Yesterday WSJ published a front-page article about the performance of Greenlight Capital, David Einhorn‘s hedge fund. The Fund lost 18.7% through the year.

Daniel Gladies from MOI also published an article same day, The Roles of Skill and Chance. (which is an excerpt from a letter of Vltava Fund, a global equity investment fund)

There are a few salient points in this article:

If someone replaced the classic coin toss for a portfolio manager’s returns, guess what ?

Assuming heads as + (good year) and tails (-) bad year, 9 bad periods in a row!

“Such a portfolio manager would probably be out of work for a long time, because his or her clients would have concluded that the manager’s investment abilities are miserable. Ha! In a coin toss, which is an activity where skill plays no role, tails appear 9× in a row and we consider it common fluctuation, whereas we regard an investor’s nine bad periods to be automatic proof of incompetence.”

Which brings up the question: “Why are people judging Einhorn so harshly ?”
Answer: The bias is always towards the negative conclusion.

Question: How good is publicity and fame in the investment world ?
Answer: Fame is only the second dish. When it becomes the first dish it ruins the meal.

Daniel Gladies conclusion is well-reasoned:

“A couple years of relatively poorer results tell us nothing about his investment abilities. The future will probably prove that these are still excellent, and his investors should instead consider adding to their investments in Greenlight Capital. Of course, all this is based on the assumption that David Einhorn does not let the superficial judgements of those around him get him down, and that he will continue in his business. Many successful portfolio managers have quit because they got tired of endlessly explaining their investment strategies and defending their methods, returned the money to their investors, and continue to manage just their own portfolios at peace and without stress.”

I would not be surprised if Einhorn ran out of patience, and perhaps he should.”

We will be doing more analysis on the roles of skills and chance here. Stick around !

Disclosure: I have no affiliation or investments with neither Greenlight Capital or the Vltava Fund.