Customer Reviews

Fooling Some of the People All of the Time, A Long Short Story

5 star:		(44)
4 star:		(17)
3 star:		(8)
2 star:		(0)
1 star:		(2)

 

 

Many well-respected money managers -- some of them with track records that spanned decades -- saw their reputations utterly destroyed in 2008. One manager who came through the carnage with reputation intact, and even enhanced, was David Einhorn (the author of this book). In addition to anticipating the fall of Lehman Brothers, Einhorn's fund, Greenlight Capital, significantly outperformed the S&P (though still ended up down on the year).

I am not an investor in Greenlight (Einhorn's fund), but I always enjoy reading their quarterly letters. They are consistently detailed, forthright and insightful, the way all investor communication should be.

I also give Einhorn respect (and admiration) for his 18th place finish in the 2006 World Series of Poker -- the $659,730 winings of which he donated to charity. The guy can clearly handle himself at a poker table.

The book itself was an interesting read on multiple levels. A friend of mine, who crunches spreadsheets in his sleep, made a friendly wager I wouldn't be able to get through the whole thing, as there is a great degree of detail (some would say mind-numbing detail) covering Allied Capital's various accounting irregularities.

I won the wager by devouring the book -- moreso out of hunger to absorb a highly trained investor's deeply analytical thought processes, than from a need to understand the particulars of Allied Capital or BDCs (business development companies).

The book sheds light on a number of excellent concepts above and beyond the Allied saga. The opening chapters, which describe the origins and philosophies and thought processes behind Greenlight Capital, are extremely informative.

The book as a whole, including all the Allied Capital detail, further offers a picture of what an exceptional investing mind looks like. If one were to try and reverse engineer the source of Einhorn's success (leaving out the irreducible good fortune component), four qualities would stand out:

- Exceptional analytical capability

- Exceptional creative ability

- Deep concentration ability

- Deep intestinal fortitude

To surpass "good" and make it to "great" as a trader or an investor, I would argue one needs all four traits. The presence of some but not all of these traits, I believe, accounts for the overwhelming tide of mediocre performance we see from Wall Street.

The typical investment banking path, for example, focuses heavily on the analytical side... while stomping the creative side into the dirt. The first few years of being an i-banker (if not one's entire career) are hallmarked by soul-crushingly repetitious activities that by and large replace spreadsheet gruntwork with any semblance of creative unconventional thought.

Worse still, the general institutional investment mindset runs directly counter to the "deep intestinal fortitude" idea -- in fact the whole of institutional investment culture seems expressly designed to browbeat the average manager into the mold of a gutless, benchmark-hugging coward, desperately afraid to deviate too far from the safety-approved track of his peers.

As if this were not enough, the mediocre types that hold the keys to most of the locks in the institutional investment world reinforce their plodding natures (and thus bolster their plodding dominance) with a "tried and true, proof in triplicate" way of thinking that drives the mavericks and creative thinkers mad (and out the door). At the end of the day, finding all four traits within a single individual becomes a rare thing indeed.

"Fooling" does have a touch of personal vendetta feel to it at times. The deep accounting detail can also be a bog in places, especially if one does not view keeping up with the myriad intricacies as an amusing challenge.

But the opening chapters alone are worth the price of admission... and if you want a gritty, true-to-life, wide-ranging gestalt feel for the combination of smarts and guts and tenacity it takes to successfully run a multi-billion-dollar hedge fund, "Fooling Some of the People All of the Time" delivers.

It would suffice that this book is well-written, engaging and informative, but it is more than that. It is an important book, for two reasons. First, it shows how much of an investment edge it can be to employ deep research and critical thought. The fact that many other investors continued to be fooled by the company even after Einhorn published his analysis may seem frustrating to the reader, but as an investor I view that reaction as confirmatory that there will always be lots of ways for independent, meticulous thinkers to make money. Second, the book demonstrates how difficult and lonely it can be to engage in activist investing, especially from the short side. Consistent with the story in this book, I have almost invariably found that the more correct the activist's views are, the more likely s/he will be subjected to ad hominem attacks; and that, when presented with cogent evidence of a serious problem, government officials either do nothing or protect the malefactor. Indeed, the business news of the last nine months is replete with examples of this. I am unaware of another book on investing that captures this second element. It is all the more commendable that Einhorn can tell this incredibly frustrating tale calmly, resisting the temptation to engage in histrionics or self-righteousness.

The book is really close to being 2 or 3 books in one. Initially heard about the book in the WSJ, I pre-ordered it on Amazon and took a few weeks to read.
In the first part Mr. Einhorn writes several chapters aimed at a non-professional investor to build the background of how a hedge fund invests, building the reader's knowledge from zero to fluent enough to understand the book. There's a glossary in the back of the book to refer to if you forget any of the terms. In fact, later on Mr. Einhorn's open and full disclosure of his investing philosophy, technique, and results contrast with those of Allied Capital and its collection of LLCs.

