A Revelation for Those Who Believe Efficient Markets and Good Regulation Exist

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	• Fooling Some of the People All of the Time: A Long Short Story David Einhorn Wiley, 2008 - 380 pages average customer review:based on 34 reviews view larger image
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highly recommended

Great book

This is a great book to read through. It disclosed how a hedge fund conducted detailed research to valuate a company and fighting the management of the company for some fraud accounting practices. Very informative, detailed and interesting!

Good writer, Great Investor, Superb Revisionist Historian

David Einhorn's book contains quite a lot of good advice, but its subtitle "A Long Short Story", says it all; this book does not need to be 350 pages long. In fact, I can give you a good portion of its wisdom here: 1) Avoid losing positions, as it takes winners to offset them just to get back to even; 2) Avoid "evolving hypotheses", which means that if you buy a stock for a reason, the catalyst occurs, and the stock doesn't respond as you wanted, don't sit around and create a new reason to own it; rather, sell it and move on. 3) A company's paying of a dividend does not necessarily signal financial strength..in fact in the case of Allied Capital they frequently raised capital in the equity markets in order to pay the dividend (which Einhorn accurately likens to a Ponzi Scheme).

Where the book falls apart is the many dealings that Einhorn claims to have had with various agencies, most of which Einhorn claims wronged him. The reality is that only Einhorn and the counter-parties know for sure whether these dealings truly happened as he portrays, but there are strong signals that his book is a self-serving diatribe; for example, when Harvard Business School wrote a case about the Einhorn/Allied Capital issue, Einhorn says that the case was biased in favor of Allied, and that he wasn't offered the chance to comment on the case as was customary because of his conspiracy theory that the research assistant had formerly worked at Capital Research, which owned Allied Capital stock. Futhermore, he implicates esteemed Harvard Business School professor Andre Perold in his revisionist history account, claiming that Greenlight was denied the right to offer input in the case. That, I can state with great confidence, is factually incorrect. The fact that the one claim in the book that I chose to attempt to verify proved untrue makes me quite suspicious about the balance of its contents.

In sum, there is some good financial advice from a great investor, but the book is twice as long as it should be, and there are too many self-serving stories of questionable veracity.

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A brilliant (but FRIGHTENING) book

This is an investment book that should not be missed (as long as your accounting and financial analysis skills are well-honed -- the critical analysis is detailed). This would be excellent reading for a CFA/MBA/CPA.

David Einhorn writes the detailed story of his investigations into malfeasance at Allied Capital. He makes the case, with all the back-up detail, that this company is essentially a "Ponzi" scheme (like a financial chain-letter). Allied books SBA (and other Federal Agency) guaranteed loans, violating origination-risk criteria, front-ending income, managing and delaying loan write-downs while inflating earnings on the pretext of lack of objective value impairment (though they do manage to write-down their equity investments earlier!), increasing portfolio size which hides higher bad-debt experience on seasoned loans which they do not disclose, and distributing capital (if the accounting had been more conservative) through increasing dividends funded by new equity. All this, as well as documented fraud.

These technical details and analysis are worth the price of admission alone. However, the most frightening thing about the book is the lack of interest in the Allied malfeasance shown by the SBA and the SEC, Congressional oversight committees, sell-side analysts and journalists, all for their own self-serving reasons. If you had any faith in government by-and-large acting in our best interests before, this book could well destroy that act of faith.

As well as the Allied Capital story (most of the book), the early chapters describe how Greenlight Capital (David's Hedge Fund) works. That's a fascinating revelation in its own right. What is most impressive, though, about the book is the quality of analysis David has done. Why are Hedge Funds who some times run short-positions so reviled these days by regulators? David is anything but a shoot-from-the-hip trader, neither is there any indication whatsoever he is trying to manipulate the market in Allied stock with rumours (everything is backed up with hard evidence and detailed analysis). By the way, David is the person who publically took on the ex-CFO of Lehman and won. If you are a financially sophisticated shareholder in Allied Capital, please do read this book -- you most probably won't be afterwards.

