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Today’s gem is this 1-minute clip where David Einhorn is discussing how he believes value investing has changed.
This is an interesting argument – that passive + algo investing has reduced the number of “stock pickers” looking for quality companies. Therefore quality companies remain undervalued because they’re undiscovered, changing value investing dynamics.
Do you agree with this?
I have a couple of thoughts on this. Firstly, I do believe multiple expansion is a key component of generating outsized returns. But there are many things around achieving multiple expansion that are out of your control and hard to predict. Interest rates, industry factors, capital flows, etc.
Secondly, Einhorn’s last point is important “eventually we’re going to have to get paid by the company“. This is the beauty of private equity and control investing. We have the option of being “paid by the company” immediately upon investing in it. And when you buy a business on a low enough multiple of cash flow, “getting paid by the company” will mean an above-average return on investment. The ability to control cash flows is a superpower of private equity investing compared to publicly-traded stock investing (where you are at the mercy of the management/board).
Going back to Einhorn’s comments on value investing… my opinion here is, you should always invest in a company with the intention of being paid by the company. Multiple expansion is the cherry on top, but should never be depended upon to drive your investment returns.
This is our approach at Atlasview Equity. We acquire businesses at a price where simply returning the internal cash flow back to equity/debt holders will generate above-average returns. And if we find reinvestment opportunities and or achieve multiple expansion, the above-average returns transforms into outsized returns.