The second part of the book builds from a small trickle to a river of fraud, and frankly this is the hardest part to get through. You're directed to watch Mr. Einhorn's speech on the web in order to understand a dissection of reactions that follow, and I admit that I felt as if I was reading a story from somebody who was picked on too much in the schoolyard and is taking revenge by writing a book. As I kept reading the chapters the story suddenly took me by surprise (around P.200 or so).

It then becomes a story of how, if you were to implement a business poorly and needed to keep it going no matter what, you would do whatever it took to keep paying a dividend to keep your stock from tanking. You might start by fibbing on the health of the business one year, sell healthy companies to hide your true results a few years later, and start directing campaign donations to the right parties a few years later. In for a penny, in for a pound. Mr. Einhorn didn't mention, but in years past I have read, that Enron kept going for so long because they did a good job spreading their money around to both the politicians and the local community. Mr. Einhorn does mention how much many parts of the US (Wall Street, the various parts of government, and mom-and-pop investors) want to continue the company so as not to lose whatever interest they have vested into the company or system.

In the end I feel educated about his hedge fund, I feel in over my head on how to value a company's investments if the company is similar to Allied Capital, I feel a bit angry on how narrow the scope and small the punishment delivered (but not surprised - I've seen how narrow the scope of investigations of companies are before), and I feel that Mr. Einhorn has, for lack of a more subtle way of putting it, wasted enough of his life worrying about this company. You're not going to get back the years you've spent. You should go on to enjoy something else in life (but I appreciate the sacrifice you made so I could read about this in a book).

I was lucky enough to get a hold of an advance copy of the book from Amazon. Couldn't put it down. Finished it and went out and bought one for everyone at our company. Then went and bought more over the weekend to hand out to folks. It is an absolutely terrific book, and thank you, David Einhorn, for writing it. I loved the first few chapters on Greenlight and was absolutely mesmerized by the rest. One of my colleagues has gotten about half way through and said he did not realize that folks could "not get it" when faced with compelling evidence. I told him to read on, and that his disbelief will get much worse. I think that it is a stunning example of the concept of cognitive dissonance (at best, and probably being very kind with that). Writing this book took a great deal of courage and I know I am a better investor for having read it.

Here is the best (and easiest) way to figure out whether or not you want to read this book: watch the speech by the author that started the whole controversy detailed in this book (you can find the video on the author's site or YouTube by searching "Einhorn Allied speech"). If some combination of his general sincerity, obvious enthusiasm for "what is right" and readiness to get into accounting detail hold your attention, you'll enjoy the book; if not, chances are you won't. (Of course, there is a different argument to be made about who SHOULD read the book -- regulators, legislators, investors, managers, business students -- but last time I checked, those folks aren't building required reading lists based on Amazon reviews.)

Because we have the advantage of hindsight, we know that Einhorn was right about pretty much everything, even as the story has continued to unfold after the book's publication: Allied's accounting irregularities, their unsustainable business practices (he anticipated Allied's need to sell Callidus -- see p.327), and ultimately the decision to short the stock (Allied shorted the stock at $26.25 -- it closed 2009 around $4). But the reason to read this book is for process more than outcome. You'll learn a bit about how some hedge funds operate, but you'll learn a lot more about deceptive corporate management, negligent boards of directors, lazy government regulators and easily distracted journalists. Sadly, many readers may not find much "news" in any of that.

The book is a bit dry and detailed at points, perhaps partly due to legal concerns but primarily because it is about accounting, governance and regulation. That said, it's a pretty quick and compelling read for those with any interest in the subject.

Ever wonder how the Internet bubble REALLY formed? How Enron got away with fraud for so long? Do you think that the truth always comes out eventually? And that the good guys win in the end?

Read this book and see how even the free American economy can't handle bad news about its companies. How companies are able to hide the truth from investors and how some on Wall Street and even the government end up helping them out.

This true story is Kafkaesque. The writing is easy to understand. And the ending is a wakeup call.

Perhaps the only honest modern book on investments I have read. Also gives a limited insight into Einhorn's mind and way of thinking as an investor.

Einhorn masterfully tells the true tale of his battle against stock manipulation, corrupt and lax government, unscrupulous management, fee-hungry and conflict-laden investment banks, and careless and lazy long investors.

In the foreword, Greenblatt says something to the effect that he doesn't want his kids to read this book, because that will cause them to lose their innocence too soon. People should read this book for precisely that reason: to gain an appreciation for the sort of underhanded tactics that big business and the financial industry uses all of the time to part the little guys with their hard-earned money. And how the government often turns a blind eye (case in point Madoff, Stanford, Allied Capital, etc.)

