GLRE - Greenlight Capital Re

[giofranchi]

I think David Einhorn is a great investor.

 

So please go easy on me here as I am often mistaken :D, but ...

 

The problem for me here is a) the fees charged for him to manage the money, and b) they appear to have little underwriting discipline at Greenlight... The classic flaw in reinsurance.  What signs do you see that the float will ever be a "paid float"? It is nice to play what if on a superior combined ratio, but I see no competitive advantage for GLRE.

 

At current interest rates, why not just buy into the hedge fund on margin if you want to lever Einhorn's investments. You can prob lever up cheaper than Greenlight's loose pen. Better yet, you could just go out and match his 13f if you want and avoid the high fees. Lever up to your liking.

 

My idea is that Mr. Einhorn not only is a good investor, he is also a good businessman. It is true they have encountered some underwriting setbacks during 2012. But I believe a good businessman finds ways to overcome obstacles. He knows how important it is to partner with a prudent, shrewd, and opportunistic underwriting officer, and I have an extremely hard time believing he chose one carelessly. I am prone to judge what happened in 2012 to be a one-time underwriting mistake. Of course, no one can be sure about the future and, as always, time will tell.  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[giofranchi]

Mr. Einhorn on "what Apple should do".

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

iPrefs-Unlocking-Value.pdf

[giofranchi]

It doesn't help he became a "Macro Tourist" investor. I wonder how well he is doing in his gold position.

 

Owning physical gold should not be viewed as a way to make money. Rather, it is a way of saving capital that creates optionality for future spending power and investment resources.

- John Hathaway

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[giofranchi]

What GLRE is Worth to Einhorn

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

what-glre-is-worth-to-einhorn.pdf

[giofranchi]

GreenlightRe portfolio of investments returns +5.8% for the first quarter 2013.

 

As of 31-March-2013, the largest disclosed long positions in our investment portfolio are Apple, General Motors, gold, Marvell Technology and Vodafone; our investment portfolio is approximately 112% long and 74% short. This exposure analysis is calculated on a delta adjusted basis and excludes macro positions, which consist of gold, credit default swaps, sovereign debt, foreign currency positions, interest rate derivatives and others.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[muscleman]

GreenlightRe portfolio of investments returns +5.8% for the first quarter 2013.

 

As of 31-March-2013, the largest disclosed long positions in our investment portfolio are Apple, General Motors, gold, Marvell Technology and Vodafone; our investment portfolio is approximately 112% long and 74% short. This exposure analysis is calculated on a delta adjusted basis and excludes macro positions, which consist of gold, credit default swaps, sovereign debt, foreign currency positions, interest rate derivatives and others.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

That is not very impressive return.

One thing I don't understand is why he starts to make macro bets instead of focusing on the stocks.

[giofranchi]

That is not very impressive return.

 

If you are 112% long and 74% short, it is not so bad either!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[muscleman]

That is not very impressive return.

 

If you are 112% long and 74% short, it is not so bad either!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

I am still relatively a newbie in investing. With just 3 years of experience and total return still in red.

I explored various methods and eventually believed that the best way of investing is not long/short but instead pure long in a cash account with significant margin of safety.

Margin of safety takes care of everything.

AIG, for example, has huge cash piles and ready to repurchase shares if the share price goes down. Over time it would be very profitable.

But for GLRE, long/short strategy requires the market to be efficient, but there is no rule that says a market has to be efficient. One trading mistake could lead to a lot of problems. I have seen short positions going up way more than long positions. Why? Because long positions are generally out of favor stocks. That is why they get undervalued in the first place. When the market gets irrational and bullish, out of favor stocks may rise much less than hot stocks.

 

What I am looking for is decent business that could be run by monkeys. Not some business that can only be run by the super genius. Remember any genius makes mistakes from time to time.

[giofranchi]

That is not very impressive return.

 

If you are 112% long and 74% short, it is not so bad either!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

I am still relatively a newbie in investing. With just 3 years of experience and total return still in red.

