It’s always a good idea for individual investors to look at what institutional investors, also known as the smart money, are choosing. You should never base your decisions solely on others without doing research, but institutional investors are professionally trained and often have decades of experience and the returns to back it up.
Following these successful investors is also a good way to find new ideas and check your thesis. Yet too often I feel that individuals only look at two or three of the best investors rather than casting a wider net.
Warren Buffett and Bill Ackman definitely come to mind. I have nothing against Buffett or Ackman, who are certainly two of the best ever, but here is the billionaire I think people should follow.
A strong record despite fundamental shifts
David Einhorn runs the hedge fund Greenlight Capital, which he launched at age 27 after raising about $900,000 from family and friends. Einhorn rose to prominence by betting on (or short-selling) Allied Capital in 2002, when he questioned the company’s accounting practices.
Years after he announced his short position, the Securities and Exchange Commission validated Einhorn’s claim and found that Allied had indeed violated securities laws because of its accounting practices.
Einhorn also played a key role during the Great Recession when he shorted Lehman Brothers in 2007 due to the company’s underwater securities.
But like many of the greats, Einhorn is also known for his value investing approach, looking for stocks trading below their intrinsic value. Earlier this year, he said he believes the practice of value investing could be dead due to the broken market structure and the rise of passive investing:
Value is simply not a consideration for most investment dollars out there. There’s all the machine money and algorithmic money, which doesn’t have an opinion about the value, it has an opinion about the price: “What’s the price going to be in 15 minutes, and I want to be ahead of that.”
This shift in market structure has led him to change his investment philosophy for his larger business interests. Now he focuses on companies that look cheap in terms of value and return capital to shareholders through buybacks or dividends. It’s always a good sign to see even the best investors adapt, even if Einhorn is likely frustrated by this shift in market structure.
Despite the change in strategy, he has generated strong long-term returns. Greenlight has an average annual return of 13.1% since its launch in 1996, compared to 9.5% for the broader benchmark S&P500. That equates to a total return of more than 2,900%, compared to the S&P 500’s 1,117%.
Einhorn’s big winner
The largest position in Greenlight’s portfolio is a housing company called Green Brick Partners (NYSE: GRBK). He founded Green Brick in 2006 with veteran real estate investor and homebuilder Jim Brickman.
In 2008, during the housing market collapse, Einhorn and Brickman started a real estate equity fund, where they initially began buying land and making loans to distressed builders. By 2013, the housing market had recovered and their fund had acquired a lot of land. Needing capital to grow, the two took the fund public and became Green Brick Partners. Brickman became CEO and Einhorn became chairman of the board of directors.
Greenlight Capital began purchasing Green Brick shares in the fourth quarter of 2014 at an average price of $7.20. Initial purchases amounted to approximately $112 million. Although Greenlight has been in and out of the stock over the years, the position is currently valued at around $950 million.
Einhorn and Greenlight still owned more than 25% of the shares, according to Green Brick’s most recent proxy statement. The stock has nearly doubled in the past year and is up more than 670% over the past five years.
All these land purchases since 2006 have been a differentiating factor for Green Brick in the housing sector. At the end of the second quarter of 2024, it owned more than 28,500 lots, most of which are in the growing Texas market. As inventory and land have become increasingly limited and there is increasing competition to acquire, especially in strong and desirable housing markets, this strategy has paid off.
A value investor with plenty of runway
When I look at Einhorn’s current investments, I see that he still owns many value stocks, which I always find the most interesting to evaluate because they trade at attractive valuations and their future depends on their ability to pay down debt to pay and generate cash. flows and transform the trajectory of their revenues.
However, Einhorn is aware of changing market dynamics and is willing to adapt, an important characteristic for any investor. At only 55 years old, I believe he still has plenty of room in his investing career and is a smart individual with a unique point of view that individual investors should keep an eye on and study.
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Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool holds and recommends Green Brick Partners. The Motley Fool has a disclosure policy.
Here’s the billionaire investor you should follow — and he’s not Warren Buffett or Bill Ackman originally published by The Motley Fool
