GLRE - Greenlight Capital Re

[giofranchi]

Forgive my ignorance but shouldn't prudent insurance management dictate that premiums written be flat to negative in this underwriting environment?

 

Well, as you can see their leverage is still way below the industry average… This of course doesn’t mean you could afford writing unprofitable business… But I think they are very careful about the business they decide to write… Let’s just put it this way: float in a different environment would have grown much faster! ;)

 

Gio

 

[giofranchi]

 

 

Thanks for the presentation Gio!

 

I am surprised at the 10% investment return over 10 years...seems low. Doesn't Einhorn usually do 20% a year on average?

 

2004-2014: not a very good investment decade for Mr. Einhorn…

 

If and when the investment environment changes, and Mr. Einhorn's performance gets back to his long-term track record (or nears it), expect a 20% CAGR in BVPS! ;)

 

Gio

 

[Guest Dazel]

 

 

Gio,

 

Did not know it was not a great decade for Einhorn.

 

Thx

[giofranchi]

 

 

Gio,

 

Did not know it was not a great decade for Einhorn.

 

Thx

 

I think not as much volatile as Mr. Watsa’s record… but close! And I think for the very same reasons: also Mr. Einhorn is worried about too much debt in developed countries and too high asset prices…

 

Like many people seem to believe, they both are probably wrong… Anyway, their "cautiousness" won’t last forever… And this is the reason why I think in a different market environment both Mr. Einhorn and Mr. Watsa could get results more in line with their long-term track records.

 

Gio

 

[Guest Dazel]

Interestingly, even with same worries Watsa and Eihnhorn took different paths. Einhorn is a gold bug hedging accordingly and Watsa is a Treasury hoarder. I have not followed Einhorn closely.

Bill Ackman I have and he has been quite spectacular....GGP was a home run for me...he is not macro like Watsa and Einhorn...business focused and I like that.

 

As you said Macro guys are rarely right often...hedging is different though...How Watsa actually can be that bearish and put a fortune into a failing Irish bank and a falling knife of a phone maker? Does not add up. He could have simply have held more cash or treasuries and not hedged...and invested like he always has...he is running an insurance company so he can not lose at the wrong time.

 

Funny Chanos is all over CNBC...as great short seller..calling HP a zero at $11 after it dropped like a

stone...and Watsa quietly bought it...now it's $30...no news on that.

 

CNBC still does not know Watsa but Chanos is on every time the market drops a few points....why?

 

My rambling point is "fear" is headlines....and it's a biological factor that is very predictable. Human nature predicts "fight or flight"....it's a human defense mechanism that is turned on when anything

threatens us. Evolutionary to protect us from being eaten by predators. It's a drag in investing...it predicts speculators failures. They are unable to "think" when fear is abound. That is why Chanos, Soros, Einhorn, and now the golden "bear" Watsa scare markets. However, without fear in the air it

does not work. Soros mastered it through his reflexivity theory...Benjamin Graham called it fear and greed....Buffett said besides margin of safety that fear and greed are the two most important investment influences....and he has also recognized that Greed is gradual and fear immediate.

Finally, he says he is successful at investing because he is wired differently. That is actually biologically correct and not a figure of speech.

 

If you are not bored to death by this read "The hour between Dog and Wolf" by John Coates it is  the best book ever written on this.

 

Dazel

[giofranchi]

Thank you for that book! I will surely read it! :)

 

“Fight or flight” is not really how we humans are wired to respond to a threat… “What Every Body Is Saying” by Mr. Navarro is a good book on body language… The author tells us the way humans are wired to respond to a threat is, in the right order: freeze, flight, fight.

 

But this has nothing to do with Mr. Einhorn and Mr. Watsa's worries during the last 10 years… Those worries instead are founded in history. Period.

 

I have studied US economic history of the last three centuries, and I have never found a single instance in which times weren’t exceedingly hard when a combination of high total debts and high asset prices came about… Of course, now we know “value investing”, as it was theorized by Mr. Graham in the ‘30s and later applied by Mr. Buffett… But, the jury is clearly still out… The years we are living through are the first time since the ‘30s when that combination of high total debts and high asset prices is present… and those problems are not solved: we still have high total debts and high asset prices.

 

Though this time we are trying to solve the situation spreading the pain over a very long time (two decades), and therefore it is plausible a “business focus” will finally be proven to be the best policy, we simply cannot know for sure… And I like Mr. Einhorn and Mr. Watsa’s policy of “better safe than sorry”… Imo, whoever says he/she knows how this all will play itself out in the end… is simply deluding him/herself!

