Fooling Some of the People All of the Time - A Long Short (and Now Complete) Story

This book really does have you anticipating each and every page. Not only is David Einhorn entertaining as a story teller, the book takes you into the mind of one of the greatest investors of all time, emerging from our time.

one looooong detailed book about the corruption in the stock market/media/market manipulation...

However... the key take away from this book if nothing else...

You reduce your risk by 86% by investing in 8+ stocks.
You reduce your risk by 92% by investing in 15+ stocks.

Or something like that...

So yeah, diversify.

This book is an extremely detailed and long, drawn out account of the challenges faced by a bearish hedge fund manager in exposing accounting irregularities in one of the first sub-prime mortgage companies to implode. Obviously David Einhorn's objective is to expose management malfeasance to the investment community as well as to make money for his investors, two closely-related efforts. The problem for the reader is that the book is not at all interesting to even enthusiastic and experienced investors. A big-picture general approach to the sub-prime debacle like Michael Lewis' "The Big Short" is much more "recommendable."

David Einhorn's new book about his long-running battle with Allied Capital is an amazing book. More than just an investing book, it's an investing novel, with good guys and bad guys and clueless, gullible and conflicted investors, regulators, Wall St. "analysts" and media. I stayed up all night to read it.

The review by George Anders in the Wall St. Journal recently missed the point. Anders focused on Einhorn, highlighting his tremendous track record and saying he's gutty, tenacious, patient and disciplined, but that's not the story! The real story is what Allied Capital has done and the utter failure of regulators, investors and the media to do anything about it. I don't see how it's possible to read this book and not come to the conclusion that this company has done -- and continues to do -- all sorts of terrible things, but rather than expressing an opinion on this, Anders makes it seem like a he-said-she-said tempest in a teapot and, reading between the lines, seems to be saying that because the stock hasn't plunged, that Einhorn's investment thesis has been proven wrong. It hasn't -- but it can sometimes take many years.

(Full disclosure: Funds I manage are short the stock of Allied Capital and I'm mentioned briefly in the book.)

Timing isn’t the most important element of securities investing, but it is very important. Over the past two decades, few investors have timed things better than David Einhorn, who started Greenlight Capital with under $1 million and today manages about 10,000 times more money.

But as an author his timing was terrible. Since 2002, Greenlight had shorted Allied Capital, a Washington, D.C., based investment company that mostly made loans to small and medium-sized businesses that were 75% guaranteed by the Small Business Administration.

He was betting Allied’s stock price would have to go down because he had detected accounting errors, which could hardly be the result of anything but fraud, in Allied’s Securities and Exchange Commission reports. Further investigation discovered out-and-out fraud in loan originations.

But as Keynes said, “The market can remain irrational longer than you can remain solvent,” and Allied’s stock did not go down.

“Fooling Some of the People All of the Time” is Einhorn’s riproaring account of six years bearing down on Allied. It is as exciting (for people who can get excited about Wall Street) as Michael Lewis’s “The Big Short” and far more useful as a primer on what really smart investors do.

Also what really corrupt companies do.

But Einhorn published his book in 2008, and very soon people were worried about the collapse of Lehman Brothers, which was 100 times bigger than Allied. And then AIG, bigger even than Lehman.

Einhorn did not help his own book by being short on Lehman, too; and when people subsequently thought of David Einhorn it was not as the young guy who made a small killing on Allied but as the whiz-kid who made a big one on Lehman.

In fact, he didn’t make any personal money off Allied because he got into a public dispute with Allied management, which alleged he was maligning a good company for personal gain. Einhorn countered by pledging to turn over any gains to charity.

The real interest of “You Can Fool Some of the People” is that Einhorn, like Harry Markopolos blowing the whistle on Bernie Madoff, could not get anyone to look as closely at Allied as he had. (You should read “No One Would Listen,” Markopolos’s excellent book.)

Not the SEC, nor the SBA, nor brokerage analysts who followed Allied, nor business journalists, nor Allied’s mostly widow-and-orphan stockholders. Not its directors. Hardly anybody listened, although a couple of other savvy investors joined Einhorn in the pursuit of Allied.