Virtually all of the current reviews accurately describe this book. The individual who pans it, declaring that Allied's long history of paying dividends invalidates Einhorn's thesis, either likely didn't actually read the book or doesn't understand the fact that the funds garnered from Allied's constant chain of secondary offerings have essentially been used to pay all those dividends through deceptive if not fraudulent accounting. This is the classic description of a Ponzi scheme.

One of the weaker points of the book as a complete report on the rationale for shorting ALD is that it is primarily an indictment of BLX, Allied's Small Business loan subsidiary. Since BLX is a minor (but hardly insignificant) portion of ALD's 'assets', the reader is left to guess at what the value of the rest of ALD's current portfolio may be. Based on this book though, one is almost forced to conclude that ALD is rotting from within.

Another conclusion that one takes away is that as always, when the government is subsidizing/guaranteeing anything (in this case small business loans through the SBA) it is inevitable that waste, abuse and outright fraud will result as the incentives to abuse the program are so much greater than the incentives to detect and prosecute the abusers and too many (bureaucrats, politicians and regulators) are dependent on the resulting stream of money that flows from these programs and their clients. Of course the taxpayer ends up holding the bag.

The audience for this book is probably quite limited as you need a fairly sophisticated financial background and some persistence to get through it, but I highly recommend it. Certainly every taxpayer and shareholder of Allied should (but likely won't) read it. Thank you Mr. Einhorn for bringing this story to light and for pledging your eventual profits (if any)from your ALD short to charity.

I'm not going to be very eloquent here, but I just finished this book and felt compelled to review it. As an investment professional myself, I was blown away by this book. Quite simply, this book is: 1) an incredible story, and 2) a detailed insight into the process of a keen investor. The book moves quickly and is really a page-turner. I couldn't put it down as each new page left me aghast how the regulatory agencies and the Wall Street machine would be so reluctant to investigate (let alone punish) Allied's actions. The book is so well written that I'm a bit suspicious that Einhorn wrote the whole thing himself (most fund managers I know can only write in bullets). In terms of the insight into the mind of David Einhorn, his well articulated investment thesis and supporting analyses were learning tools for me that I can apply in my own work. Often with books on investing, I get disappointed because they're filled with generalized maxims like "buy only undervalued securities with a high margin of safety", which is helpful in a philosophical sense, but not very instructive on implementation. In this book, Einhorn systematically takes the reader through his investment thought process, and gives supporting analyses. One could almost use the analyses in his book as templates to look at other BDCs and specialty finance companies.

Lastly, I just want add a little editorial here on the sad failure of the regulatory agencies. As with the Madoff scandal, the SEC's unwillingness or inability to enforce its already existing regulatory powers is really disheartening as a citizen. I guess you can also throw in the SBA, USDA, Congress, and others in there. With all this talk of greater financial regulation, what's the point if those with the powers don't bother to exercise them?

David Einhorn is a man who believes in checking out companies carefully. When he saw that Allied Capital wasn't following accounting rules and was making lots of bad loans, he smelled an opportunity to make money as the company collapsed. After investing, he had an opportunity to share his idea at a charity event. Allied Capital's stock quickly dropped in response.

This book describes six years of battling to get the story out of what he had learned, to persuade regulators to crack down on Allied Capital so the rules would be followed, and to stop any illegal activities at Allied Capital. The book is written from Mr. Einhorn's perspective.

Along the way, Allied Capital decided that it had to discredit Mr. Einhorn's allegations and his motives.

After many years of battling, Mr. Einhorn learned a number of important lessons:

1. Policing small capitalization companies is a low priority for reporters, analysts, institutional investors, and regulators.

2. If a company keeps paying a dividend (even if it's not smart to do so), many individual investors will be attracted and will be loyal.

3. The Small Business Administration is more interested in shoveling out money to small businesses than it is in ensuring that fraud isn't being perpetrated on the tax payers.

4. Wall Street investment banks will help defend any company that pays a lot of fees.

5. With enough new capital, large mistakes can be smoothed over.

I'm sure that if he were faced with the same investment opportunity today, Mr. Einhorn would run rather than take a short position.

I highly recommend this book to people who learned about perfectly efficient markets and active, honest regulators in school. "Let the investor watch out for himself or herself" would be a better motto in describing the capital markets.

This book will be boring to those who want to a quick take. But you need to read all of the misrepresentations, misstatements, and personal attacks to get a true sense of how the game is played.

If you want a more recent version of this problem, just look at securitized mortgages.

Thanks for sharing, Mr. Einhorn!