 

Or at least has no historical evidence on which to base his/her certainties… ;)

 

Gio

 

[giofranchi]

What I do think, though, is that in a few years we will finally find out! And then both Mr. Einhorn and Mr. Watsa will be back to business as usual. That’s when their results will start to shine again! ;)

 

Gio

 

[Guest Dazel]

 

 

Nothing to do with Watsa and Einhorn...rambling...you are correct freeze, flight or flight. Those that use the fear as opportunity are wired differently...Watsa and Einhorn are wired differently as well. They are both are investing giants.

 

However, they are mostly famous for being bears? Why? We recognize fear quickly and we remember how bad things were when they were in the headlines...until enough time goes by and greed takes over.

 

[peter1234]

If you are not bored to death by this read "The hour between Dog and Wolf" by John Coates it is  the best book ever written on this.

 

Great discussion. Thanks for the book tip.

 

:) :) :)

[muscleman]

Gio, how would you compare Bart Hedges with John Berger as an underwritter? From the historical combined ratios, GLRE's combined ratio seems acceptable.

 

The reason that I prefer TRPE is because I want a portion of my assets invested in event driven/special situation. GLRE seem to have more bets on macro. David Einhorn did pretty well in his early days when he mostly focused on stock bets. The results have not been so good since he transitioned into macro bets. (That sort of reminds me of Fairfax. ::))

[constructive]

I'd argue Third Point is more macro oriented than Greenlight. Greenlight has a simpler portfolio, long/short equity plus gold. Third Point is longer biased on equity, plus lots of credit, gold and currencies.

[starmitt]

Being as Einhorn started Greenlight in 1996, there aren't enough years to really argue that 2004-2014 was a bad decade for him. It would make more sense to argue that with increased AUM, the decline in performance is expected. It also makes sense to remember that Greenlight Re is paying hedge fund fees for the investment of float; it isn't like Einhorn is acting as an investment officer inside GRLE.

 

The Greenlight RE portfolio does include currency forwards, weather derivative swaps, interest rate options, CDS' - not exactly vanilla.

 

 

[giofranchi]

Being as Einhorn started Greenlight in 1996, there aren't enough years to really argue that 2004-2014 was a bad decade for him. It would make more sense to argue that with increased AUM, the decline in performance is expected.

 

I really don’t think this is the case.

Mr. Einhorn’s way of investing has never changed. He has always employed a long/short value based strategy in mid/large capitalization companies. The funds he manages today are but a small sum if compared to the universe of companies he could invest in. I don’t see AUM being a drag on performance at this point. Also because he is totally free to manage AUM: he can close his fund to new investors, or even give back some capital, if he truly believed he cannot find a large enough number of rewarding opportunities.

 

No, I simply think in 2005 / 2006 he started to get worried… Like Mr. Watsa did. And for good reasons imo!

 

Now, just think of this: a manager who had achieved an average annual return of 10% from 1929 to 1949… what kind of return do you think such a person would have subsequently achieved from 1950 to 1967? That’s how I think about Mr. Einhorn form 2018 onward… In the meantime, if he goes on achieving 10% annual, with present leverage GLRE will compound BVPS at a 13% CAGR, with a bit more leverage (and they certainly can afford it, being still much less leveraged than their peers) a 15% CAGR in BVPS is definitely achievable.

 

Like GLRE’s management says:

- We continue to find ways to create value in a difficult market

- We are eager to see what we can do in a favorable market

 

Gio

 

[starmitt]

Einhorn's first eight years are not analogous to any other manager's (real or hypothetical) 20 year results. Arguing that his first eight years are more representative than the subsequent 10 years doesn't hold.

 

Also note that the comment was that "It would make more sense to argue that with increased AUM..." not that "Because he had increased AUM..."  After all, for the vast majority of managers, such is the trend.

[thepupil]

Einhorn's first eight years are not analogous to any other manager's (real or hypothetical) 20 year results. Arguing that his first eight years are more representative than the subsequent 10 years doesn't hold.

 

Also note that the comment was that "It would make more sense to argue that with increased AUM..." not that "Because he had increased AUM..."  After all, for the vast majority of managers, such is the trend.

 

Agree completely. What's Greenlight's AUM ? $10 or $11B. It's hard to run a short book that big. If he has 60% of NAV in shorts that is a $6B short book. To have a 3% short in something like JOE (a $2.1B company), he'd have to be short 15% of shares outstanding.

 

The growth in AUM severely limits the opportunity set of juicy shorts. Not saying he won't be able to do well, but he is more constrained than in his early years, like any big long short fund

[frog03]

Yes, DE's record is (similarly to Pabrai...) heavily front-loaded.  Giving more credit to few years with few assets rather than more years with more assets does not make sense to me.

[jay21]

Yes, DE's record is (similarly to Pabrai...) heavily front-loaded.  Giving more credit to few years with few assets rather than more years with more assets does not make sense to me.

 

If anything, shouldn't it be the opposite as they will be managing larger assets going forward.