They never truly caught up with them. Allied did eventually come close to collapse, but unlike Enron or Madoff, it was taken over by a bigger company (Ares) and its top officers were never punished. (Some small fry in the Detroit branch were convicted of various charges related to phony loan originations.)

Greenlight profited somewhat from its short, but the big losers were American taxpayers.

By 2008 no one had time for a relatively small con game like Allied, but relative does not mean small. Allied was a $4 billion company, and it had raised more than a billion dollars in fresh capital during the period that no one was listening to Einhorn. The amount of taxpayers’ money the SBA lost in fraudulent loans was at least a quarter of a billion dollars, maybe a lot more.

And that is why it is still well worth reading “Fooling Some of the People All of the Time.” (Get the revised edition which carries the story forward from the mistimed original publication.)

If you have a retirement account, do this. Even if you don’t, it’s a great yarn, and although the subtitle calls it a long story, it isn’t. Paper-wasting design tricks make it appear to be 379 pages, but the text is really about 200 pages. 200 tightly-written, thrilling pages, even when you know the outcome.

This is a magnificent white-knuckle page-turner, reminiscent of the finest cold war spy novels, and destined to be a classic. If you think government agencies will save your investments from corruption or protect your tax dollars from swindlers, or that investigative journalists will dig into a complicated financial story, or that their editor won't deep-six it, or that your brokerage always provides you with sound analysis, or that your elected officials place your interests over those of their biggest donors, well ... read the title. Then stoke the fire, get out a bottle of single malt and read the book.

This book is analogous to the book A Civil Action. I am a lawyer who works on plaintiffs' class actions and was amazed at how Allied Capital's tactics and all the behind-the-scenes maneuverings line up with what a plaintiff's class action lawyer would see in his or her career. The book was a little tedious but every few pages has something amazing. The ability of management to gloss over things and spin was just amazing. The book is loaded with amazing quotes, including those that show how the company was able to create an effective smokescreen by simply turning everything around and doing attacks on the person pointing out the wrongs.

Einhorn calmly covers the history of his coverage of Allied Capital and the many wrongs in its SEC filings. But I kept thinking, "Well, so what: the analysts are wise to it and already have all this factored into the price." The most glaring omission in the book is any discussion of the most important financial statement: the statement of cash flows. There is never mention of any errors in any statement of cash flows, which is what sophisticated investors look at, and hard to falsify. Einhorn keeps insisting that assets were overvalued but that is like saying a bank does not accrue enough in bad debts, all while the bank stock trades at depressed levels (including below book-value): because the market KNOWS to discount the stock price.

This well written book documents how a well-connected financial company steals money from investors and government - and gets away with it.
If you think Wall street firms, analysts, rating gencies and the SEC protect your interests as an investor, or that when they don't the Media- Press, TV etc. serve as "watchdogs" to keep them honest - this book proves you are naive.

The book documents a vast pyramid-scheme that cost the investors and the US tax-payers billions, and how none of the people whose job is supposedly to prevent, detect and punish such things was really interested. Notably, when things eventually did come out, not one of these even admitted to being wrong.
Most disappointing - the financial media (press and TV) come out as lazy bums, blindly trusting and repeating what self-serving companies tell them, and doing no real independent work or thinking.

A a side note, the book also shows how when a government agency that hads out Billions of tax-payer money does such a poor job that it does not detect fraud against it over years despite having all relcvant info, and said detection being easy - when the fraud is finally detected, the agency's First priority is not recovery of the money, not punishing the criminals, not to detect the full size of the fraud, and not even to try and prevent future fraud - the focus is only on how to make the agency look OK, by minimizing the fraud and trying to pretend it never happend.

Well written book explains in detail even to the non-financial expert exactly how a giant pyramid scheme on wall street, worked.

Read this before you trust your money to any broker, and never again trust any analyst or pundit's opinion.

David Einhorn is a man who believes in checking out companies carefully. When he saw that Allied Capital wasn't following accounting rules and was making lots of bad loans, he smelled an opportunity to make money as the company collapsed. After investing, he had an opportunity to share his idea at a charity event. Allied Capital's stock quickly dropped in response.

This book describes six years of battling to get the story out of what he had learned, to persuade regulators to crack down on Allied Capital so the rules would be followed, and to stop any illegal activities at Allied Capital. The book is written from Mr. Einhorn's perspective.

