's campus and community and so we just and we have a you know a group of different entities that we support for different purposes you know within within that range and we've built like a nice portfolio of things that we support through kind of partnerships with other organizations well we're we don't actually do anything we are a granting organization so we give grants to other philanthropic organizations that are well aligned we tend to sometimes ask for very specific grant proposals so there's a reason like if you ask for money for us you're going to take the money because you're going to do a particular thing and then we're gonna fund that particular thing but sometimes we just like the organization and we will donate for the for the infrastructure and overall general support of the organization as well and kind of thinking a bit more about the aims of the foundation where does the focus on empathy stem from stem from for you and for you personally I guess well empathy it's part it's a it's a core skill in getting along with other people there's other core skills as well but empathy is certainly one if you can if you can understand where somebody is coming from or why they are feeling a particular way and relate to them on that basis it you know it bridges okay and we're next we're what other courses are you having a look at da you have you ever thought about expanding internationally you know we tend we've done a few things internationally over time but it actually turns out there's really plenty of people not getting along well enough right where we are and so we tend to be focusing you know the closer it is just like what the investing the closer it is to where we are the better chance it is that we will understand it will understand the people will understand the likelihood of being able to make a contribution that will make a difference and so our bias is towards being closer to home whenever possible okay do you have a particular moment that stands out for you through your charitable work or particular calls that you've donated to that stands out for you I don't um I don't think I have a personal moment I tend to I tend to be away from in a certain sense I I get involved in the decisions and the grant making and the allocations and involved in in you know supervising the structure and the strategy of the team but I I do not tend to you know participate directly on the ground okay do you think kind of take going back say 20 years gee would you have known then that you would have had an interest in the kind of world of philanthropy and that you would have given so much to this kind of these causes no because I had no idea that the kind of opportunity to do that was in front of me I'm truly surprised and it's it's a blessing and an honor and a privilege to be able to have this aspect of my life which I which I never would have forecast okay and we're thinking about kind of what next in the philanthropic area where we're next and what next kind of with the financial career what is it that motivates you to carry on managing the fund and kind of where next well I love it I love trying to solve the puzzles I love trying to find the investments I love trying to figure out what it is that is motivating a situation where we have a difference of opinion you know people have say what is the most exciting part is it like when when like you have some company and you're and you're proved right is that the most exciting part that's actually not the most exciting part that's not a bad part but that's not the most exciting part the most exciting part is when you think you've figured out the joke and you kind of get the joke and you understand what it is that you're doing and why it is that what you have an opportunity now where you're going to be able to deploy capital and it's very likely to work out well and those situations come up few and far between when you really have it and it's really really exciting because then after that then it's just a question of watching watching it happen mm-hmm so we're next what are the plans very international expansion with the fund which are the particular areas that you're looking at investing in next no at the moment we're trying to do well with what we have and that's proving to be very difficult for us in the current and the current environment we are invested in domestic markets I'm sorry in developed markets so we will invest in Europe we will invest in Japan will invest in Australia and Canada and the United States and maybe a couple other places that are developed markets that I'm not thinking of but that's the vast majority of where we are and I have no aspirations to get further away because I find that once you get into places further away you do you know you're subject to what's going on with the insiders and there's local rules and there's local customs and there's local knowledge and it's very very hard to compete with that sitting in New York even if you get on an airplane and go and visit once in a while okay sure and so from there shall we open up to questions from the audience so if anyone has a question if you'd like to raise your hand and we'll try and go through as many feels possible so you got it firsthand right up there at the back I have two questions on the current market environment the first one would be you said that the barriers of entry were very low when you entered the market and I wonder whether that's still the case today or even especially the case today with a lot of money in the market and so my question would be are those barriers to entry is still very low the second question would be you said that the rules of valuation of companies seem to be somewhat off today and that there is a cyclical moment for you I assume that means right now you have to differentiate between firms that have a joke and firms that are just that are just highly valued by this current market environment what are the specific difficulties of doing that telling the jokes from the from the weird ones yeah look when I started there were people who started their funds and they said in order for us it depends on what your structure