In Search of the Perfect Investment

Down again today.

Survey your holdings. Sell the ones you’re uncomfortable with. Start with the highest P/E ones.

Sell ones that are obvious duds — like anything remotely tied to energy and maybe ultra-flying technology.

Then sit tight. Be calm.

The media is focusing on “bad” news: especially China.

China is a not a huge “story” for us. Read yesterday’s blog. Click here.

I’m here to report that America — based on my just-completed 1,400 mile West coast road trip — is doing just fine.

The hotels are full. The restaurants are crowded. The highways are abuzz with trucks.

It’s time to tentatively go “bottom fishing.”

I hope that after my four-hour dentist appointment this morning, I’ll have a little time and a clear head — certainly one with four more teeth.

Companies like Verizon aren’t going out of business. Verizon sports a fine 4.8% yield. Verizon actually has surprisingly good cellphone reception out here in the west — better than in the east. (My non-scientific research.)

Today’s New York Times has a piece on hedge funds. Worth reading:

Greenlight Capital Down 14% for Year; David Einhorn Surveys Investors

David Einhorn’s hedge fund, Greenlight Capital, fell 5.3 percent in August and is down 14 percent for the year. Credit Brendan McDermid/Reuters

David Einhorn has earned a reputation as one of the savviest stock pickers on Wall Street. But the recent market turmoil has not spared him, and this year is shaping up to be one of the worst in his big hedge fund firm’s two-decade history.

Now, Mr. Einhorn wants to know what his investors think about his hedge fund, the nearly $11 billion Greenlight Capital.

The fund was down 5.3 percent in August and down 14 percent for the year, according to people briefed on the matter.

Going into August, Greenlight had been down 9 percent, performing much worse than the average hedge fund, which as of the end of July was up 2.5 percent for the year, according to the research firm HFR.

Earlier this year, Mr. Einhorn’s firm retained an outside consulting firm to conduct a survey of investors, which included more than 100 questions, to gauge their thoughts about the hedge fund and its accessibility with investors, said people briefed on the matter.

The outside firm began contacting some of Greenlight’s 700 investors several weeks ago to conduct phone interviews that lasted about 30 minutes each.

The flagship fund at Third Point, led by Daniel S. Loeb, is up just 0.6 percent for the year, after losing 5.1 percent in August. Credit Michael Nagle for The New York Times

It is not clear what Mr. Einhorn, 46, intends to do with the results of the survey, which he has conducted from time to time.

A person briefed on the matter said that the timing of the survey had nothing to do with the fund’s recent performance. Still, it is an indication of how hedge fund managers, even famous ones like Mr. Einhorn, need to be sensitive to what their investors are thinking.

“We’re disappointed about the recent results,” Greenlight said in a note on Monday, adding that it had pared back its positions.

Questions are increasingly being raised by public pension funds and others about whether hedge funds are worth the hefty fees they charge, given that many big funds are underperforming.

August was a torrid month for hedge funds, and other prominent hedge fund managers have disclosed bets that have turned sour. Many funds were crowded in the same stocks that were hammered by the rapid sell-off last week.

Leon G. Cooperman, founder of the $9 billion Omega Advisors, told investors on Aug. 21 that he was down 11 percent for the month. Last week, William A. Ackman surprised investors by announcing that all the gains for his Pershing Square Capital Management hedge fund for the year had been wiped out by “significant volatility” in the global markets. Mr. Ackman’s multibillion-dollar hedge fund was down 7.3 percent for the quarter and 4.3 percent for the year as of Aug. 25.

The world’s largest hedge fund, Bridgewater Associates, led by Raymond Dalio, told investors that its Pure Alpha fund was down 4.77 percent as of Aug. 21. And the flagship fund of Third Point, led by Daniel S. Loeb, is up just 0.6 percent for the year, after losing 5.1 percent in August.

For Mr. Einhorn, this year has been one of bad timing and wrong calls. In July, Mr. Einhorn called his investment in SunEdison “our only significant winner,” adding that the stock had gone from $24 a share to $29.91 a share over the quarter. But in August, the stock took a sharp dive and is now trading at $10.40 a share.

Mr. Einhorn also bet heavily on the chip maker Micron Technology, increasing his stake in the company over the second quarter, according to the latest 13F filings.

Even so, he told investors in July that it was “our biggest loser” in the quarter. “It’s a cyclical business and, regrettably, we missed the turn of the cycle,” he told investors in a letter in July.

Along with gold, General Motors and Apple rank among his biggest long positions, both of which have had uneven returns in recent months. His fund has held a small position in Greek bank stocks and warrants. “Greece has been anything but sun-kissed,” Mr. Einhorn wrote in his July letter.