Along the way, Allied Capital decided that it had to discredit Mr. Einhorn's allegations and his motives.

After many years of battling, Mr. Einhorn learned a number of important lessons:

1. Policing small capitalization companies is a low priority for reporters, analysts, institutional investors, and regulators.

2. If a company keeps paying a dividend (even if it's not smart to do so), many individual investors will be attracted and will be loyal.

3. The Small Business Administration is more interested in shoveling out money to small businesses than it is in ensuring that fraud isn't being perpetrated on the tax payers.

4. Wall Street investment banks will help defend any company that pays a lot of fees.

5. With enough new capital, large mistakes can be smoothed over.

I'm sure that if he were faced with the same investment opportunity today, Mr. Einhorn would run rather than take a short position.

I highly recommend this book to people who learned about perfectly efficient markets and active, honest regulators in school. "Let the investor watch out for himself or herself" would be a better motto in describing the capital markets.

This book will be boring to those who want to a quick take. But you need to read all of the misrepresentations, misstatements, and personal attacks to get a true sense of how the game is played.

If you want a more recent version of this problem, just look at securitized mortgages.

Thanks for sharing, Mr. Einhorn!

"Fooling..." is a wonderful book. It will appeal to many readers:
- more technically-inclined finance folks looking to get into the mindsets, behaviors and tactics of outstanding investors
- more public policy oriented folks, looking to get a perspective on how things work at government agencies. The picture that emerges here is startling, to say the least. Einhorn shows in factual, rational way how bureaucaracies meant to serve the public-interest can malfunction due to conflicts of interest. The answer to questions like "why didn't regulators see the financial Crises coming" gains a compelling, and alarming, perspective
- more human-interest focused readers, who will get a kick out of Einhorn's tenaciousness and Allied management's beguilement
- pure thriller readers looking for a good yarn.

I do, however, have some gripes about the book. I thought that Einhorn provided an overdose of examples of the potential situations in which Allied may have or did overvalue assets. The second, and this is a bit more imporant, is that Einhorn rarely provided a sense of perspective regarding how "bad" Allie's practices are. In one of the rare instances, the book cites that Allied had a certain percentage of delinquencies that were above those allowed by the Small Business Association. But for the casual reader it is not to easy to tell how really bad those levels were. These two points make it seems at times Einhorn is forcing his case a bit.

Yet, all in all, "Fooling.." is a great, fun, technically enlightening read. And it is nice to read the edition in which we get a "happy ending" to the story

As the "too big to fail" financial institutions are trying outrageously to remove the compensation ceiling imposed by their messiah the US Government, this book makes anybody feel all the more hopeless against those greedy bastxxds, that we have no way out from the inevitable armageddon with the ongoing monetary easing. This book wont improve a reader's investment and trading capabilities, but for sure is a good story (sad it's true) and warning to the world at large. Recommended!

p.s. Below please find a summary of what this book is all about on page 356.

Six years ago, I told the SEC about Allied's aggressive, inappropriate, and illegal accounting. Five years ago, I told multiple government agencies about he fraud at BLX. Four years ago, I told the FBI that other Allied critics and I had our phone records stolen. Three years ago, I notified Allied's Board in detail about its management's misconduct and make a detailed presentation to the US attorney in Washington outlining a variety of illegal activities. Two years ago, the USDA was notified about BLX's pervasive fraud at that gency. One year ago, Allied admitted it had Greenlight's and my phone records. Neither Allied nor any regulator has commented on the matter since. It is hard to imagine that an investigation should take so long, if Allied is, in fact, co-operating. As of now, Allied continues its aggressive accounting. (as of 2008 when this book got published)

Many well-respected money managers -- some of them with track records that spanned decades -- saw their reputations utterly destroyed in 2008. One manager who came through the carnage with reputation intact, and even enhanced, was David Einhorn (the author of this book). In addition to anticipating the fall of Lehman Brothers, Einhorn's fund, Greenlight Capital, significantly outperformed the S&P (though still ended up down on the year).

I am not an investor in Greenlight (Einhorn's fund), but I always enjoy reading their quarterly letters. They are consistently detailed, forthright and insightful, the way all investor communication should be.