is and what you're doing in order for us to be in business you know I need to be here I need to have you know five different industry analysts helping me I need a chief financial officer I need three assistants I need a lawyer I need somebody to program computers I need a couple traders you know before you know it you're hiring ten fifteen twenty forty people to launch a fund if you're going to do that you need to launch with a certain amount of capital so that you have enough income from management fees in order to fund the getting going of the business that was true then and I think it's true now as well so if you are going to create an elaborate organization you need to have the fees that create elaborate organization and the to entry then were not zero and the berries to that now are not zero you have to figure out where that initial pool of capital is gonna come into but just like then if somebody was gonna give you or you had a way to raise a couple hundred million dollars you could do that then and if you know where you're gonna get your first couple hundred million dollars you can do that now and you can compete on that basis our thing wasn't really like that it was me and another guy and we were in an office and it was a hundred and thirty square feet and I kind of had to suck in my gut to get between my desk and the file cabinet to get around to my chair and we were at a t-shaped desk you know facing each other with computers back then we shared an AOL email account and we sent the monthly result which I personally did by fax that was on the radiator so heat my partner would calculate the result print them out hand him to me and I would fax them one at a time to the investors that was where we were technologically back then I'm we probably weren't even state-of-the-art at the time but it's the way it was but I'll tell you that with very very small amount of assets under management you could do that because there was nobody that needed to be fed there was not a lot of expense I literally wrote a check for $10,000 and my partner wrote a check for $10,000 and then a purchased for us the filing cabinet the television the computers to whatever is that we needed and the rest of it we made a deal effectively with our brokers and so forth to you know kind of get us going with a little bit of infrastructure like a copy machine and a coffee maker and you and I think you could still do that today and if you had a differentiated strategy and articulated it well and developed a client base and and and and had good success that backed up the story I think it's completely replicable now just as it was for me like 20 years ago so it's a question of what it is that you're trying to do and what kind of barriers there entry there are in order in order to do that so I i'm sure there's regulatory changes and other changes that have made it by the other hand there's a whole industry that along the way has has developed which is cap introduction and and you have these big banks that if they decide that they're gonna back you they will get you in front of 50 or a hundred potential clients and you can tell your story and raise that initial capital and we didn't have that back then the industry was not as developed so we had to do it you know a different way and and it and ultimately when we told our initial story you know literally three people or four people signed up and that was it and they signed up for a small amount of money and the good news was is we just kept telling our story and the results were good and some of the initial investors one of the initial investors after six months said hey you did a really great job for me here's my 15 friends you know tell him I called and go meet all of them and that kind of word-of-mouth is how effectively we were able to build our company the second question you have to remind me cuz I talked too long there was how you decide how did you friend shake the jokes against the companies that are just highly valuing this currently right market generally speaking we don't short companies on what we think to be valuation we've always insisted on over valuation combined with some kind of deterioration on the other hand about three years ago which we thought was four years into the building of this we'd managed to miss the whole first four years of it and a lot of appreciation in a lot of these I think questionable companies we kind of for whatever reason thought we were getting towards the end of it and we decided that if we could look at a company none of the companies were profitable or materially profit and said if we didn't know what this business was right but we knew what the financial statements were and we knew what the projected financial statements were and we thought a little bit about the business or we didn't even know what the business was but we just looked at with the financial circumstance and future financial circumstance the company if we closed our eyes and didn't know what the company did if we didn't know if it was a you know an office supply company or a paper maker or you know Netflix right if we didn't know what it was and you just looked at all of the the numbers and you said what did what would you pay for the stock and if the answer was 90 percent less than where it was trading we created a basket of about 40 or 50 of these and shorted a small amount of of a large number of them and over time at least until the beginning of this year that basically worked out because even though we had two or three or four that really worked against us in a pretty big way a big number of those 50 ultimately failed or d-rated and the stocks went down a lot and and certainly in the gains there were roughly enough to cover the ones that appreciated this year you know it has not been the case pretty much everything that's remained or even that we've put into that basket has only continued to go up but the thesis on all of them is that none of them are actual viable businesses and the market might disagree with us on this but you know when they start showing real profits then then we'll take a different point of view on particular