Fooling Some Of The People All Of The Time: A Long Short (and Now Complete) Story (2010) - Plot & Excerpts
This is overall a good book, however it does tend to get very technical and I would recommend staying away unless you are a passionate investor / want to learn how a short investor thinks. The entire book is about David Einhorn’s saga of shorting Allied Capital. The things that you find out about Allied almost makes this book seem like a movie given how many opportunities the SEC / SBA had to shut these guys down, but chose not to investigate, despite the warnings Greenlight gave them. It all starts off with a speech Einhorn gives at a conference detailing his research around Allied Capital and a number of discrepancies he has found in the accounting by Allied and its reporting methodology. The book walks you through countless incidences of Allied reporting certain loans at face value and then dropping the face value to 10% after the next quarter out of nowhere. Upon further investigation, it is clear Allied knew these loans / properties were worth nothing several quarters in advance, however they delayed the write down for a long time. It is scary the amount of fraud that went on here in terms of reporting / disclosure and misinformation Allied provided to the public in the form of blatant lies. You truly learn how much one of the greatest investors in the world digs into a company to short them as Einhorn knew that company cold from the different accounting methodologies to different assets at the company to different managers at each of the operations. BLX, one of Allied’s portfolio companies, was a corporation full of fraud that ended up costing the SBA hundreds of millions of losses. This is prime example of why the salaries for some of these governmental employees should be higher as the SBA simply did not care whenever Einhorn presented the facts to SBA about how they were being completely fooled out of their money and never took the time to investigate. Einhorn spent several years bringing this in front of the SEC / SBA before they finally decided to investigate. Einhorn always said that he was going to donate the proceeds to charity and at the time of the completion of the book, he had still not made any money on his short. Despite him saying this, Allied continue to accuse Einhorn of making up rumors in order to drive down the value of the stock so that he could become rich off his investment. However, I believe Allied did eventually take a nose dip whereby Greenlight did make a significant amount of money on their investment. Allied still is public today and trades, although I assume must have a different management team in place now after all the scrutiny all the individuals went through in the book. It is just scary to know this is what happened at a public company as can only imagine the things that happen in some private companies completely under the radar. In 2002, David Einhorn, the President of Greenlight Capital, gave a speech at a charity investment conference to benefit a children’s cancer hospital. He was asked to share his best investment idea, so he did. He described his reasons why Greenlight had sold short the shares of Allied Capital, a leader in the private finance industry. Greenlight bet that the stock would decline because the company’s business was in trouble and its accounting was corrupt. Einhorn’s speech was so compelling that the next day, when the New York Stock Exchange opened for trading, Allied’s shares remained closed. So many investors wanted to sell or short the stock that the NYSE could not balance all the sell orders to open Allied’s trading in an orderly fashion.What followed was a firestorm of controversy. Allied responded with a Washington–style spin-job — attacking Einhorn and disseminating half-truths and outright lies. Rather than protect investors by reviewing Einhorn’s well-documented case against Allied, the SEC — at the behest of the politically connected Allied — instead investigated Einhorn for stock manipulation. Over the ensuing six years, the SEC allowed Allied to make the problem bigger by approving more than a dozen additional stock offerings that raised over $1 billion from new investors.