I also give Einhorn respect (and admiration) for his 18th place finish in the 2006 World Series of Poker -- the $659,730 winings of which he donated to charity. The guy can clearly handle himself at a poker table.

The book itself was an interesting read on multiple levels. A friend of mine, who crunches spreadsheets in his sleep, made a friendly wager I wouldn't be able to get through the whole thing, as there is a great degree of detail (some would say mind-numbing detail) covering Allied Capital's various accounting irregularities.

I won the wager by devouring the book -- moreso out of hunger to absorb a highly trained investor's deeply analytical thought processes, than from a need to understand the particulars of Allied Capital or BDCs (business development companies).

The book sheds light on a number of excellent concepts above and beyond the Allied saga. The opening chapters, which describe the origins and philosophies and thought processes behind Greenlight Capital, are extremely informative.

The book as a whole, including all the Allied Capital detail, further offers a picture of what an exceptional investing mind looks like. If one were to try and reverse engineer the source of Einhorn's success (leaving out the irreducible good fortune component), four qualities would stand out:

- Exceptional analytical capability

- Exceptional creative ability

- Deep concentration ability

- Deep intestinal fortitude

To surpass "good" and make it to "great" as a trader or an investor, I would argue one needs all four traits. The presence of some but not all of these traits, I believe, accounts for the overwhelming tide of mediocre performance we see from Wall Street.

The typical investment banking path, for example, focuses heavily on the analytical side... while stomping the creative side into the dirt. The first few years of being an i-banker (if not one's entire career) are hallmarked by soul-crushingly repetitious activities that by and large replace spreadsheet gruntwork with any semblance of creative unconventional thought.

Worse still, the general institutional investment mindset runs directly counter to the "deep intestinal fortitude" idea -- in fact the whole of institutional investment culture seems expressly designed to browbeat the average manager into the mold of a gutless, benchmark-hugging coward, desperately afraid to deviate too far from the safety-approved track of his peers.

As if this were not enough, the mediocre types that hold the keys to most of the locks in the institutional investment world reinforce their plodding natures (and thus bolster their plodding dominance) with a "tried and true, proof in triplicate" way of thinking that drives the mavericks and creative thinkers mad (and out the door). At the end of the day, finding all four traits within a single individual becomes a rare thing indeed.

"Fooling" does have a touch of personal vendetta feel to it at times. The deep accounting detail can also be a bog in places, especially if one does not view keeping up with the myriad intricacies as an amusing challenge.

But the opening chapters alone are worth the price of admission... and if you want a gritty, true-to-life, wide-ranging gestalt feel for the combination of smarts and guts and tenacity it takes to successfully run a multi-billion-dollar hedge fund, "Fooling Some of the People All of the Time" delivers.

This is a really good book, and a perfect example of the famous Buffett's quote "There's never just one cockroach in the kitchen". The short trade started with a call based on inadequate accounting on investments by the Allied Capital company, but evolved into an almost thriller-like investment case that included public attacks, lending frauds, corporate spying, prosecutions, among others.

In my opinion, above all the details and developments of the story, the most interesting aspect of the book is the fact that it shows how a good investment research work should look like: objectively oriented and focused on what's relevant, thorough analysis, deep curiosity and eagerness to look for alternative sources of information, besides courage to confront the conventional wisdom & knowledge of the crowd. For investment professionals, this short is a great case study with aspects that can be applied to many other investments out there. And for the layman, it's a pretty useful book to understand how is the work of a premium investment research professional.

Of course, fitting a single short-story into a 400-page book will have ups and downs. It's almost impossible to keep a frenzied pace along the whole book under such circumstances. The book starts pretty well and in a crescendo, as the reader slowly discovers all the accounting misdoings of Allied. Then the pace slows down, until the moment that the story develops into a financial thriller, with frauds and spying coming to play. Towards the end of the book, the pace slows down again and the story starts to go over the same aspects once more, a point in which the book can get a little tiring for some readers.

Still, for the reasons outlined above, I would definitely recommend this book. Overall, the reading experience will be surely enriching.

This is a really good book, and a perfect example of the famous Buffett's quote "There's never just one cockroach in the kitchen". The short trade started with a call based on inadequate accounting on investments by the Allied Capital company, but evolved into an almost thriller-like investment case that included public attacks, lending frauds, corporate spying, prosecutions, among others.