names thank you I'm sure it was our question over there yeah the one at the back yep yeah so my question is just I mean you've been a contrarian investor for some time I think a lot of your investments during the bubble during both in the dot-com and later on have been contrarian and a lot of people around you must have gone you know long all the time so the question really is how do you sort of stick to your guns when it comes to entering a contrarian position and holding it until it works out well first of all it's not about sticking to our guns it's about reassessing constantly and when the positions don't work or they go against you the presumption is not we're right the presumption is we might have missed something here and so then you have to go back and think about it again and again and again and understand the other side and see if anything has changed and see if your view has changed and if it has changed to modify the position and you might eliminate it or you might reduce it or you might sometimes increase it but very rarely generally speaking my inclination is is when the position is not going well it's more likely that we've missed something and so the choice is generally either to reduce or eliminate it or to simply keep it if we think that it's right so it's not a but on the other hand if we continue this way and we continue to think that we're right then I find that patience is the way to go and then we have to wait and let the let the story play out however it does while we continue to reassess it to see if in fact we were wrong which would you get both outcomes hey anyone else okay right at the front head thank you so much for coming today so I'm to talk to you about for example the vulture funds for example was the current situation in Puerto Rico like many people have realized that the cover indebtedness is very often exacerbated by vulture funds actually that those hedge funds actually exploit the situation instead of trying to help to alleviate or refinance them so I'm wondering how you think about that and whether there are conflicts with the idea of - let's repeat thank you generally speaking by putting a pejorative named vulture on what you call a vulture fund you've kind of convicted the suspect without without a trial right fundamentally what vulture funds do is there's people who have lent money the loan has gone bad or appears likely to go bad and rather than lose their entire investment or continue to work through a restructuring they choose to sell their historic investment and it's a service to them that there's someone who's willing to buy the other side of that to let them have whatever money the market says is the right price for that so then the question is is then you have people who have expertise in in accumulating portfolios or situations like that buying them effectively at the right price and then figuring out how to maximize the value out of the previous loans that have been made and that's essentially that's essentially what they do now occasionally you know more in corporate situations than in then in government situations like you talked about with Puerto Rico but generally speaking you know sometimes you know they try to enforce laws or they try to work to try to get you know get recovery they generally operate within whatever the rules are and I don't really see why there's a Sun obvious social problem to this so I'm not really sure that there's a that there's a that there's a genuine problem but it's very easy to say look you know you know you paid 30 cents on the dollar for something that was initially a hundred cents aren't you greedy by trying to figure out how to make that 30 cents into 50 cents but the alternative right is to say you can't do this and if you want you buy a bond it's yours to keep and so if you're the original purchaser at 100 and there's a you know and something goes wrong and the bond is now only worth 30 well you can't sell it you have to keep it you go figure out how to collect so you get a specialization of expertise that that's created through these funds thank you so much sure okay so in the I'll bet that I actually just wanted to follow up on your last point you were talking about mrs. if you look I know you don't want to dwell on it but if you look at your last quarter and you compare that to the returns of the sp500 and your note again we're not trying to read too much into the sarcasm are you going to be changing anything going into the next few quarters continuing to short your bubble basket if you can give some details that would be appreciated yeah our goal is to achieve attractive risk-adjusted returns over time while taking demonstrably less risk than the market as a whole which means fundamentally we're not comparing ourselves to the sp500 or in index and so we don't evaluate ourselves that way certain of our investments have worked out decently lately certain of our other investments have worked out less decently and what we do is we reevaluate all of them and some of the ones that have worked we sell or reduce because they've worked and we're not interested in them anymore and some that haven't worked we exit or reduce because we decide whatever it was that we were thinking is no longer true or is unlikely to be born to be true and we modified the positions accordingly and we do that on a position by position basis throughout the portfolio and we do that whether things are going well for us or whether things are not going well for us so I don't have a very good specific answer because it's just part of our ongoing process thank you sure how did the front just here yeah so I was wondering what's the sort of weight or value placed when you because obviously everybody in the world is making difficult decisions because everything is much more complex the number and and significance of unknown unknowns I suppose or factors that you can't necessarily oh you can't mitigate all risk basically I think is what I'm getting at so there always always be this element of intuition or experience I guess which which factors in how do you sort of way that up versus what just the numbers and the