I explored various methods and eventually believed that the best way of investing is not long/short but instead pure long in a cash account with significant margin of safety.

Margin of safety takes care of everything.

AIG, for example, has huge cash piles and ready to repurchase shares if the share price goes down. Over time it would be very profitable.

But for GLRE, long/short strategy requires the market to be efficient, but there is no rule that says a market has to be efficient. One trading mistake could lead to a lot of problems. I have seen short positions going up way more than long positions. Why? Because long positions are generally out of favor stocks. That is why they get undervalued in the first place. When the market gets irrational and bullish, out of favor stocks may rise much less than hot stocks.

 

What I am looking for is decent business that could be run by monkeys. Not some business that can only be run by the super genius. Remember any genius makes mistakes from time to time.

 

muscleman,

I think you should do what you understand. In other words, to stay inside your circle of competence. Imo, the most dangerous thing is to do something you do not understand, just because a lot of highly respected people told you that’s the way to go… If you stick with what you know and understand, I think you will enjoy at least some success, and you will avoid disaster.

Take, for instance, the board: Parsad, twacowfca, Eric, Moore, Kraven, Packer, etc., they all have very different investment styles. Yet, they all have gone a long way defining their circles of competence, and they all have the discipline to stick to them. It surely is not just a coincidence that they all are extremely successful! To know what you are doing and not to stray elsewhere: imo, that is the difference between a pro and an amateur.

For my part, I like to partner with outstanding capital allocators. The businesses I personally manage have absolutely no moat… unfortunately, life is very hard!…  ;D so, I personally understand very well the importance of shrewd capital allocation. Because I must try to do it myself, if I am to generate some wealth over time. I understand much better the success of a good capital allocator, who constantly shifts resources from poor business operations to good business operations, than the success of a business which enjoys a sustainable competitive advantage. What I mean is I find much more predictable the success of an opportunistic capital allocator, than the sustainability of a wide business moat.

And, imo, an opportunistic capital allocator knows when to be aggressive, and when to be defensive. When caution is warranted, he knows how to protect his capital. Furthermore, he understands very well the ‘opportunity cost’, and always keeps some ready cash at hand.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[muscleman]

That is not very impressive return.

 

If you are 112% long and 74% short, it is not so bad either!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

I am still relatively a newbie in investing. With just 3 years of experience and total return still in red.

I explored various methods and eventually believed that the best way of investing is not long/short but instead pure long in a cash account with significant margin of safety.

Margin of safety takes care of everything.

AIG, for example, has huge cash piles and ready to repurchase shares if the share price goes down. Over time it would be very profitable.

But for GLRE, long/short strategy requires the market to be efficient, but there is no rule that says a market has to be efficient. One trading mistake could lead to a lot of problems. I have seen short positions going up way more than long positions. Why? Because long positions are generally out of favor stocks. That is why they get undervalued in the first place. When the market gets irrational and bullish, out of favor stocks may rise much less than hot stocks.

 

What I am looking for is decent business that could be run by monkeys. Not some business that can only be run by the super genius. Remember any genius makes mistakes from time to time.

 

muscleman,

I think you should do what you understand. In other words, to stay inside your circle of competence. Imo, the most dangerous thing is to do something you do not understand, just because a lot of highly respected people told you that’s the way to go… If you stick with what you know and understand, I think you will enjoy at least some success, and you will avoid disaster.

Take, for instance, the board: Parsad, twacowfca, Eric, Moore, Kraven, Packer, etc., they all have very different investment styles. Yet, they all have gone a long way defining their circles of competence, and they all have the discipline to stick to them. It surely is not just a coincidence that they all are extremely successful! To know what you are doing and not to stray elsewhere: imo, that is the difference between a pro and an amateur.

