Greenlight Capital's Einhorn: Current US stocks are the most expensive in decades, Buffett selling stocks to hoard cash is a warning signal

On October 15th, David Einhorn, the legendary fund manager on Wall Street and founder of Greenlight Capital, released the third-quarter 2024 investor letter.

In the letter, he mentioned that the current U.S. stock market is the most expensive in decades, but he is not excited about the bull market. Greenlight Capital has risen 9% year-to-date (up over 23% as of the 16th), but compared to the S&P 500 index's nearly 21% increase, it is not performing well.

He also pointed out that Greenlight Capital's performance has significantly lagged behind the market for the whole year and may continue to underperform in the future. Buffett selling stocks to hoard cash indicates that "now is not a good time to hold stocks in a big way," although this does not mean the stock market will decline in the short term.

According to a previous article by Wall Street News, during October 3-7, Buffett once again reduced his holdings in U.S. banks and cashed out $383 million, reducing his stake to 10.1%. Since mid-July to early October, he has cashed out a total of about $10 billion.

The key points of the full text are summarized as follows:

• The U.S. economy remains relatively strong, with a nominal annual growth rate of around 5-6%. The market is not just hitting historical highs. From many indicators, this is the most expensive stock market we have seen since the establishment of Greenlight Capital.

• It is worth noting that Mr. Buffett once again sold most of his stock portfolio and accumulated a huge cash reserve. Mr. Buffett's adjustment of his investment portfolio is not a prediction that the market will fall next week, next month, or even next quarter. Instead, these stock sales are more likely to indicate a long-term view, that now is not a good time to hold stocks in a big way, and better opportunities are expected in the near future.

• We agree with Paul Tudor Jones' view that the last third of managing the bull or bear market trend is usually the most difficult. Although we have taken a conservative stance on net exposure, it is not entirely bearish. Just as our performance this year shows, we may not perform well in a rising market, but if the market continues to rise, we do not want to put ourselves in a losing position.

Below is the full text of the letter, with some content omitted:

This is the most expensive stock market in decades

Dear Partners,

The return of Greenlight Capital Fund ("Partnership") in the third quarter of 2024 was 1.1%, net of fees and expenses, while the return of the S&P 500 index was 5.9%.

Many things happened in the world this quarter. Nevertheless, we had a very calm period, in part because we maintained a conservative position with a very low exposure to stock beta. As we discussed at the partner dinner in January, the U.S. economy remains relatively strong, with a nominal annual growth rate of around 5-6%However, on the other hand, the market is not just hitting historic highs. From many indicators, this is the most expensive stock market we have seen since the founding of Greenlight Capital.

Buffett's stock sales indicate he believes the market is overvalued, Greenlight Capital may continue to underperform

Of course, Buffett is arguably the most successful investor of his generation, and perhaps of all time. Although Mr. Buffett often points out, "It is impossible to time the market."

But it must be acknowledged that he is one of the most outstanding market timers we have seen. When the market was too "frothy" in the late 1960s, he closed his fund. By the early 1970s when the market bottomed, he re-emerged as a stock picker in the public eye, and before the 1987 crash, he sold all stocks except a few illiquid ones.

Later, he avoided various corporate credit crises and positioned himself favorably during the 2008 global financial crisis. Some may argue that avoiding bear markets is an underrated reason for his long-term outstanding returns. Therefore, it is noteworthy that Mr. Buffett has once again sold most of his stock portfolio and accumulated a huge cash reserve.

Our feeling is that Mr. Buffett's portfolio adjustments are not predicting a market decline in the next week, month, or even quarter. Instead, these stock sales are more likely to indicate a long-term view that now is not a good time to heavily hold stocks, and better opportunities are expected in the near future. We refrain from calling this market a bubble, but simply observe that dividend yields are low, price-earnings ratios are high, and even though corporate earnings are at cyclical highs, it is not the peak.

Clearly, since 2024, market growth has outpaced corporate revenue and earnings growth. We agree with Paul Tudor Jones' view that the final third of managing bull or bear market trends is usually the most difficult. While we have taken a conservative stance on net exposure, it is not entirely bearish. Just as our performance has shown this year, we may underperform in a rising market, but if the market continues to rise, we do not want to be in a losing position.

It is worth noting that almost all of our returns this year have been alpha returns. While we are up 9% year-to-date, the S&P 500 index has risen nearly 21% over the same period.

This quarter, both our long and short positions have slightly underperformed the market average. Thanks to the significant rise in the price of gold, the macro investment portfolio has once again performed strongly this quarter. We also incurred losses in stock index hedging.

Due to underperformance, Greenlight Capital exits positions such as NeuBase Therapeutics

This quarter, we exited several positions, including NeuBase Therapeutics. We described this emerging company in our fourth quarter 2020 letter. Ultimately, the company ran out of funds and failed.

We do like to hold some small "lottery tickets" in our investment portfolio, but this ticket did not win. Our investment in it was less than 1% of cost, and over a five-year holding period, we lost most of itAfter achieving a 20% internal rate of return on Natwest Group PLC in the past two years, we have sold these stocks. Our investment thesis has been validated, and we no longer believe these stocks are significantly undervalued.

For a period of time, the post-COVID market environment was favorable for Ryanair, allowing the company to raise prices and improve its profitability. However, this situation has changed. Recent price reversals and disappointing earnings have led us to ultimately abandon some unrealized gains.

Please mark your calendars for the 29th Annual Partner Dinner, scheduled to be held in New York on January 21, 2025.

As of the end of the quarter, the largest disclosed long positions in the partnership were Brighthouse Financial, CONSOL Energy, Green Brick Partners, HP, and Solvay. The partnership's average long position was 97%, with a short position of 64%.

Best regards,

Greenlight Capital