In my opinion, above all the details and developments of the story, the most interesting aspect of the book is the fact that it shows how a good investment research work should look like: objectively oriented and focused on what's relevant, thorough analysis, deep curiosity and eagerness to look for alternative sources of information, besides courage to confront the conventional wisdom & knowledge of the crowd. For investment professionals, this short is a great case study with aspects that can be applied to many other investments out there. And for the layman, it's a pretty useful book to understand how is the work of a premium investment research professional.

Of course, fitting a single short-story into a 400-page book will have ups and downs. It's almost impossible to keep a frenzied pace along the whole book under such circumstances. The book starts pretty well and in a crescendo, as the reader slowly discovers all the accounting misdoings of Allied. Then the pace slows down, until the moment that the story develops into a financial thriller, with frauds and spying coming to play. Towards the end of the book, the pace slows down again and the story starts to go over the same aspects once more, a point in which the book can get a little tiring for some readers.

Still, for the reasons outlined above, I would definitely recommend this book. Overall, the reading experience will be surely enriching.

Einhorn has a very friendly, casual and even self-effacing writing style that flows very nicely. It is not the first book to point out the corruption in politics and business, but the evidence he provides and serves up on a silver platter to government regulators is amazing and unbelievable. Amazing because he and others kept digging, probably when a lot of other people would have just given up. Unbelievable, because it highlights the ineptness and political selfishness that plagues our country to an extent that I didn't think was possible. It is an eye-opener/jaw dropper. He also doesn't just highlight the shortcomings of the government and business, he also shows the unwillingness of Wall Street analysts to dig deeper because the investment banks were making so much money off of Allied.

I'll admit that at some points the explanations of the fraud with respect to the loans can get slightly technical and detailed, but it certainly does not detract from the story and will not hinder your overall understanding of the massive fraud that was being committed.

Einhorn doesn't preach at all about short-selling. Sure there are people that are unscrupulous, but Einhorn and his ilk are truly about the economics of business. If the economics aren't profitable, eventually a business will fail and short-sellers recognize this before a lot of other people do. There are bad short sellers (not Einhorn) just the same as there are bad government employees, bad cops, bad teachers, etc.

Overall, the book is well-written in a conversational style. I had an overall negative bias toward hedge funds before reading the book from media coverage. However, now after reading this book, I don't have such a negative view towards hedge funds. The book also enforces the adage "there are two sides to every story"; even if companies or Wall Street say only they are telling the truth.

p.s. the review that stated receiving the dividend was proof that Allied had cash in the bank and was not a fraud is absurd. Sure, shareholders got their dividend, but at the expense of U.S. taxpayers being defrauded out of millions of dollars.

Good book for understanding the active investment and long term Equity L/S, when the environment is against you, how to leverage various of resources to change the environment instead of just wait. However, such short is not profitable considering long term following and the interest paid.

This book is really two disparate parts welded together.

The first, quite enjoyable, section of the book describes Einhorn's start in the hedge fund business. If you have an interest in fund management, you'll get a lot out of how he put his first fund together and quickly rose to prominence with spectacular performance out of the gates. The book provides a detailed behind-the-scenes narrative on his early investment decisions and how each investment unfolded in the context of the overall fund. The main takeaway for me was the importance of gauging roughly where in the cycle the overall market is (based primarily on valuation and confidence levels) and positioning one's long/short ratio accordingly. Note that doesn't imply taking an all-or-nothing stand on the direction of the market (which can easily become more irrational in the short term) but it does imply overweighting the part of your portfolio which is most attractive (i.e. the longs during times of panic and the shorts during times of exuberance). By keeping both long and short exposures, the investor is still able to profit if the market moves against him. This thinking helped Einhorn do well during the dot.com bubble years and the subsequent crash (one of only a few investors to achieve this). Virtually all his returns in the crash years came from his shorts - a strong reminder of their value during tough times.

I liked his point that a successful short position needs to be based on both overvaluation and a flawed business model (or fraud). Just one of these conditions is not sufficient. Plenty of overvalued businesses continue to walk on air for long periods of time (like that cartoon character running off a cliff but not realizing it until he looks down) and in the interim a company may actually grow into its valuation (the store.com for instance). On the other hand if a business model is flawed but the market realizes it there is obviously little to be gained - only variant opinions are rewarded.