the rationale and they had you know the advisers and people are saying I guess maybe personally or maybe just more in a business context something like that yeah the way you deal with unknown unknowns which they're an unknown number of but certainly exists right is through portfolio construction you know you you we like to run a concentrated portfolio but even our best idea we're not going to put all of our money in so you have to set some kind of a limit you have to have some kind of a risk management you have to have some level of diversification we have some amount of lungs and some amount of shorts and so depending on you know we we have a certain amount of market risk that we're willing to take on a knowing basis and then you have the idiosyncratic risk relating to the individual investments you know people say I always say you know people say like oh there's a stock and it's at ten dollars and it's got one dollar of downside and it's got you know ten dollars of upside and I look at a go/no it has ten dollars of downside because you can lose your whole investment in any stock when you make it we manage risk further by the level of investment that we make were not levered we don't you know we don't borrow more money to make even more investments that's one way that you avoid risk or you control your risk if you you know if you don't have to ever repay anybody you're not subject you know to lending terms and conditions that being said other people do things in different ways and they have risk management tools you know I was you asked about the financial crisis and one of the funny things to me is is one of the things that was most exposed in the financial crisis is the flaw and the mathematical modeling of tail risk in the so-called Value at Risk which is a method that is used by all of the large banks and institutions and what value at risk basically does I'm going to digress a little bit is it basically says you know if the risk is you know something that's going to happen beyond a certain level of frequency you don't have to put any capital aside so we're gonna put capital aside to cover 95% of all possible outcomes or 98% of all possible outcomes but we're not going to put capital aside for really really remote things beyond whatever the tail is right and I think that was one of the big problems because what happened was is people said if you don't have to put any capital against it I can take that bet an infinite number of times so in other words it's like if you were on the other side of roulette the house side of roulette and you're offering thirty five to one odds a 38 38 to one opportunity and you have a rule that says I only have to put out capital for a 1 in 25 event how much capital do I have to set aside if someone's going to bet the number 13 against me and the answer is zero and so since you didn't have to put any capital aside the financial institutions were willing to take an infinite amount of risk against it and that's how you and then what happened obviously is a relatively unlikely or they thought relatively unlikely happened and there was no capital that was set aside against the terrorists that turned out to be much more likely and much more correlated than it was so I would view that as the kind of risk management that I don't want to practice so we take a more layer by layer what are our investments what is our risk on this investment that investment in the next investment and we tend to think of risk as how much can we lose in our worst case so that's why when I say there's a ten dollar stock how much can you lose the answer is not $1 it's ten dollars and that's the way that I think about it Thanks sure shall we go to the lady just in the aisle there yeah just that hi thank you for coming I was just wondering because you mentioned earlier that you look at the financial statement you give a price to the company in question and compared to the market price that sounds like something that might be computerized and maybe machine learning can do a good job at that so I was wondering whether you're considering integrating that yeah so forth first of all that's true and second of all what I was trying to say though was illustratively which was I was trying to make a point that we generally don't sell short stocks just on valuation but when we came to a point with certain stocks that the valuation was so seemed to us to be so extremely out of whack that it wasn't really a debate as to whether the stock was in a range of a fair value in other words it was you know 90 percent or so overvalued you don't need a computer to help you figure that out because you're so far off and even if you're wrong by a hundred percent instead of it being ninety percent over it's 80% overvalued that was the point that I was making we do not sit around all day and try to figure out the precise value of individual stocks we just don't do that because those are not relevant to our actual ability to make decisions so if we have a stock and it's you know ten dollars the goal is not to figure out if it's worth eleven dollars or eleven and a half dollars or twelve dollars the goal is to figure out is it worth a lot more than ten dollars and since we're looking for and not being precise about that because it doesn't matter really whether it's worth if we buy it at ten it doesn't really matter if it's worth eighteen or twenty or twenty-five and there's no point in us trying to figure that out right now because all the only decision we have right now is do we want to own the stock at ten and if we think it's undervalued by a lot that's good enough first decide to own it now and by the time it starts approaching higher values we can reassess and we can fine-tune our thinking on an ongoing basis so when it gets to fifteen we can say do we still think that this is very undervalued or eighteen or twenty and sometimes the facts will change and so if you would have maybe if you'd bother to figure out that it was worth twenty in the first place by the time he gets to fifteen you might decide it's worth thirty or alternatively you might decide you know what it wasn't ever probably even