For my part, I like to partner with outstanding capital allocators. The businesses I personally manage have absolutely no moat… unfortunately, life is very hard!…  ;D so, I personally understand very well the importance of shrewd capital allocation. Because I must try to do it myself, if I am to generate some wealth over time. I understand much better the success of a good capital allocator, who constantly shifts resources from poor business operations to good business operations, than the success of a business which enjoys a sustainable competitive advantage. What I mean is I find much more predictable the success of an opportunistic capital allocator, than the sustainability of a wide business moat.

And, imo, an opportunistic capital allocator knows when to be aggressive, and when to be defensive. When caution is warranted, he knows how to protect his capital. Furthermore, he understands very well the ‘opportunity cost’, and always keeps some ready cash at hand.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

That is right. Staying within the circle of competence is really important. I learned it the hard way.

I think if you stick with GLRE and FFH, you will make a lot of money in the end. At least much better than the S&P500 index.

My circle of competence is to look for a major sector that is distressed and see if there is any really cheap ones with good MoS. That is why I sold GLRE and bought AIG. My thoughts is that with AIG trading at only 50% of book, if it makes 10% return on equity and uses all the proceeds to buyback stocks, then it is equivalent to making 20% return on equity. But actually making 20% return on equity requires a world class investor in charge. Making 10% return on equity is much easier under various macro economic conditions.

[rukawa]

I am very skeptical that GLRE will do well in the near term and I don't understand why anyone would invest in them.

 

Insurance is an extremely hard business! Fraud is normal. To do well you literally have to assume you are only dealing with frauds, cheats and thieves at every level of the business. Underwriting well is difficult. You can read about Buffett, you can read about Prem, both have had HUGE problems with their insurance companies. They aren't stupid. And each of them had some experience with the industry. It took a very long time to sort these problems out.

[giofranchi]

I am very skeptical that GLRE will do well in the near term and I don't understand why anyone would invest in them.

 

Insurance is an extremely hard business! Fraud is normal. To do well you literally have to assume you are only dealing with frauds, cheats and thieves at every level of the business. Underwriting well is difficult. You can read about Buffett, you can read about Prem, both have had HUGE problems with their insurance companies. They aren't stupid. And each of them had some experience with the industry. It took a very long time to sort these problems out.

 

If I were back at the beginnings, I would never buy Berkshire Hathaway. Instead, I would buy I small insurance company and start from there.

--Warren Buffett

 

Of course, a business with terrific economics can be a bad investment if the price paid is excessive. We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large figure we show for intangible assets. Overall, however, we are getting a decent return on the capital we have deployed in this sector. Furthermore, the intrinsic value of the businesses, in aggregate, exceeds their carrying value by a good margin. Even so, the difference between intrinsic value and carrying value in the insurance and regulated industry segments is far greater. It is there that the huge winners reside.

--Warren Buffett, 2012AL

 

rukawa,

I disagree with your view. Also investing is very hard and competitive. And success both in investing and in insurance depends on the same thing: temperament. Mr. Buffett and Mr. Watsa have the right temperament to be extremely successful both as investment managers and as insurance underwriters. You might argue that Mr. Einhorn is different and, therefore, won’t be as successful. I clearly think otherwise and have a lot of respect for Mr. Einhorn’s skills.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

 

[jay21]

Just opened up the Q:  http://www.sec.gov/Archives/edgar/data/1385613/000138561313000019/glre-2013331x10q.htm

 

Skimming it and saw they have a -676% loss ratio for their severity contracts.  Interested to see how that' possible.

[giofranchi]

Q1 2013 Conference Call Transcript

 

giofranchi

greenlight-capital-re-Q1-2013-conference-call-transcript.pdf

[ItsAValueTrap]

I have a lot of respect for Einhorn as an investor, but I'm not sure I'd be comfortable with his position sizing.  The history of short selling is ugly for the shorts. 

 

ItsAValueTrap,

it is a bit strange to hear that from you! Aren’t you “shorting stocks that other value investors are long…”?!  :)

Anyway, a long/short strategy is something completely different from a short only strategy. What you write might be certainly true for a short only strategy, but for a long/short strategy I guess what Mr. Julian Robertson suggests is mostly true:

 

“I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.”

