David Einhorn is one of the most successful and respected hedge fund managers in the world today. David Einhorn also happens to be one of the most successful and respected Texas Holdem poker players in the world today.
If ever proof was needed of the strong connection between poker and investing, David Einhorn is indeed living proof.
The New York magazine ran a great story written by Hugo Lindgren on David Einhorn in June 2008 entitled “The Confidence Man”. The piece focuses on the role of Einhorn and Greenlight Capital in the fall of Lehman Brothers due to Einhorn’s prescient shorting of Lehman stock into its collapse in September 2008. Although the Lehman part of the story, and the rest of the background on Einhorn is fascinating to read, the Masked Financier was drawn to the references to David Einhorn’s skill at Texas Holdem Poker and how this is related to his success at investing.
In fact, this story demonstrates the validity of the Texas Holdem Investing method, but in reverse. Einhorn was a great investor first, and then after that took up Texas Holdem poker and was equally brilliant.
Einhorn runs the Greenlight Capital hedge fund out of Stamford in Connecticut. Greenlight has produced returns significantly above the market average since it was founded in 1996 with a mere $900,000 in funds. By 2008 Einhorn was managing over $6 billion.
The first relevant piece of the article to investing and poker is where Einhorn signed Greenlight’s first letter to fund investors with the Ken Griffey Jr. quote “I don’t consider myself a home-run hitter. But when I’m seeing the ball and hitting it hard, it will go out of the park.” The Texas Hold’em corollary here is that as a player you should never be looking for home runs because they don’t happen that often. However, when you see the cards lining up in your favour and you’re playing well you should maximise your betting and go to win the big pot. Similarly, investors rarely hit home runs, which would be categorised as making 2x or more on a trade or investment. This just doesn’t happen that often in the real investment world (contrary to what lots of the boiler room-type investor promotions on the web would tell you). However, if you do watch your basics and make good investments, you will come across some potential investing home runs where things move massively in your favour. At those times you should hit hard, and bet hard by putting a material amount of funds into these transactions (bearing in mind good risk management!). Then you must complete the investment home run by letting your profits run rather than cutting out too early.
The article then describes that Einhorn didn’t spend much time actually preparing for the World Series of Poker. But in typical journalistic fashion this statement omits to point out that his many years of successful professional investing had honed Einhorn’s mind into the perfect state for playing poker. This is an example of the Texas Holdem Investing concept in reverse, whereby the Texas Holdem Investing method teaches poker first as a way of developing the mindset necessary for successful investing.
The article then goes on to describe Einhorn’s own thoughts on poker and how it relates to investing. He notes that “Texas Holdem is all about folding and waiting for that time that comes up every hour or two where you actually have an advantage and you can press it.” Of course this logic directly relates to investing, where a large part of the work is sitting on your hands and analysing the markets while you wait for favourable opportunities to present themselves. Einhorn makes an interesting point that one of the likely reasons that he outperformed many expert poker players in the World Series is that the money at stake to him was relatively speaking quite small. And it is true, the money that changes hands in the worlds investment markets dwarfs the pots that are at stake in all the Texas Holdem games the world over! However, it is interesting to note that this is another example of Texas Holdem Investing in reverse, where Einhorn’s long history of investment success translates into an advantage at the poker table. In the same way, a long training program of learning poker can translate to an advantage in the investment world compared to other investors who have not had such an education.
The article then goes on to make an interesting comparison between poker and investing that is directly related to one of the key elements of Einhorn’s successful investment record with Greenlight. One of the specialities of Einhorn has been short selling which is effectively making an investment bet that will increase in value if the share price of a target company falls. And one of the main reasons for undertaking such a strategy is if the investor thinks that management of the target company are misrepresenting performance metrics. Put simply, shorting is a good idea if you can spot management teams that are bluffing their numbers. And Einhorn has proven to be exceptional at this. Some of his early shorts such as Conseco and Resource America returned over 80% (note this is an incredible return, but still below the 2x mentioned above for an investment home run). And perhaps his most celebrated (and public) short sale of them all was that of Lehman Brothers during the summer of 2008, when he exposed the top management for some pretty serious bluffing with the financial balance sheet equivalent of 7-2 offsuit pocket cards.
The New York magazine article does leave out one of Einhorn’s other important observations regarding Texas Holdem poker and why it is very similar to investing in terms of the uncertainty of outcomes. And this perspective can be found in a New York Times article from 2006 entitled “Hedge fund manager who plays his cards right”. Einhorn describes poker and investing as both being “games” where the information is not complete. He states that in both Texas Holdem and investing the “player” has a certain set of facts and is looking for scenarios where there the “player” has an edge of some sort. This edge can be either statistical (where the investor / poker player knows the numbers for an investment / set of cards very well and can gauge probabilities accurately) or psychological (where the investor / poker player is able to ascertain the mentality of the company management / opposing players for a particular situation).
So, in conclusion, if you are a good investor it is likely that your trips to Las Vegas or PartyPoker will be more profitable than the average fish. And the reverse logic applies too, as described in Texas Holdem Investing, whereby if you are skilled at poker you are likely to be good at investing. If it works in reverse for David Einhorn, then Texas Holdem Investing should work with poker for learning investors.
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Good article. One flawed point is in reference to Eihorn’s shorts that returned 80%. The most a short can return is two times and that is only if the stock goes to zero. In my opinion 80% return on a short is harder to do than a two times return on a long position.
Thanks for the comment Tony.
I’m not sure I would totally agree with your perspective on the relative difficulty of achieving an 80% return through either a long or a short.
I think the key factor which determines the relative skill in making money on a long or a short is the general market trend in place.
Over the long term since the general equity market trend is upwards that does mean that profiting from short positions is more difficult – Jim Chanos has often commented on the mindset required to be a short investor in a bull market.
However, there have been protracted bear markets, where clearly it would be easier to make investment profits as a short seller (following the market trend) rather than trying to fight the trend as a long-only investor.
I think the main point of that part of the article is that an 80% return in investing is an exceptional return – whether on the short or the long side.
Einhorn’s an impressive guy. Didn’t stop me from profitablyshorting one of his stocks last year.