worth 20 it was probably worth fifteen and so you want to sell it at that point and those are the kinds of ongoing assessments that we make but we do it in a very imprecise way is the way I would describe it know we view these investments as puzzles right there are the few things that you know but they're not the most important things because everybody knows them right the most important things are what is it that you can infer and how good are you assessing the possible range of outcomes the the either the known unknowns are the unknown unknowns and and how you construct that into into a portfolio and and those things I'm sure the machines have views on these and and the shorter the term of the decision the more likely probably the machine is going to figure it out better and faster than the human but the our goal here is is to find things that are just widely misunderstood by it by a large margin so it's that we're not really with that kind of technology because I don't think we would beat them shall we go for question just in the middle there just forward a row what yeah there we go thank you very much I'd like to hear your comment about the gap between the investors and companies I think it is very over simplified argument but it is often said that there is a short termism in the market on the other hand company is failed to justify the premiums they paid for their margin acquisition so I'd like to hear your comments on short-termism and how could how it can company fit in the gap between the companies and investors I'm sorry I don't understand the question there's a gap between the investors and companies about the time frame about investment or capital share repurchase or dividend so how do I see the idea that corporations have a longer horizon then yes your new investor has a so I would like to hear the gap how to fill the gap but I think that one of the inefficiencies in the market is investors are generically - short-term oriented and I think that time arbitrage is one of the best inefficiencies in the market you know there's lots of investors that if you say hey this stock isn't going to go up in the next six months they're gonna say well then why should I buy it I can wait six months and I can buy it then because I really want to buy it just doing the period that it goes up and that's cute but it's also imprecise right and so sometimes you know if you have something in you know it's either gonna go up sometime in the future because you think it's undervalue but all the other investors say I'm not gonna buy this because it's quote-unquote dead money sometimes those are just the best investments because nobody wants them and it may work out faster than people think and we've had that experience a number of times where people have said hey you've got to do that and so some of them will work out faster and some of them will work out on time and some of them work out later and some of them will work out never now relating to the difference of opinions then between what you know shareholders want and what companies want there's there's a natural tension there but there's also a large agency difference right because the the career and the incentives of corporate managers is not always aligned with value creation and it's not always a question of the investors being on the short-term in them and the management being on the long-term right if the management's job is to simply make sure that the company is solvent right because as long as they're solvent they'll get their pension then there's no incentive to ever take any risk right and you do run into managers where that's their essentially their their agenda there's other times where you have a company that has a well thought out strategy that's gonna create compounding value over a period of time and needs its capital for whatever it's doing and it's into-into had just have time to do its research its development its market growth and so forth and execute its strategy and the management should essentially be left alone to do that and so I view that as a there is a tension there and it should be looked at on a case-by-case basis and sometimes the shareholders who are suggesting change or would like to see things that might improve the value of the company are right and sometimes the management's are right and I think you look at on different cases when we get involved which is very rare in terms of pushing an agenda our view is invariably that if it doesn't help in both the short term the intermediate term in the long term then it's not a good solution to what the problem is and so the few times that we've stood up and advocated for something we've been of the view that it would be beneficial to the company regard of what the horizon is we've got time for one more question so shall we go right to the back of that corner David I don't know if you watch billions but how representative is it of hedge funds like I do I do watch the show and it's really entertaining okay so with that if everyone would like to join me in thanking Dave David for coming and speaking to us all here tonight you

Channel: OxfordUnion

Views: 82,084

Rating: 4.8222222 out of 5

Keywords: Oxford, Union, Oxford Union, Oxford Union Society, debate, debating, The Oxford Union, Oxford University, David Einhorn, Investment, hedge funds, investor, business, forbes, billionnaire

Id: Qvz5LS9pIjs

Length: 50min 21sec (3021 seconds)

Published: Fri Dec 15 2017

Reddit Comments

[u/Sovereign--]

He's great, the interview is okay. I like hearing the guy talk but the medium just isn't interesting. I know some guys Said business school... future ibankers and so on. So they get what is close to an investing genius and that they ask him questions about what he'll do in the next few quarters.

Not to sound shabby but value philosophy is lost on those guys.

Aside from the Q&A always great to hear guys like that talk.

V. interesting how he starts about starting up on 900k$

[u/Necrocell]

Really good watch. What a guy!

[u/yuinausicaa]

The interview and Q just showed how smart the guy is

[u/fwtony]

nice. thanks for posting. look forward to watching this.