Wisdom From the Second Most Influential Investor in America Today

When the hedge fund investor David Einhorn appeared on a recent conference call of Herbalife (NYSE: HLF  ) , shares of the company declined sharply, even though he never revealed his thinking one way or another. Just the thought that he might have a negative view was enough to hurt the stock price.

At the Ira Sohn Investor Conference soon after that call, Einhorn began his presentation with some remarks about Martin Marietta Materials (NYSE: MLM  ) , which he said has "lots of problems." Shares of that company immediately plunged 8%. Fortunately for Herbalife, he didn't mention anything at all about that company during his Ira Sohn talk -- shares of Herbalife increased 14% after his presentation.

No. 2 tries harder
Clearly, David Einhorn has tremendous influence in our markets today. In fact, I think it's fair to say he's the second most influential investor in America right now, after Warren Buffett. What makes him so influential? Here are five possible reasons:

1. Nothing works like success. David Einhorn has had some very high profile successes, and that's obviously a huge reason he's so influential. First, he waged a lonely battle against Allied Capital, after announcing his short position in that company. Later, he laid out his short case on Lehman Brothers in April 2008. In both cases he was attacked by the companies and the press. And in both instances he was proven right in the end.

The Lehman call was certainly enough to solidify his reputation, yet he had another remarkable call just last year. At the Value Investor Conference in 2011, he announced his short position in Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , which was trading at about $60 per share at the time. It's now trading at around $21 or so. Once again, Einhorn had made a very public call that turned out to be quite prescient.

2. He works extremely hard. Despite all of his popularity, Einhorn approaches his work more like a scholar of medieval manuscripts than the investing rock star that he has become. His firm Greenlight Capital has been described as a library, and Einhorn is famous for his incredibly detailed investing presentations on both his short and long positions.

In his book on the Allied Capital saga, Einhorn said that his research starts with the question of why a security is likely to be misvalued by the market. His team then begins its rigorous analysis. If Greenlight decides to go forward with an investment, Einhorn needs to believe that they have "a sizable analytical edge over the person on the other side of the trade." And in order to come up with that edge, Greenlight digs in as deeply as it can.

3. He's transparent with his research. In order for you to be influential, investors actually need to know what you are thinking. Unlike a lot of other hedge fund investors, Einhorn sees no reason to be secretive, and is very willing to share his ideas with the public. When I interviewed him last year for Fool.com, he was extremely passionate about this issue. When asked about Whitney Tilson's famous short call on Netflix (Nasdaq: NFLX  ) , he praised Netflix CEO Reed Hastings for openly engaging with Tilson on the issues at hand.

4. He's courageous. When you read about his experience with Allied Capital in Fooling Some of the People All of the Time, you see that it took a lot of guts for him to take the stand that he did. He was attacked by the company, skewered in the press, and even investigated by the Securities and Exchange Commission. One of the most gripping scenes in the book is when the SEC questions him in a Stalin-esque interview room. And taking on Lehman Brothers probably wasn't any easier.

There isn't a lot of courage on Wall Street or in the financial press nowadays, so I think investors really appreciate that quality of Einhorn's.

5. He's fiercely independent. Einhorn is refreshingly unpredictable in his outlook on investing. Recently, he's been long on gold and Apple (Nasdaq: AAPL  ) . And his long position on the latter company shows that he's not only a short-seller; he will look for great investments in a wide variety of places. Ultimately, he invests in what he believes. In his book, he writes that "if you know you are right, all you need is patience, persistence, and the discipline to stay the course."

A great American success story
One similarity between Buffett and Einhorn is that they both deserve their status as highly influential investors. Buffett made his reputation by investing in great businesses and holding on to them for the long term. Einhorn commands the attention of the investing world as a result of his willingness to learn more about his investments than the folks on the other side of those trades. To paraphrase that old Smith Barney ad, Einhorn gained his influence the old-fashioned way. He earned it.

Einhorn remains long on Apple, and has joked that he "can't find any prohibition on trillion dollar market capitalizations." Our analysts have put together an Apple research report that details the opportunity and spells out three reasons to buy Apple (and three reasons to sell Apple). Grab a copy of this new premium research report, and you'll automatically get free updates.

John Reeves owns shares of Apple. You can follow him on Twitter @TenBaggers.

The Motley Fool owns shares of Netflix and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a bull call spread position in Apple and creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (12)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2012, at 5:19 PM, buddylee59 wrote:

    It was Smith Barney, not EF Hutton, which made money the old fashioned way, as John Houseman intoned: "We earn it"

    EF Hutton was the one where everyone would become silent and lean in to hear, because 'when EF Hutton talks, people listen.'

    Had to bring it up in honor of Mr. Einhorn's deservedly-lauded attention to detail.

    BL

  • Report this Comment On June 15, 2012, at 8:41 PM, 712Mike wrote:

    well I just hope he is correct about aapl

  • Report this Comment On June 16, 2012, at 7:06 AM, TMFBane wrote:

    @buddlee59,

    Thank you for pointing that out. You are absolutely correct, and that was my mistake. I've asked our editors to correct the error.

    Somehow, EF Hutton got stuck in my mind -- maybe there's small lesson there too. Sometimes, it's the stuff you think you know, that maybe you actually don't know.

  • Report this Comment On June 17, 2012, at 9:13 PM, NYPaperman wrote:

    My Dear Mr. Reeves, I have read, reread, have tried to digest what you have written about Mr. Einhorn being the second most influential investor - as you say - second only to Warren Buffett. After due consideration and considerable thought I can only conclude that you are either delusional, employed by Mr.Einhorn, are Mr. Einhorn, or just plain confused. And plainly, what a load of sycophantic rubbish. Comparing Mr. Einhorn with Mr. Buffett is like comparing an underdeveloped teenage toadstool with, well, Warren Buffet. I suggest you research Mr. Einhorn and his company Greenlight Capitol and compare Greenlight Capitol with Berkshire Hathaway. We don't live in the past. If the best that you can make of Mr. Einhorn's prognostications occurred in April 2008 regarding Lehman Brothers that's pretty sad. Greenlight Capitol is a hedge fund, valued at the end of the last quarter (3/31/2012), at $5.5 Billion and is based in the Cayman Islands. As of this past Friday (6/17/2012) Berkshire Hathaway A shares (BRK.A) were selling for $122,600 per share and the company as a whole had an approximate market cap of $204.06 Billion (Now that's dollars!) and of course it's based in Omaha, Nebraska. Time will tell and actually it already has. What you have written is kind of embarrassing. And, you really owe true scholars of medieval manuscripts an apology for comparing the Einhorn approach to real scholastic research.

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