Recently, my fellow Fool John Reeves had the opportunity to interview hedge-fund hotshot David Einhorn (part 1, part 2). Einhorn is known for his sharp investing, straight-shooting style, and tenacious battling for what he believes is right.
All of this gives us good reason to be interested in what Einhorn has to say in the recently released Greenlight Capital partners' letter. Here are a few key areas that jumped out at me.
What are we going to do with you, Bernanke?
Einhorn makes it perfectly clear that he is not on board with Federal Reserve Chairman Ben Bernanke's current policies. Or, at least, he doesn't believe for a second that the Fed will be able to contain the inflationary impact of the central bank's monetary easing.
Einhorn noted that after an August speech by Bernanke, in which the chairman pledged additional easing, the S&P 500 rallied by 19%, oil rose by 16%, copper was up by 32%, coffee jumped by 34%, corn climbed by 43%, and cotton skyrocketed by 57%. Bernanke explained away the rise in oil on emerging-market demand, but the Einhorn letter was skeptical: "Ostensibly, it's a coincidence that many of the necessities of life came into simultaneous shortage and shot up in price just as Mr. Bernanke promised additional monetary stimulus."
What does the future hold? Uncertainty.
We can't predict the future, and it's comforting to hear that even the top-notch folks at Greenlight don't pretend to be able to do it: "As for the future, we are 100% certain of nothing. The good news is that our job is not to know the future, but rather to understand that it is uncertain and to construct a portfolio that should generate attractive results under a wide variety of outcomes."
In the case of Greenlight, being ready for a range of outcomes means carefully crafting a portfolio with both long and short positions (similar to what Motley Fool Alpha does). More generally, I touched on this idea in a recent article that discussed Michael Mauboussin's view on process versus outcome and on creating an expected value for an investment.
It can be tempting sometimes to think that we have a good view into what the future holds, so a sober reminder of the market's uncertainties is always helpful.
The letter highlighted three Greenlight holdings that performed particularly well. Arkema, a French chemical company formerly owned by Total
Offshore oil and gas driller Ensco
Finally, global real estate company MI Developments (MIM) headed for the rafters after its CEO, Frank Stronach, agreed to give up control of the company in exchange for a handful of company assets. It doesn't sound as if Greenlight is particularly fond of Stronach or the agreement.
Arkema and Ensco were both among Greenlight's largest longs at the end of the fourth quarter.
Greenlight discussed two new positions in the portfolio: BP
I have a hunch that being at the center of one of the world's worst man-made disasters will never make an appearance in How to Win Friends and Influence People, unless there's ever a companion edition focused on what not to do. As a result of the Gulf of Mexico oil spill, BP has found itself on the wrong side of popular sentiment. However, Greenlight sees opportunity in the mess, suggesting that the company can still generate $20 billion per year in earnings, which gave the stock a pro forma price-to-earnings ratio of 7 when Greenlight invested.
With Sprint, Greenlight sees "early signs of a promising turnaround" and praised CEO Dan Hesse for improving customer service and Sprint's handset lineup. The fund highlighted the potential for margin expansion as Sprint consolidates its two networks and the company's wireless-spectrum holdings -- both direct and through Clearwire
I owned BP shares before the oil spill, suggested that the market had overreacted after the spill, and expressed bullishness even after its shares had staged a bit of a recovery, so it's probably not surprising that I'm on board with Einhorn's call on BP. Sprint is an interesting case -- though the company has been reporting losses for a while now, it has continued to churn out a significant amount of cash flow. Thanks to Einhorn's interest, I'm putting that one back on my radar.
Know when to fold 'em
As with the uncertainty of the future, it's good to get a reminder that even the best investors out there don't get them all right. Among the positions that Greenlight closed during the fourth quarter was its short of real estate investment trust HCP
Fellow famed investor Warren Buffett might jump at this dividend stock if he were you. Or at least that's what my fellow Fool Anand Chokkavelu thinks.
Total is a Motley Fool Income Investor recommendation. The Fool owns shares of Ensco. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Fool contributor Matt Koppenheffer owns shares of BP and Total, but of no other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.