David Einhorn: It's a New World for Investors

I really respect David Einhorn because he has evolved from a pure value investor into recognizing the importance of macro. Anybody who doesn’t recognize that at this point is going to pretty useless going forward. Buy great companies with high free cash flow and big moats! Hoo-ray! It’s a new world, y’all and Einhorn gets it. His speech Monday at The Value Investing Congress is a masterpiece:

The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor.

……….

Now, the question for us as investors is how to manage some of these possible risks. Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike (NKE), IBM (IBM), McDonald’s (MCD) and Walgreens (WAG) over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit driven hyper inflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long term value as difficult to assess.

However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.

Comments

[Dave Wrixon:]

I think the answer is to buy Great Stock in Great Companies just don't buy them in Dollars. There is whole World to invest in out there. Wall Street is broken, go and have a look somewhere else, and I don't mean Chicago.

Oct 22 04:26 AM

[yellowhoard:]

Grandpa Ben sounds like a pretty smart guy.

Oct 22 08:27 AM

[doubleguns:]

The dollar is worth .00094 oz's of gold. Now you know what a dollars worth.

Tomorrow may not be so. Most probably not so.

Oct 22 08:39 AM

[Albertarocks:]

On Oct 22 08:39 AM doubleguns wrote:

> The dollar is worth .00094 oz's of gold. Now you know what a dollars
> worth.
>
> Tomorrow may not be so. Most probably not so.<

You'd think the British would be up in arms about the value of their pound. They're supposed to be able to take a one pound note into any bank and exchange it for one pound of silver. That's why it's called a pound sterling (sterling silver). Crazy, eh?

Oct 22 08:45 AM

[bartpr:]

we are trying to end the credit bubble. it will take years to recover consumer new worth. now we enter the stimulus bubble. every bubble ends in pain. the bubbles also come more frequently. i am now down to 20% stock. , having no confidence in the gov or wall street.

Oct 22 01:57 PM

[Old Trader:]

Regarding macro vs. value/bottom up investing;

None of us operate in a vacuum, and it only makes sense to periodically take a step (or several) back to look at the "big picture" and assess changes and how they might impact our portfolios.

Oct 22 07:19 PM

[ebworthen:]

The question is also whether or not it is moral and ethical to invest in a rigged market where the savings, investments, and retirement of numerous generations is gambled with and squandered.

The bigger question isn't whether you can make a lot of money being a pimp, running a casino, or a lottery; but does it benefit society to invest in such ventures?

Oct 23 12:37 AM

[user396040:]

As an investor entering retirement, I have to bear in mind that most of my expenses will be in dollars unless I move out of the country(I have visited Costa Rica where many US retirees are settling but I still plan to stay here. So my focus has to be on staying ahead of dollar denominated inflation.Right now, I don't see anything that beats dividend paying blue chip stocks (T, XOM, MCD, PG, JNJ, etc) with pricing power that will keep up with dollar inflation.

Oct 23 12:49 PM