Jan 8 2009
This two-part essay has been receiving a lot of attention. Whitney Tilson said the following about it in an email:
I read the essay twice, both to learn what the two thinkers think, and as an exercise in evaluating Einhorn as a money manager. I've written before that how well an investor writes can offer clues into how well he invests. It may seem like a marginal activity for a money manager selector to focus on (along with tracking the conspicuous consumption habits of investors), and it's not the main thing I look at, but the logic of active investor selection, especially hedge fund manager selection, is ruthless:
1) Active investment managers are very expensive
2) There is a wide performance gap between the best ones, the mediocre, and the worst
3) In most cases, low-cost passive investment alternatives are widely available
4) Unless you manage to invest in the top ten percent of active managers (or even better if you pay someone like me or a fund of funds to select for you), your money and efforts spent on active manager selection rather than passive investing will have gone to waste.
Therefore, the manager selector must look hard at anything and everything that could be of use, both art and science.
With that self-justification out of the way, I was less impressed with the Lewis/Einhorn essay than Whitney Tilson. Although I agree with them that there is a lot wrong with the financial world that needs to be fixed, I don't think they proved that the various cited "causes" of the current crisis in fact caused the current crisis. Yes Wall Street is too short-term oriented, but that's been true for a long time (and Japan's vaunted long-term thinking of the 1980s, celebrated in airport books everywhere, did not prevent it from experiencing a crisis of its own). Yes the SEC is a revolving door between the public and private sector, but it's been that way since Ambassador Kennedy. Yes the ratings agencies face perverse incentives, but that's always been true.
I'd be interested to hear your thoughts. If you read the essay, force yourself to forget about the fact that one of the co-authors is a very successful and wealthy hedge fund manager.
P.S. By the way, I must take points off from Einhorn for his choice of collaborators. Michael Lewis may be the Tolstoy of narrative business non-fiction, but as an investment thinker I would not rank him as highly. Check out this takedown of Warren Buffett in the New Republic from 1992--17 years and about $38 billion (of Buffett net worth) ago. Here is how Buffett biographer Roger Lowenstein described the article and Buffett's reaction to it:In "Saint Warren: Wall Street's Fallen Angel," Lewis charged Buffett with a series of investing and ethical flaws so all-encompassing that an unknowing subscriber might have supposed that he was reading of one of the century's great swindlers--and one of its great failures, to boot. Lewis took the Efficient Market Theory as gospel and dismissed Buffett's career as a run of lucky coin flips. That aside, "Fallen Angel" was rife with actual errors.
Buffett was livid over the Lewis piece. Morey Bernstein, the author of The Search for Bridey Murphy and a Ben Graham devotee who had known Buffett casually, wrote Buffett a sympathetic note, damning Lewis's article, apparently in more profane terms. Buffett--ever careful with words--responded: "Morey--Thanks for the empathy re the Michael Lewis piece. He is everything you say he is." (pp 404-405)
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