[giofranchi]

Einhorn's first eight years are not analogous to any other manager's (real or hypothetical) 20 year results. Arguing that his first eight years are more representative than the subsequent 10 years doesn't hold.

 

Also note that the comment was that "It would make more sense to argue that with increased AUM..." not that "Because he had increased AUM..."  After all, for the vast majority of managers, such is the trend.

 

Agree completely. What's Greenlight's AUM ? $10 or $11B. It's hard to run a short book that big. If he has 60% of NAV in shorts that is a $6B short book. To have a 3% short in something like JOE (a $2.1B company), he'd have to be short 15% of shares outstanding.

 

The growth in AUM severely limits the opportunity set of juicy shorts. Not saying he won't be able to do well, but he is more constrained than in his early years, like any big long short fund

 

Mr. Einhorn imo will do very well. I have little doubt about it. I strongly advice to read his book... you will understand what kind of person Mr. Einhorn actually is... I have nothing but the utmost respect for him and his skills! :)

 

Gio

 

[starmitt]

Read his book years ago. This was not and is not about Einhorn the person or even the skills of Einhorn the investor. It was and is about the reasonableness of assumptions used in the process of investment evaluation.

 

 

[giofranchi]

Read his book years ago. This was not and is not about Einhorn the person or even the skills of Einhorn the investor. It was and is about the reasonableness of assumptions used in the process of investment evaluation.

 

They are the very same thing!! ;D ;D ;D

 

Someone as shrewd as Mr. Einhorn surely knows what he can and what he cannot do! The amount of money he manages is still relatively small for the strategy he employs.

I repeat: he has been too much worried about macro, and has been too aggressive on the short side. Those are the reasons why recent years have not been so good.

 

We will have better years! ;)

 

Gio

 

[constructive]

Yes, DE's record is (similarly to Pabrai...) heavily front-loaded.  Giving more credit to few years with few assets rather than more years with more assets does not make sense to me.

 

This is true. But unlike Pabrai and many other investors, Einhorn's returns are substantially more attractive on a risk-adjusted basis. And of course, it makes sense that a less volatile investment strategy is more compatible with insurance.

 

I agree with gio that given Einhorn's obviously very intelligent investment approach, 10% performance is likely not a ceiling but closer to a floor.

[starmitt]

They are the very same thing!! ;D ;D ;D

 

They are not. The skills and the person are a subset. No matter what the character or the skills of the investor, it is an error in logic to take one period as the norm (especially the shorter period!) and another period as not the norm. The totality is the reality of the investor.

 

Someone as shrewd as Mr. Einhorn ... he has been too much worried about macro, and has been too aggressive on the short side. Those are the reason why recent years have not been so good.

 

As shrewd as you say he is, you think (with your hindsight) that he has pursued a lesser approach for a decade. That is the reality - as shrewd as he is, he can and will pursue what you will consider a lesser approach for extended periods. Given that, it is not internally consistent to forecast that during a certain period he will be performing at the previous level, or necessarily at a higher level.

 

 

 

[giofranchi]

They are not. The skills and the person are a subset. No matter what the character or the skills of the investor, it is an error in logic to take one period as the norm (especially the shorter period!) and another period as not the norm. The totality is the reality of the investor.

 

starmitt,

sorry… I don’t understand you… I am a businessman, not a philosopher… a businessman simply knows how important are the partners he chooses for himself in business. Period.

 

As shrewd as you say he is, you think (with your hindsight) that he has pursued a lesser approach for a decade. That is the reality - as shrewd as he is, he can and will pursue what you will consider a lesser approach for extended periods. Given that, it is not internally consistent to forecast that during a certain period he will be performing at the previous level, or necessarily at a higher level.

 

Not at all! I totally agree with the strategy Mr. Einhorn has followed during the last decade. As I have very often repeated, better safe then sorry! And, by the way, imo the jury is still out! ;)

 

Gio

 

[giofranchi]

By the way starmitt,

since 2004 Mr. Einhorn has done 2.3% annualized better than the S&P500. By the end of this market cycle I think he will be outperforming the S&P500 by 4-5% annualized since formation. And over the long term there is absolutely no reason why he shouldn’t go on outperforming the S&P500 by a similar amount.

Do yourself the math and see which CAGR in BVPS this implies for GLRE.

...The only reality that matters!

 

Gio

 

[starmitt]

 

starmitt,

sorry… I don’t understand you…

 

Sorry Gio, I will be more direct. None of this commentary has been specific to Einhorn. As stated earlier "It was and is about the reasonableness of assumptions used in the process of investment evaluation."  It is a mistake to take eight years as "the norm" and the subsequent 10 years as a "not the norm." It does not matter who the investor is. Similarly, to argue that after 10 years of outperforming by 2.3%, bringing the long range average down to 4-5% outperformance, that in the future the 4-5% outperformance will be maintained is not based on or supported by logic. That isn't reality; that is projection of belief.