Fooling Some of the People All of the Time

Fooling Some of the People All of the Time: A Long Short Story

David Einhorn

What it’s about

This is a book written by a successful shareholder activist hedge fund founder. Short sellers like Einhorn perform a vital market function by exposing overvalued or fraudulent companies, promoting transparency, and preventing bubbles. But it's an uphill battle: Shorts face unlimited risk (if wrong, losses can be catastrophic), intense backlash from targets, and skepticism from the market. Einhorn shows how thorough, forensic research (digging into footnotes, loan portfolios, appraisals, etc.) can uncover hidden problems that Wall Street analysts miss or ignore. Regulators (SEC), journalists, investment banks, and politicians often failed to act decisively. The company he targeted and for which he provided details on his investing and activist approach in this book, Allied Capital, had political connections (lobbying, ties to influential figures), which allegedly slowed scrutiny. The SEC investigated Einhorn instead of Allied initially, and responses were sluggish. Even obvious problems can persist if incentives align against correction: Analysts avoid rocking the boat, banks protect clients, regulators fear political blowback. The book shows how manipulation thrives in opaque corners of finance (e.g., small-cap or niche lenders like Allied).

Why I like it

This book provides a very nice case study example of how to perform due diligence as an investor and/or activist investor. It also provides a more profound demonstration of the failure of market participants and regulators to be open-minded and shows how rigorous, data-driven analysis can reveal opportunities in an otherwise well-functioning market.