 

1- There are different ways to short.  You can short common stock or buy puts.

 

There's nothing really wrong with buying puts.  The risk management when it comes to buying puts is easy.

 

Shorting common stock is dangerous.  Obviously you need to stay liquid when you get Volkswagen'ed (Einhorn had to cover and lose money on that one).  But ***there are other things that can happen***.  You need to pay interest on the borrow.  Unfortunately, the borrow rates on some stocks are ridiculous nowadays.  ATPG's borrow costs went up over 90% (your credit card debt is cheaper).  The other thing that can happen is that you can get bought-in on your position.  Other people will engineer these buy-ins on you.  The brokers will sell you out to the Jim Cramers and Michael Steinharts of the world. 

 

And oh yeah, almost everybody hates short sellers.  The SEC tends to investigate a lot of short sellers even though most of them don't do anything wrong.  This causes a lot of legal fees for the hedge fund.

 

Go read Richard Sauer's book... Jim Cramer books (including the one by his ex-employee)... and the Market Wizards book that interviews Steinhart.  Sauer's book is the most relevant to the dangers of short selling.

 

2- Long/short can make it worse.  The only reason why long/short works is because some factor made the longs underpriced and the shorts overpriced.  That force can make the longs even more underpriced and the shorts even more overpriced.

 

It's not unheard of to lose money on both your longs AND your shorts.  That's how Copper River, a long/short fund, got killed.

 

---

 

Maybe Einhorn's chance of blowing up is only 1%.  I think that Buffett has the right idea in avoiding that 1% chance of blowing up. 

[muscleman]

I have a lot of respect for Einhorn as an investor, but I'm not sure I'd be comfortable with his position sizing.  The history of short selling is ugly for the shorts. 

 

ItsAValueTrap,

it is a bit strange to hear that from you! Aren’t you “shorting stocks that other value investors are long…”?!  :)

Anyway, a long/short strategy is something completely different from a short only strategy. What you write might be certainly true for a short only strategy, but for a long/short strategy I guess what Mr. Julian Robertson suggests is mostly true:

 

“I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.”

 

1- There are different ways to short.  You can short common stock or buy puts.

 

There's nothing really wrong with buying puts.  The risk management when it comes to buying puts is easy.

 

Shorting common stock is dangerous.  Obviously you need to stay liquid when you get Volkswagen'ed (Einhorn had to cover and lose money on that one).  But ***there are other things that can happen***.  You need to pay interest on the borrow.  Unfortunately, the borrow rates on some stocks are ridiculous nowadays.  ATPG's borrow costs went up over 90% (your credit card debt is cheaper).  The other thing that can happen is that you can get bought-in on your position.  Other people will engineer these buy-ins on you.  The brokers will sell you out to the Jim Cramers and Michael Steinharts of the world. 

 

And oh yeah, almost everybody hates short sellers.  The SEC tends to investigate a lot of short sellers even though most of them don't do anything wrong.  This causes a lot of legal fees for the hedge fund.

 

Go read Richard Sauer's book... Jim Cramer books (including the one by his ex-employee)... and the Market Wizards book that interviews Steinhart.  Sauer's book is the most relevant to the dangers of short selling.

 

2- Long/short can make it worse.  The only reason why long/short works is because some factor made the longs underpriced and the shorts overpriced.  That force can make the longs even more underpriced and the shorts even more overpriced.

 

It's not unheard of to lose money on both your longs AND your shorts.  That's how Copper River, a long/short fund, got killed.

 

---

 

Maybe Einhorn's chance of blowing up is only 1%.  I think that Buffett has the right idea in avoiding that 1% chance of blowing up.

 

1% chance to get blown up is not small in the long term.

[bargainman]

I was putting together my list of owner operators, and I noticed that GLRE:

 

http://finance.yahoo.com/q/mh?s=GLRE+Major+Holders

 

does not list Einhorn as a major holder.  Surely this is a mistake.  Anyone know where the real figures are, and how much of GLRE Einhorn owns?