I did not, however, like Einhorn's point that 2x overvalued is effectively the same as 20x overvalued (i.e. both are irrational in the same way that 2x infinity is the same as 20x infinity). Personally, I would much rather be betting against a company at the 20x level as the hype and expectation are that much greater, creating a scenario where the smallest slip-up can bring collapse, and of course the maximum profit potential is larger. Recognizing this can help one increase a short position as it goes against you (in much the same way that value investors double down on battered stocks.)

While I really admire Einhorn as an investor it was highly discouraging to see how the short term orientation of his investors affected his decision making - including covering losing shorts that eventually would have paid off handsomely. It is a great pity that the hedge fund industry works on monthly and not annual or even longer-term performance. It can only be a detriment to eventual returns.

The second section of the book (comprising 2/3rds of its volume) consisted of a very detailed account of fraud at Allied Capital (a BDC investment company) in which Greenlight has held a very public short position (now vindicated with Allied's bankruptcy during the credit crisis). While I sided with Einhorn and was amazed at the extent of the cover-up, I found it much too detailed and convoluted to be enjoyable reading.

I enjoyed Buffet's comment to Einhorn that the problem with shorting crooks is that they'll play a lot dirtier than you will. It's interesting that Buffet has executed several shorts over his career and has no theoretical problem with the strategy but prefers to have a "long persona". After reading of Einhorn's constant battle with the media it is easy to see why.

Indeed a Long Story about incompetence, lies, unfairness and above the law actors. I found the story to be just okay though. I didn't find it outrageous or surprising that politics and relationships got in the way of doing the right thing.

The Allied story reminds me of Ackman's experience with Herbalife in a lot of ways - a thesis backed up by data and conviction, executives that unfairly made out with millions, and poor people left holding the bag. The big difference between Allied and Herbalife is that the FTC did corroborate Ackman's analysis in a debilitating ruling and the story has yet to be completed. The Herbalife scheme is a chance for regulatory bodies to redeem themselves from decades of incompetence.

Just finished reading this book (e-book on Kindle Fire) and I highly recommend it. You need to be somewhat knowledgeable about capital markets to understand parts of it, but Einhorn certainly explains much of the more complex stuff in layman's terms--there's a glossary at the end of the book you can refer to (not convenient to flip to and fro on the e-book).

While I enjoyed the book, it was very disturbing. Sometimes bad guys really do get away with it all and don't suffer any consequences for their misdeeds. The main takeaway from the book is that the system needs to be overhauled. Regulators don't do enough when a fraud is occurring, Wall Street analysts are bought--and won't be critical when the subject is paying them lucrative fees, and there is an unhealthy skepticism of short sellers--who when acting appropriately, serve as de facto market regulators (in the interest of profit, of course).

***A BRIEF SPOILER ALERT*** Despite Einhorn's and Greenlight's significant resources and prowess they essentially fail to get any regulatory agency to meaningfully hammer down on Allied Capital (and its subsidiary BLX). Greenlight literally hands over high level analysis detailing obvious loan origination related fraud(s) at an SBA lender called BLX, that is costing tax payers hundreds of millions of dollars. Additionally, Greenlight further asserted that BLX's publicly traded parent, Allied Capital--and its Board, stood idly by as this fraud persisted. Greenlight further demonstrated that Allied's accounting statements were materially misstated--which is a huge deal because Allied routinely issued new equity to support its rising dividend distributions to shareholders (a de facto Pyramid/Ponzi Scheme). Although nobody acted to stop this, the company does ultimately collapse proving Greenlight's short thesis correct. There's a lot more to this story, but I'll stop here.

This is brief history of the dispute between David Einhorn, founder of Greenlight Capital, and Allied Capital (stock ticker ALD). Mr. Einhorn details his research into ALD that culminated in a speech he gave at a charity event. Since the speech ALD has been attacking not just Einhorn, but everyone and anyone who has said anything bad concerning their company.

