In an interview with Bloomberg Television, the founder of Greenlight Capital David Einhorn said that he’s not sure if value investing will ever be a popular strategy again, because significant structural changes to the market have shut out many value investors.
Interviewed at the Robin Hood Investors Conference, Einhorn said that a great deal of value investors have transitioned into passive or quantitative investing, and that market participants have not gotten the same training and experience in value investing and making valuations as in the past. The tightening of the value investing field has made it easier for companies to slip through the cracks and become mis-valued, he contends.
“The world has moved passive,” Einhorn told Bloomberg, and that’s resulted in staff reductions across the board in departments that used to be devoted to active investing and caused structural changes in how investing is done these days. In the past, “we could buy something at a reasonably low multiple…benefit from [the company] being somewhat better, and realize that other investors would see what we say…and rerate the shares,” he explained. “That isn’t happening anymore, because there’s nobody to notice what actually happens at these companies.” Because no one is paying attention to what things are really worth, a significant number of companies are being valued incorrectly. Before, Einhorn could buy companies at 8 or 9 times earnings; now, they’re buying the same companies at 3 or 4 times earnings, and if those companies are then buying back at 10%, 20% to 40% of their stock in some cases, eventually “we’re going to have to be paid by the company,” Einhorn said, instead of allowing for other investors to deduce what Einhorn and his active investing peers had “already figured out before them.”
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