Adam Taback, president of alternative strategies for Wells Fargo Private Bank, said, “I don’t think he got any dumber – he’s one of the brightest guys in the industry. I don’t think he’s lost his edge. I think he’s just had a bad run.” Mr. Taback pointed to the Federal Reserve’s quantitative easing – pumping money into the financial system – as a factor that had made Mr. Einhorn’s job more difficult, because stocks tend to rise and fall together.

“If you look at the market, it isn’t pricing risk in the way it should be, and it’s very difficult to get things right,” Mr. Taback said.

Still, some investors speculated that Mr. Einhorn might be managing too much money and that his firm is not as nimble as it once was, making it more difficult to exit losing positions.

In the hedge fund industry, Mr. Einhorn has developed a reputation for accurately identifying stocks that will plunge in price and sectors that will be hit. Earlier this year, he announced that he was broadly shorting oil drillers and fracking companies, including Pioneer Natural Resources. With energy prices plummeting in August, his bet against much of the oil sector most likely helped minimize his firm’s losses. But the coal producer Consol Energy, another of his biggest positions, ended the month roughly flat.

Mr. Einhorn, who started his firm in 1996 with $1 million that was invested by family and friends, may be most famous for his 2008 presentation questioning the finances of Lehman Brothers, several months before the investment bank collapsed in the financial crisis. But not even Lehman’s failure could prevent a roughly 23 percent loss for the firm that year, a bleak time for many hedge funds.

And Mr. Einhorn’s bets against companies have not always been well timed. In 2011, Mr. Einhorn took a short position against Keurig Green Mountain, at the time a Wall Street darling, questioning the coffee company’s ability to grow in a competitive market. Last November, Mr. Einhorn told his investors he had settled his wager at a loss after the stock continued to surge. Greenlight bought shares in the company for an average price of $47.59 a share and covered the bet at an average of $67.02.

The stock hit its peak soon after and has lost its momentum since. So far this year, the stock is down 59 percent. It closed on Monday at $56.60 a share.

The poor results this year come after Mr. Einhorn opened the doors of his firm to new investors, raising money for the first time in years. Last summer, the hedge fund consulting firm Cliffwater was one of several consulting firms that recommended institutional investors commit new money to Greenlight.

One concern for Greenlight is that if the difficult year continues, the firm may be hit with redemption requests from investors. If too many investors were to ask for their money back, it could force the firm to sell stocks to raise cash.

Greenlight’s investors include wealthy individuals and institutions, such as pension funds and other investments funds. In its report last year, Cliffwater estimated that 20 to 25 percent of Greenlight’s investors come from so-called funds of hedge funds, investment vehicles that invest in a number of hedge funds.

Roughly 15 percent of the outside capital managed by Greenlight comes from Greenlight Re, the Bermuda-based reinsurance firm that Mr. Einhorn and Greenlight took public in 2007.

At the moment, the threat of redemptions does not appear to be pressing. A number of Greenlight’s investors say that while this year’s performance is troubling, the broader economic environment has made it particularly hard for stock pickers like Mr. Einhorn to make money.

Saying that Mr. Einhorn’s “overall record has been good,” Bill Latimer, whose charitable foundation is invested with Greenlight, said he was not looking to redeem any money.

Other investors are willing to give Mr. Einhorn the benefit of the doubt, noting that the firm has generated an annualized return of just over 19 percent since it opened for business in 1996.

In his most recent note to investors, Mr. Einhorn made an appeal to investors to sit tight, signing off with a quote from the inventor Thomas A. Edison.

“A diamond is a piece of coal that stuck to the job,” Mr. Einhorn wrote.

Backup. Backup.Backup. A friend got hit with a particularly nasty virus called Cryptolocker, also known as ransomware. The perpetrators (perps for short) lock your entire computer. They demand money — typically $750 — to send you the software to unlock your hard drive. If you don’t have a backup, you have no choice but to pay.

I recommend making clones of your hard drives and making daily working file by working file backups.

I travel with:

+ One SSD (solid state drive) clone of the one in my main laptop.

+ A 128 gigabyte flash drive, containing backups of working files.

+ A second identical laptop to my main one, which is a Lenovo ThinkPad X230.

+ One small Phillips head screwdriver for switching hard drives. (The Phillips-head screw and screwdriver are named after Henry Frank Phillips, a businessman from Portland, Oregon.)

I also don’t go to web sites that persuasive emails send me to — especially those offering me $20 million inheritances.

Harry Newton who presents two nice pictures from his travels. The picture scategorically proves that the world is still a nice place:

First, the Yosemite Valley floor:

Second, Half Dome at sunset:

It’s a beautiful day. Go enjoy it.