Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New David Einhorn (best classic books of all time .TXT) 📖

to your portfolio in an effort to decrease risk is small.” This insight struck me as incredibly important. It is hard to find long ideas that are ones and twos or shorts that are nines and tens, so when we find them, it is important to invest enough to be rewarded. Based on this concept, we decided that Greenlight would have a concentrated portfolio with up to 20 percent of capital in a single long idea (so it had better be a good one!) and generally would have 30 percent to 60 percent of capital in our five largest longs. We would size the shorts half as large as we would longs of the same quality, because when shorts move against us, they become a bigger portion of the portfolio and to give us the ability to endure initial losses and maintain or even increase the investment. In most successful short sales, we lose money gradually for a period of time until we suddenly make a large gain—often in a single day.

It turned out that raising $10 million to start Greenlight proved too ambitious. As we went through the contact list and took whatever meetings we could get, we soon realized that almost no one would invest with a couple of twenty-seven-year-olds with no track record. We decided that the only way to get a track record would be to get started. In one year we could have a one-year record, and in three years a three-year record. It was not going to happen any faster than that.

We launched in May 1996 with $900,000—more than half from my parents. Our initial investments included MDC Holdings, a homebuilder that we still own, and EMCOR, an electrical and mechanical systems contractor that had recently emerged from bankruptcy. We made a good profit on EMCOR, though it took until 2001 before it really worked.

We made 3.1 percent in May 1996. (Whenever I cite Greenlight fund returns, they are after fees and expenses, that is, the “net” to the partners unless otherwise indicated as “gross.” I always discuss the impact of individual investments on the gross return.) At the end of the month, we invested 15 percent of the fund in C. R. Anthony, a small retailer that had recently emerged from bankruptcy and returned to profitability. The market valued the company at $18 million despite its having twice that in net working capital (current assets less all liabilities). Greenlight returned 6.9 percent in June.

In July, the market suffered a correction and the S&P 500 fell 4.5 percent. However, our portfolio enjoyed several good events and generated a 4.8 percent profit. We had bought bonds in the campsite operator U.S. Trails at 77 percent in June, and the bonds got called at 100 percent in July. We made a nice gain when the semiconductor capital equipment manufacturer Tylan General announced it would be sold at a good premium. Finally, our larger short position (we had only two at the time), Microwarehouse, announced terrible results due to systems problems, and the stock collapsed.

After the close of trading on the last day of each month, I stood at the fax machine and sent the statements to the partners one at a time. Most of the people we met before we launched asked to be kept informed, whether they meant it or not. Now, a few began to notice and send money. We got our first million-dollar partner that August.

The year could have gone better only if we had not missed some opportunities. At one point during the summer, I considered an investment in the creditor claims in the bankrupt retailer Best Products. I finished the work, but rather than buy the position, I decided to “sleep on it.” I came in the next morning and told Keswin that I wanted to make it a 12 percent position. I called the salesman I had discussed the idea with at a brokerage firm that traded the claims and gave him my order. He asked if I had seen the news. I hadn’t. Service Merchandise had agreed to buy the company, and the claims had doubled overnight. Of course, making a mistake on an actual investment is far direr than missing a good opportunity.

Another of our initial partners thanked us for the good results by giving us a list of about a dozen of his “wealthy” friends. Most became partners. One did not invest because he presented me with a brainteaser card puzzle that I couldn’t solve. He asked me to take one suit from the deck and arrange it so the cards would appear in sequential order when I turned the top card face up, put the next card on the bottom of the deck, turned the next card face up, put the next card on the bottom of the deck, and so forth. I blew it: I would have to work on my card skills. (The correct order is A, Q, 2, 8, 3, J, 4, 9, 5, K, 6, 10, 7.)

Greenlight returned 37.1 percent in the last two-thirds of 1996 without a down month. Our assets under management hit $13 million. We decided to have a “partners’ dinner” to explain our results and rented a small room in an Italian restaurant on the Upper East Side of Manhattan. The partners came on a snowy evening in January. And they weren’t just Mom and Dad, but about twenty-five people—almost everyone we invited, including several from outside of New York. We gave a presentation of the business and the results. It was not hard, as both longs and shorts contributed, and we did not have a significant money-losing investment to discuss. The results were led by C. R. Anthony, which had increased 500 percent and generated about one-third of the return.

The next day, Bruce Gutkin, one of our four “Day One” investors, who would eventually become our head trader in 2004—originally our only trader, but this is an age of title inflation—called to say not only how enjoyable