When David Einhorn Talks, Markets Listen—Usually
It was shaping up as an especially good episode of The David Einhorn Show. The founder of the $8.8 billion hedge fund Greenlight Capital was speaking in May 2012 at his favorite venue, the Ira W. Sohn Investment Research Conference, held that year at New York’s Lincoln Center, to a packed audience of money managers eager to hear which stocks were in his cross hairs. Thin, mild, diligent, and looking, at 44, like he could still get carded for beer, Einhorn is renowned for his fearlessness. Not simply for the boldness of his calls, but his embrace of the dull and unglamorous work that others simply won’t do. Since launching his fund in 1996, he has been right so often and, occasionally, against such high odds, that his public positions are the closest thing in finance to self-fulfilling prophecies. When he names a target out loud, in his nasal, Wisconsin-tinged voice, it’s like jolting the company with a cattle prod.
All speech long, Einhorn was getting the electric response he’s accustomed to. He criticized Martin Marietta Materials, a construction company: The stock lost 14 percent in eight minutes. He identified a threat to Dick’s Sporting Goods: The retailer shed 6 percent in three. The professional investors in the audience and the financial journalists live-blogging and tweeting Einhorn’s every remark even paid attention to what he didn’t say. By neglecting to mention Herbalife—a marketer of nutritional supplements whose stock he had single-handedly caused to plummet two weeks prior—Einhorn caused its shares to soar. The fund manager jokingly pulled a wand from his pocket and chanted a spell. The Einhorn magic was in full effect.
Then he began to speak about Apple. The day before, Greenlight had disclosed in a regulatory filing that its stake in Apple was valued at $877 million, almost 10 percent of the fund’s assets. Einhorn had been buying shares in the company since 2010, initially paying an average of $248. Now they cost $553, a 123 percent gain, and Einhorn told his audience that Apple still had plenty of room to grow, with a price-earnings multiple that was below average. “I have a hard time seeing how anyone ranks Apple as below average,” Einhorn said, arguing that the company could hit a market capitalization of $1 trillion.
Unlike the other stocks he had mentioned, shares of Apple barely budged—King Midas had touched a table, and it stubbornly remained wood. Partly this was a function of Apple being one of the largest and most actively traded companies in the world. And partly it was because markets obey David Einhorn more when he is bashing a stock than when he is boosting one.
His reputation as a “short”—an investor who bets that a stock will lose value—has eaten at him for years. “The press began referring to me as a ‘noted short-seller,’ a label I didn’t care for,” he wrote in Fooling Some of the People All of the Time, his book about his experience shorting a publicly traded lender called Allied Capital in 2002. In the investing hierarchy, long-term investors such as Warren Buffett who find undervalued companies to buy and hold have long garnered the most admiration and respect, while scrappy short sellers are often derided. Einhorn declined to be interviewed for this story, but as his friends are quick to note, Greenlight Capital has always been “net long,” with more money wagered on stocks going up than down. Even so, his takedowns of companies have proved more dramatic than his growth bets, and Einhorn on stage can seem to relish his shorts just a bit more than his longs. It was at the Sohn conference exactly 10 years earlier that he caused a sensation, methodically making the case that Allied was cooking its books. In 2008, he returned to take a wrecking ball to Lehman Brothers.
In 2012, Einhorn concluded his Sohn presentation by telling the audience that he’d invented something. It was a novel kind of preferred stock, he said, the characteristics of which could help certain companies unlock billions of dollars in value. He called his creation Greenlight Opportunistic Use of Preferreds, or—in case anyone missed his intent—GO-UPs.
Einhorn’s youthful persona—his boyish looks, his habit of bringing his parents to public speaking events, his tendency to litter PowerPoint slides with cartoons and animal pictures—helps to obscure that he’s already lived through much of the textbook life cycle of the superstar hedge fund manager. Impossibly smart at a young age, he hung his own shingle at 27, then made billions for his clients by discovering the one investing strategy that he was extremely good at—producing fanatical levels of research and unapologetically embracing the short sale—and doing it over and over again. More recently, having amassed a net worth of more than $1 billion, according to the Bloomberg Billionaires Index, he has turned to charity work and the pursuit of the ultimate billionaire plaything, a Major League Baseball team. At the same time, Einhorn’s legendary performance has begun to slip, with losses in five of the last eight quarters. Beginning with the 2012 Sohn conference, Einhorn’s yearlong effort to manipulate Apple, the largest company on the planet, may be as much about his legacy as about opportunity, an attempt to prove he can create value on the way up as well as on the way down.