This book is really two disparate parts welded together.The first, quite enjoyable, section of the book describes Einhorn's start in the hedge fund business. If you have an interest in fund management, you'll get a lot out of how he put his first fund together and quickly rose to prominence with spectacular performance out of the gates. The book provides a detailed behind-the-scenes narrative on his early investment decisions and how each investment unfolded in the context of the overall fund. The main takeaway for me was the importance of gauging roughly where in the cycle the overall market is (based primarily on valuation and confidence levels) and positioning one's long/short ratio accordingly. Note that doesn't imply taking an all-or-nothing stand on the direction of the market (which can easily become more irrational in the short term) but it does imply overweighting the part of your portfolio which is most attractive (i.e. the longs during times of panic and the shorts during times of exuberance). By keeping both long and short exposures, the investor is still able to profit if the market moves against him. This thinking helped Einhorn do well during the dot.com bubble years and the subsequent crash (one of only a few investors to achieve this). Virtually all his returns in the crash years came from his shorts - a strong reminder of their value during tough times.I liked his point that a successful short position needs to be based on both overvaluation and a flawed business model (or fraud). Just one of these conditions is not sufficient. Plenty of overvalued businesses continue to walk on air for long periods of time (like that cartoon character running off a cliff but not realizing it until he looks down) and in the interim a company may actually grow into its valuation (Amazon.com for instance). On the other hand if a business model is flawed but the market realizes it there is obviously little to be gained - only variant opinions are rewarded.I did not, however, like Einhorn's point that 2x overvalued is effectively the same as 20x overvalued (i.e. both are irrational in the same way that 2x infinity is the same as 20x infinity). Personally, I would much rather be betting against a company at the 20x level as the hype and expectation are that much greater, creating a scenario where the smallest slip-up can bring collapse, and of course the maximum profit potential is larger. Recognizing this can help one increase a short position as it goes against you (in much the same way that value investors double down on battered stocks.)While I really admire Einhorn as an investor it was highly discouraging to see how the short term orientation of his investors affected his decision making - including covering losing shorts that eventually would have paid off handsomely. It is a great pity that the hedge fund industry works on monthly and not annual or even longer-term performance. It can only be a detriment to eventual returns.The second section of the book (comprising 2/3rds of its volume) consisted of a very detailed account of fraud at Allied Capital (a BDC investment company) in which Greenlight has held a very public short position (now vindicated with Allied's bankruptcy during the credit crisis). While I sided with Einhorn and was amazed at the extent of the cover-up, I found it much too detailed and convoluted to be enjoyable reading.I enjoyed Buffet's comment to Einhorn that the problem with shorting crooks is that they'll play a lot dirtier than you will. It's interesting that Buffet has executed several shorts over his career and has no theoretical problem with the strategy but prefers to have a "long persona". After reading of Einhorn's constant battle with the media it is easy to see why.
What do You think about Fooling Some Of The People All Of The Time: A Long Short (and Now Complete) Story (2010)?
Einhorn tells an extremely long winded story of fraud at Allied Capital. It's pretty interesting stuff, if you're into financial fraud, but almost annoyingly biased. Still, since Einhorn was right, he gets to write the book. I think the book could have used a stronger editor, as Einhorn insists on explaining every move in his quest to show the truth about Allied's corrupt practices and documenting every slight (from the media, the SEC, Allied, and various individuals). The same info could have been gotten across in at least 100 fewer pages. Still, worth reading. May make you depressed about the government's ability to function.
—Dayna
David Einhorn manages a hedge fund whose strategy partly consists of pinning incompetent or fraudulent companies and betting against them. This book centers on his fight with Allied Capital, one of the fraudulent companies. Fraudulent data turns Einhorn on like a full-fledged disco party turned on the Bee Gees. Seriously, you can feel his excitement about the numbers bubbling over on every page, and, to be honest, much of it is skim-worthy. Because it's just data data data.And still, this book had me sitting upright the whole way through because Einhorn's fight with Allied gets pretty heated. From flat-out lying to journalists about their numbers, to breaking into Einhorn's private phone data, Allied pulls some crazy stunts to keep afloat.Einhorn's argument in this book is twofold. One, it's that hedge funds are a private-sector solution for uncovering fraud in corrupt companies, and two, it's that government agencies like the SEC have the wrong incentives for catching fraudulent companies like Allied. Einhorn recounts document after document that he sent to the SEC, warning them about Allied's practices, but the SEC just bummed around.If you're interested in what needs to change at the SEC, you might like this article written by Einhorn and Michael Lewis, published in the NY Times, 2009, a year after Einhorn's book was published:http://www.nytimes.com/2009/01/04/opi....It's one of the best articles I've read about the crisis.
—Jon
It started out so promising... The first 50 or 60 pages are really great. They lay out a classic David v Goliath tale of an investor who is challenging a large and successful company with the belief that the company is engaging in accounting fraud. The challenge, raised by the author as CEO of hedge fund Greenlight Capital is one of the classic tales in hedge fund lore where a company goes out of its way to attack and discredit an individual. Einhorn, who was betting against the company, spent the next 6+ years in an on-and-off battle trying to prove to everyone - the SEC, the department of justice, other investors, the public - that the company was a fraud. Nobody, it seemed, would listen. Sounds interesting, right? Well, it is, to a point. But Einhorn, seemingly trying to make his case to the reader, goes into excruciating detail into what he considered the fraudulent activity. The book gets lost in these weeds. Furthermore, Einhorn's conviction in 2012 (well after the book was published) for market abuse (insider trading like activities) undermines the saintly tone he takes in the book. I think the first few chapters are great for understanding the world of hedge funds and the work that hedge fund professionals put into their investment ideas, but in the end the book is a bit of a drag.
—Rick
