Value investors are missing one key skill

David Einhorn: Hedge fund’s performance ‘far worse than we could have imagined’

Value investors and short sellers don’t seem to understand persuasion.

David Einhorn has a big problem. David Einhorn made public bets against Tesla and Elon Musk.

Why is it so wrong to bet against Elon Musk? Because Elon Musk is a master persuader. Elon Musk changes reality through the force of his will.

Never bet against someone with a Steve-Jobs-esque reality distortion field.

It struck me that I used to think a lot like David Einhorn. And I still have sympathy for that mindset. Because by many rational yardsticks, Tesla doesn’t make sense. If you only know valuation, it makes sense to bet against Tesla. Let’s explore this.

Here are two facts. Which is more important?

  1. Elon Musk can use his persuasion skills to get money and attention at will.
  2. Tesla has real problems.

The Value Investing Years

I was self-employed throughout most of my 20s. I read hundreds of books, financial reports, academic journals, and everything else I could find. It was a blast. This might surprise you, but value investors also spend a lot of time studying psychology.

People get irrational and emotional when it comes to money. As value investors, we train themselves to be kind of robotic about the whole thing. Being rational about money is a superpower. (I’ll come back to that later.)

When it comes to managing money, you want a Spock and not a Kirk.

So I spent a decade studying financial analysis, psychology, economics, marketing, and other important fields that touch the business cycle in one way or another.

As the market went up and up, value investing got less and less exciting. So I made some new hobbies.

The power of persuasion

I noticed a pattern. You might have noticed it as well.

Some companies and some people inspire a cult-like following.

These master persuaders are highly skilled at moving people. Call it sales, call it persuasion, call it manipulation. They move people.

Think about Apple. Think about Tesla and Elon Musk. Think about Amazon.

And Disney! I used to live in Orlando. People would make their whole lives about Disney, totally consumed by the fantasy.

I used to think “Why would anyone pay 3x for an Apple when an Android will do?” (I still think iPhones are overpriced, but that’s another story.)

With persuasion in your toolkit, you can see that Apple will never lower their prices. Premium prices equal premium brand. Someone at Apple would have to be idiotic to give that up. They aren’t going to sell iPhones for $99 a pop at the local gas station.

Now that I understand the importance and the power of persuasion I would never bet against a persuader. Elon Musk is a master persuader.

David Einhorn is in big trouble.