Einhorn, who grew up outside Milwaukee and graduated from Cornell University, founded Greenlight in 1996. Since then the fund has returned an annual average of just under 20 percent, earning Einhorn the respect of both friends and rivals. “Have you ever read the book The Fountainhead?” says Curtis Schenker, president of hedge fund Scoggin Capital Management. “I think David is like Howard Roark. There are probably on Wall Street 20 original thinkers, and everyone else copies what other people are doing. And David is an investor who’s an original thinker.”
In 2002, Einhorn was gaining prominence for eye-popping returns—57.9 percent in 1997, 31.6 percent in 2001—when he was invited for the first time to make a presentation at the Sohn conference, where investors pay thousands of dollars to hear trading ideas from Wall Street’s sharpest minds and raise money for pediatric cancer treatment in the process. Einhorn decided to tell the group he believed Allied Capital was improperly inflating the value of its loans.
Visibly nervous and wearing a kaleidoscopic tie, Einhorn opened by telling the crowd that he had rehearsed in front of his wife the night before. “Let me tell you that at the end of my remarks, which lasted 15 minutes, she was snoring,” he said, smiling. “So don’t feel bad, because what I’m going to tell you today is a little bit more technical. I’m going to go into just one idea, and I’m going to go into it in quite some depth.” A nerdily bravura performance on accounting principles, audit procedures, and commercial mortgage-backed securities followed. The next morning, Allied shares opened down 20 percent, earning Greenlight a nice profit.
Einhorn became an instant star, but short selling was considered a contemptible tactic by many business executives, journalists, and much of the public, who dislike the notion of profiting from a company’s struggles. Allied fought Einhorn’s campaign with everything it had. He was investigated by the Securities and Exchange Commission on suspicions of stock manipulation, and Allied’s investigators stole his phone records. His wife, Cheryl, lost her job as a writer and editor at Barron’s, which the couple attribute to scrutiny of the Allied trade by the weekly’s sister publication, the Wall Street Journal. “It was a bad few days,” Einhorn wrote in his book. “It is never a good thing to get your spouse fired.”
Eventually, the SEC found fault with Allied’s business practices, and an executive at one of its subsidiaries pleaded guilty to fraud in 2007. Allied was taken over by Ares Capital three years later. Vindicated, Einhorn responded to the conclusion of one long, punishing battle by launching another one, this time with a target that was bigger and more complex. In late 2007, Einhorn went public with a critique of Lehman Brothers, which he said was overleveraged and covering up massive liabilities on asset-backed securities. His presentation on Lehman at the 2008 Sohn conference sent its shares sliding. Einhorn was criticized in the Wall Street Journal and the New York Times as a panic profiteer. History proved him right.
With two victories behind him, Einhorn’s influence grew. He’s had some misses on his share of investments, of course—his involvement with New Century Financial was a disaster, handing Greenlight a $140 million loss at one point, and Marvell Technology was a significant loser in 2012—but his hits have more than offset his losses. His October 2011 presentation on Green Mountain Coffee Roasters, which focused on weaknesses in its accounting and patent portfolio, spurred a 50 percent selloff. “Apparently now I’m a verb,” he later joked, referring to the phenomenon of “Einhorning” a company. Today, Wall Street is obsessed with the battle over Herbalife, which has pitted celebrity investors Bill Ackman, Carl Icahn, and Daniel Loeb against one another. Einhorn started it, by popping up on an Herbalife earnings call on May 1, 2012, and asking questions about its sales network—implying, to savvy listeners, that he might suspect the company was a pyramid scheme. Einhorn shorted the stock, but exited the trade early and avoided getting sucked into the feud that flared up around it, which reached a childish low when Icahn and Ackman berated each other live on CNBC.
“He’s a nerd in the best way possible,” says Larry Robbins, founder of Glenview Capital Management. “My guess is that part of the reason that David’s so passionate about his public presentations is that he’s sick of apologizing and feeling bad for being the smartest kid in the room.”
On May 31, 2012, Einhorn pitched his GO-UPs idea to Apple directly, on a conference call with Chief Financial Officer Peter Oppenheimer. The company had built up $110 billion in cash, most of it sitting overseas, earning little interest. Einhorn told Oppenheimer that Apple could issue $500 billion of perpetual preferred stock to existing stockholders, paying a 4 percent dividend. It would be something like a one-time gift, but issued in stock, with no maturity and paying $2 per year forever. It could be financed out of Apple’s U.S. profits, keeping the company’s foreign cash untaxed and available for acquisitions or hard times. Einhorn said his idea could boost Apple’s stock price by more than $100 per share. Financial academics would later poke serious holes in GO-UPs, describing them as a form of alchemy—or worse. “Issuing preferred stock will not add value to the company, not one cent,” wrote Aswath Damodaran, a New York University finance professor, adding, “You cannot create value out of nothing.” After listening to Einhorn’s idea, Oppenheimer responded coolly, waiting more than three months before telling Greenlight, on Sept. 5, thanks, but no thanks. Apple stock was about to break past $700. They were doing just fine without Einhorn’s input.