[eggbriar]

100% beneficial interest of class B shares as shown on the proxy statement:

 

http://www.sec.gov/Archives/edgar/data/1385613/000138561313000015/proxystatement2012.htm

[bargainman]

Interesting..

"Mr. Einhorn, together with his affiliates, is limited to voting the number of Class B ordinary shares equal to 9.5% of the total voting power of the total issued and outstanding ordinary shares. Mr. Einhorn owns 4,864,461 Class B ordinary shares"

 

Does this mean that Einhorn effectively does NOT control the company?  Or is there another clause somewhere that someone knows of?

[giofranchi]

I was putting together my list of owner operators, and I noticed that GLRE:

 

http://finance.yahoo.com/q/mh?s=GLRE+Major+Holders

 

does not list Einhorn as a major holder.  Surely this is a mistake.  Anyone know where the real figures are, and how much of GLRE Einhorn owns?

 

Hi bargainman,

please take a look at the file in attachment. :)

 

giofranchi

what-glre-is-worth-to-einhorn.pdf

[bargainman]

"The fee structure is straight forward: 1.5% management fee (payable monthly) and a 20% incentive fee paid annually with no preferred rate of return or hurdle rate"

 

wow.  nice work if you can get it..  I'm not sure if that, or the article, makes me want to invest in this vehicle..  He definitely takes a pound of flesh.  It seems like, from the article, it's a vehicle for him to extract fees from given that it's worth more that way than it is from his straight share ownership...

[giofranchi]

"The fee structure is straight forward: 1.5% management fee (payable monthly) and a 20% incentive fee paid annually with no preferred rate of return or hurdle rate"

 

wow.  nice work if you can get it..  I'm not sure if that, or the article, makes me want to invest in this vehicle..  He definitely takes a pound of flesh.  It seems like, from the article, it's a vehicle for him to extract fees from given that it's worth more that way than it is from his straight share ownership...

 

Well, of course that's up to you!

I was only trying to be helpful and answer your question about how much of GLRE Mr. Einhorn owns. :)

 

giofranchi

[bargainman]

gio, you are of unlimited helpfulness!!! :-)  thank you for your continuing contributions to the board..  I take if you're still comfortable enough with this arrangement?  Can you walk me through your thinking/rationale?  It really seems like an expensive way to get his services...

[giofranchi]

gio, you are of unlimited helpfulness!!! :-)  thank you for your continuing contributions to the board..  I take if you're still comfortable enough with this arrangement?  Can you walk me through your thinking/rationale?  It really seems like an expensive way to get his services...

 

Thank you, bargainman! Very kind of you!

I guess the image in attachment goes a long way explaining why I keep holding an investment in GLRE: Earned Premium = 50% of capital and Invested Assets = 175% of capital is VERY LOW leverage, if compared to almost any other insurance and reinsurance company that I know of (LRE excluded, of course!). Yet, if they just manage a CR of 100%, while Mr. Einhorn achieves a return of 10% annual after fees, BVPS will compound at 18%. And you shouldn’t forget that Mr. Einhorn has returned 19.4% annualized since May 1996, net of fees and expenses.

If you can buy near BVPS, it seems to me there is a huge margin of safety here. :)

 

giofranchi

[jay21]

"The fee structure is straight forward: 1.5% management fee (payable monthly) and a 20% incentive fee paid annually with no preferred rate of return or hurdle rate"

 

wow.  nice work if you can get it..  I'm not sure if that, or the article, makes me want to invest in this vehicle..  He definitely takes a pound of flesh.  It seems like, from the article, it's a vehicle for him to extract fees from given that it's worth more that way than it is from his straight share ownership...

 

The fees are one of the reasons why i ended up selling this.  Einhorn put down a lot of capital himself, but the capital that attracted made the fee stream > his equity ownership.