At the end of the book, I was left with one puzzling question: why has David devoted so much of his time to researching and telling this story (early on in the events, he even says he thought of quitting because it was becoming so time-consuming)? It's almost as if he is now a dog with a financial bone and just can't let go any more. Admittedly, he's doing us all a big favor in the process (and has agreed to give any proceeds from his short position to charity, so he has no personal conflict of interest).

If anyone from the management of Allied Capital or SEC enforcement reads this review and thinks of bringing a lawsuit, do think again. I am only summarising David's book, which is in the public domain, and I never have had, neither do I, nor will I ever have any position in Allied Capital's stock. But then, of course, as David makes the point near the end, the SEC only seems to be interested in high visibility enforcement when a big company has actually failed (Enron, Worldcom), unlike Allied Capital (yet!), or it involves a well known figure (Martha Stewart). Where is the justice that we are all supposed to put our faith in?

Many congratulations, David. I hope there can be more financial books of this quality in the future.

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A Good Investment

I picked this book up as a light summer scandal read and it turned out to be anything but. This is a tremendous book. As someone with limited knowledge of the world of investing, I was a bit behind the curve in muddling my way through what is a very complicated story told using the language of the world of finance, but the author took the time to explain the concepts he used throughout and I learned an incredible amount from this case study. I imagine it will be one used in many academic Business/Finance classes. The best part of the book is that it paints a very vivid picture of life on the "inside" of the world of finance to a broad audience that typically is limited only to an outside perspective. However, the story is quite unsettling as it presents a scenario where the system (SEC, the media, Department of Justice, etc...) fails to protect investors and taxpayers and instead looks the other way while politically well-connected corporate bigwigs work the system and amass millions in part by defrauding said investors and taxpayers. I came away from the story depressed and appalled but ultimately with a better understanding of some of the reasons the country is likely facing the mess we are today. Are you a taxpayer? Do you have a bank account, an IRA a 401K or plan to fund part or all of your retirement through some sort of investment? If so, you will benefit from reading this book. Bottom line, it's not an easy or pleasant read, but it's a must read. Think of it as a good investment. :)

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A Revelation for Those Who Believe Efficient Markets and Good Regulation Exist

David Einhorn is a man who believes in checking out companies carefully. When he saw that Allied Capital wasn't following accounting rules and was making lots of bad loans, he smelled an opportunity to make money as the company collapsed. After investing, he had an opportunity to share his idea at a charity event. Allied Capital's stock quickly dropped in response.

This book describes six years of battling to get the story out of what he had learned, to persuade regulators to crack down on Allied Capital so the rules would be followed, and to stop any illegal activities at Allied Capital. The book is written from Mr. Einhorn's perspective.

Along the way, Allied Capital decided that it had to discredit Mr. Einhorn's allegations and his motives.

After many years of battling, Mr. Einhorn learned a number of important lessons:

1. Policing small capitalization companies is a low priority for reporters, analysts, institutional investors, and regulators.

2. If a company keeps paying a dividend (even if it's not smart to do so), many individual investors will be attracted and will be loyal.

3. The Small Business Administration is more interested in shoveling out money to small businesses than it is in ensuring that fraud isn't being perpetrated on the tax payers.

4. Wall Street investment banks will help defend any company that pays a lot of fees.

5. With enough new capital, large mistakes can be smoothed over.

I'm sure that if he were faced with the same investment opportunity today, Mr. Einhorn would run rather than take a short position.

I highly recommend this book to people who learned about perfectly efficient markets and active, honest regulators in school. "Let the investor watch out for himself or herself" would be a better motto in describing the capital markets.

This book will be boring to those who want to a quick take. But you need to read all of the misrepresentations, misstatements, and personal attacks to get a true sense of how the game is played.

If you want a more recent version of this problem, just look at securitized mortgages.

Thanks for sharing, Mr. Einhorn!

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