By the beginning of 2013, that was no longer the case. Apple’s share price was slipping toward $500. Einhorn dodged part of the fall, selling some 360,000 shares near their peak and then repurchasing most of them at a cheaper price, but the losses contributed to a negative quarter for Greenlight Capital. The fund fell 4.9 percent. “Our coffee was too hot, our apple was bruised,” Einhorn wrote to his investors, referring to a short bet on Green Mountain Coffee Roasters that had soured, too. The losses tarnished Greenlight’s performance for all of 2012, reducing the fund’s return from 13.2 percent to 7.9 percent—or in Einhorn’s words, “from good to pedestrian.” The Standard & Poor’s 500-stock index had gained 16 percent during the same period.
Apple was Greenlight’s single largest position, valued at nearly $700 million. If the stock continued to drop, with the rest of the market climbing, Einhorn risked having anemic returns compared with his rivals. That’s exactly the scenario that played out on Jan. 23, when Apple’s weak quarterly results sent the stock down again. Einhorn redoubled his attempts to sway the company, speaking with Apple’s finance staff on Feb. 1 and e-mailing them on Feb. 5. The next day, Chief Executive Officer Tim Cook heard Einhorn out by phone: Apple’s cash had grown to $137 billion, it was just waiting to be put to use and, maybe, help arrest the stock’s fall. But Cook’s answer was still no. (Apple declined to comment.)
On Feb. 7, Greenlight Capital sued Apple. The lawsuit caught many in the financial community, including some of Einhorn’s investors, by surprise. The suit didn’t attempt to force Apple’s hand on the cash issue. Rather, it seized on a wrinkle of corporate governance. The law requires public companies to vote on proxy issues individually. Apple had bundled four questions into a single voting item in its proxy, one of which would have required shareholders to explicitly approve the creation of a new class of shares. If the bundle passed, a drawn-out approval process would suddenly emerge as a barrier, in theory at least, to Apple issuing GO-UPs. Einhorn sued to block the vote.
Greenlight has long thought of itself as being on the side of good corporate governance, using its heft and the courts to push for transparency and better management. This time, the hedge fund found two of the best-known advocates for shareholder rights opposing it: The California Public Employees’ Retirement System and Institutional Shareholder Services were both in favor of the proposal Greenlight sought to block, arguing that it would strengthen Apple’s poor record on listening to its investors. The Nathan Cummings Foundation, an endowment that invests in both Apple and Greenlight, opposed Greenlight’s suit. Einhorn was publicly scolded by his elders. “I would ignore him,” Buffett advised Apple on CNBC. “I’d blow him off,” Jack Welch said on the same network. “I’d give Einhorn the back of my hand.”
Apple stock continued its decline. Einhorn, used to having investors rushing to follow in his footsteps, was suddenly in the unusual position of fighting the market. “If you’re accustomed to being someone who, when you breathe, markets respond, the risk is that you can come to believe that that’s going to be true without exception,” says Simon Greer, CEO of Nathan Cummings. “And when you then step into an arena with ISS and CalPERS and others—and certainly Apple’s management—and you don’t get that reaction? Then you’re in uncharted territory.”
Privately, some of Einhorn’s peers in the hedge fund ecosystem say they’re confused by his lawsuit—not its parsing of corporate governance rules, but the way it undercuts his virtuous reputation. Einhorn is a ferociously competitive investor who would never let good manners get in the way of a percentage point, but equally essential to his persona is his desire to always take the moral high ground. His campaign against Lehman, Einhorn once said, was not just profitable but also “the right thing to do.”
He also relishes his image as a regular guy. He makes a point of catching the commuter train home in time for dinner with his wife and three children, aged 11 to 16, in the suburb of Rye, N.Y., each night, and he drives a Honda Odyssey minivan. He’s also become more involved in philanthropy, joining the board of the antipoverty Robin Hood Foundation and donating, along with his wife, between $8 million and $25 million a year to 25 core causes, from an antiracism group to a Milwaukee debate league and the makers of the acclaimed 2011 documentary Bully. “The thing about David—and it’s not surprising, because it plays out in his business career—is he’s an amazing listener,” says actor Michael J. Fox, a Greenlight investor whose foundation funds research on Parkinson’s disease. “He really knows how to sit and listen and internalize stuff, and then respond to it on a deeper level.”
