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There’s an old Wall Street adage that says: “Don’t panic until the last bear throws in the towel.” Folks, start panicking.
David Einhorn became a billionaire hedge fund manager by buying undervalued stocks and successfully shorting overvalued ones. He’s the quintessential “value guy.”
He’s been out of step with this market rally for a long time. The letter he sent to his investors this week definitely had that “throw in the towel” tone to it.
Noting how growth stocks continue to outperform value stocks by a wide margin, he wrote: “The persistence of this dynamic leads to questions whether value investing is a viable strategy.”
Maybe, Einhorn wondered, “the market has adopted an alternative paradigm for calculating equity value.”
Yup, definitely throwing in the towel, at least on the strategy, if not the fund itself.
The Demise of Value Investing
It reminds me of similar comments from Julian Robertson, another billionaire value-oriented hedge fund manager — until he likewise ran into a seemingly unstoppable bull market.
Maybe you can guess when Robertson wrote these words:
“In a rational environment, this [value investing] strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic does not count for much,” wrote this noted hedge fund manager.
“The result of the demise of value investing has been stressful to us all. And there is no real indication that a quick end is in sight.”
Robertson really did throw in the towel, closing all six of his hedge funds and returning billions to his investors.
And when did Robertson send out that letter to his investors?
March 2000 — just as the Nasdaq bubble popped.
Heading for the Exits
Not every “I’m quitting this game” letter is so well-timed, of course. But it’s hard not to notice the number of successful value-based hedge fund managers heading for the exits or returning significant amounts of money to their investors (because they see few opportunities to invest at the market’s frothy levels):
- Jeffrey Ubben, ValueAct Capital Management (April).
- Seth Klarman, Baupost Group (September).
- Whitney Tilson, Value Investor Insight (September).
So let’s say you agree with Einhorn & Co.? Buy the ProShares UltraShort QQQ ETF (NYSE: QID).
As you can see from the chart, QID has been a one-way ticket for losing money as the Nasdaq travels higher and higher. When the ascent stops, though, investors will be glad they’ve parked some assets in a security that goes up while the hottest part of the market heads lower.