Einhorn is on Fox’s board and organizes the foundation’s annual poker tournament, a favorite competitive outlet. One year he was knocked out by his mother; he jokingly placed a bounty on her head, to go to the player who did the same to her, says Barry Cohen, who has played at Einhorn’s table. “I remember every now and then there’d be a tough hand, and people would throw down their cards, and he’d say, ‘Well, you had a 36 percent chance of winning,’” says Cohen, a senior managing director at Apollo Global Management, an alternative investment manager. “That was impressive. He’s got the odds in his head. Some poker odds are easy, but he was commenting on the tough ones.”
Poker is second only to short selling in the Einhorn legend, dating to the 2006 World Series of Poker main event, when Einhorn finished 18th and gave his $659,730 in winnings to Fox. Last July, at the 2012 World Series, Einhorn finished third in a charity tournament, netting $4.35 million for City Year, a Boston nonprofit. Before the tournament, he hired one of the most sought-after coaches in the game, Mike McDonald, a savant nicknamed Timex who was then all of 22 years old. The two spent 10 to 15 hours together over Skype on nights and weekends, McDonald says, covering the finer points of early-round strategy. In the background of McDonald’s Skype window, his twentysomething roommates would wander past; in the background of Einhorn’s, his wife and children. “One of the big things [we talked about] was, how people are going to use their perception of him, and how he can anticipate what people’s perception would be and react to that,” McDonald says. “He made some pretty aggressive bluffs throughout the tournament that people wouldn’t have expected, because he’s usually a very tight player.” McDonald, who knew Einhorn was playing for charity, didn’t charge for his services. The hedge fund manager later mailed a thank-you card, a bottle of Dom Pérignon, and what McDonald would only describe as a check for substantially more than his hourly rate.
A lifelong baseball fan, Einhorn spent months in 2011 negotiating to buy a stake in the New York Mets. The proposed deal, when it leaked out, showed Einhorn’s creative streak. He was set to pay $200 million for a third of the team, with an option to buy a majority stake in a few years. The franchise’s owners would have the ability to block him, but only if they refunded his money and let him keep a minority share. The deal, as Einhorn drew it up, was almost too good to be true: He would either own a Major League Baseball team, or he would have a chunk of one for a net payment of $0. In September 2011, the transaction fell apart, with the two sides unable to agree on terms. Jumbo vanity purchases are a Wall Street cliché and often signal to investors that it’s time to pull their money. When Greenlight’s next fiscal year began, the fund opened to new capital for the first time since the financial crisis.
Einhorn’s spat with Apple played out in the financial press throughout February. On Bloomberg TV, he compared the company to his “Grandma Roz,” who had a Great Depression mentality and built up too much cash. “We have come up with what we think is a win-win situation for Apple,” he said, “where Apple gets to keep its war chest, they get to keep the money, they get to have it for bad times, for growth, for acquisitions.”
“This seems bizarre to me that we’re being sued over something that’s good for shareholders,” Cook told Goldman Sachs CEO Lloyd Blankfein at the investment bank’s conference in San Francisco on Feb. 12. At the same time, he pledged to “thoroughly consider” Greenlight’s “creative” thoughts on cash.
On Feb. 21, Einhorn did something unusual for him, convening a conference call with reporters to offer more specifics on his preferred stock plan, which he had rebranded as iPrefs. The next day, a federal judge ruled in Einhorn’s favor in his lawsuit against Apple. The company canceled the vote on whether shareholders needed to approve the issuance of new types of stock.
It was a procedural victory for Einhorn in a war that otherwise continues to go badly. He didn’t attend the company’s annual shareholder meeting five days later, but his presence was keenly felt. “When I rose to speak, we had a standing ovation for CalPERS,” says Anne Simpson, the pension fund’s governance director. “There was not a single investor who spoke in favor of what Einhorn was planning.”
“When this vote is rerun” at next year’s meeting, Simpson adds, “he’s going to find that there’s a deafening silence when he calls for support, to have blank-check preferred stock issued. He’s really out of sync with the majority.”
During a Q&A session with investors, Cook addressed the Greenlight suit. “I strongly believe it was a silly sideshow, regardless of how the judge ruled,” he said. “I don’t think the issue of returning cash to shareholders is silly—we’re seriously considering it.” Cook got no more specific than that, and Apple shares fell yet further, to $444.
Einhorn withdrew his suit on Feb. 28, and various reports have since surfaced claiming Apple is set to announce new dividends or stock buybacks or both. Since the start of the year, Einhorn’s other big long bets on equities—Cigna, General Motors, and Vodafone—have increased by an average of 8.8 percent. Gold, another large position, has fallen. “One tough quarter to end a year isn’t reason to change what we are doing,” Einhorn wrote to his investors in January. “In fact, it’s surprising that we haven’t had more quarters like this over time. As always, we continue to reexamine our positions.” He closed with a classic Einhorn flourish, a quote from philosopher Daniel Dennett: “There’s nothing I like less than bad arguments for a view that I hold dear.”