Mr. Einhorn details the lack of inquisitiveness on the part of the financial reporters and stock analysts who gave, and most who continue to give, ALD passing grades without a serious look into the financials. He also tells of the lack of responsiveness from the federal government to stop BLX (Business Loan Express, a company owned by ALD) from bilking the taxpayers out of hundreds of millions of dollars in bad (fraudulent) loans. And for all of his effort Mr. Einhorn was repaid with personal attacks. Since I started reading this I have looked into this a bit and I have not been able to find a single credible source to discredit what Mr. Einhorn has said about ALD. Despite what some may believe blogs and online forums are not credible sources, they are just opinions thrown out for the masses to read.

I found this to be an excellent book. However, I would not suggest buying it for the explicit purpose of getting some investing insights into the market. That is not the intention of this book.

MY RATING SYSTEM:

* - if you have to chose between torture and reading this book, then you might want to consider reading the book - although it depends on just how severe the torture would be.

** - if you've lost your job and have quite a bit of free time on your hands, and don't have anything else better to do, then you might want to consider reading this book; don't expect to learn much or really be entertained. It will however, help you pass the time until your death.

*** - meh...I'm indifferent. Reading this book will not alter your life in any significant way, yet it is not so horrendously dreadful that your taking the time to read it will be a complete waste of time.

**** - Good book to great book zone here. You should probably read this book if you have some spare time. This book could be interesting, entertaining, or informative.

***** - Outstanding book! Make time to read this book - you'll learn or be entertained or intrigued. The book might even be good enough to provide original or helpful insights into the world that we live in.

REVIEW:
My review title is a bit tongue-in-cheek, as this book is far from a story of the glitz of activist investing. Instead, in Einhorn's chronicle of his investigations into Allied Capital, the book reveals the extent to which diligent investors will go to undercover the truth that underlies the real value in a company. Einhorn's story highlights the hard work, extensive due diligence, and tireless campaigning to bring Allied Capital's shady business practices to light.

Over the course of several years, Einhorn meticulously researched Allied Capital and its lending practices, accounting practices, and governance, coming to the conclusion that it's stable dividend stream and seemingly unshakable financial performance were the products of shoddy lending practices covered up by dishonest and misleading stories from management, and frequent trips to the capital markets to raise new equity capital.

I found the book interesting for a number of reasons. One, Einhorn spends some time discussing the early growth of Greenlight Capital, as well as some of his prior successful investments including the investment thesis underlying these investments. Two, Einhorn's chronicle of the Allied Capital saga goes into a tremendous amount of detail to demonstrate the extent to which dishonest practices permeated Allied and its portfolio company BLX. For instance, Einhorn discusses how research into bankruptcy proceedings of some of BLX's borrowers revealed interesting insights into the lending practices of BLX and the business practices of Allied. Finally, it was surprising that Allied was able to continue its operations despite the overwhelming evidence of less-than-best practices permeating its business and in many cases blatantly illegal conduct.

There is a coincidence between the best and worst parts of this book - notably, while the detail and lengths to which Einhorn goes to chronicle Allied's business practices is the critical part of the success of this book, at times it becomes a bit overwhelming and can make for dry reading, especially for those with only a passing interest in investing.

Now and then over the last two years the positions of David Einhorn have been a part of the pitch when I meet sell side analysts. Ever since Einhorn publicly presented Lehman as a short case and Lehman subsequently blew up, the founder of Greenlight Capital has been a household name. When Einhorn shorts something the world takes notice. This has not always been the case and this book portrays the uneasy details of Einhorn's earlier feud with a crooked company called Allied.

Allied acted on the edges of the credit bubble, with the same type of irresponsible lending and focus on short term loan volumes as in the MBS-market. The company focused on loans to small businesses. The loans were issued in collaboration with the Small Business Agency. The company used SBAs non-existent oversight to grant financing against all rules. Lax lending attracts crooks like flies are drawn to dung and when the inevitable non-performing loan started to show up, Allied resorted to the usual mix of creative accounting where NPLs were kept at par value, deceitful information and acceleration of loan volumes to cover up the old bad stuff. Gullible retail shareholders were lured by stable and growing dividends propped up by a constant stream of share issues. This was what Greenlight but few others saw and decided to present as their best idea at the 2002 Ira Sohn conference.

The next phase is the most chilling one. Allied was situated in Washington DC and founded by a former FBI-official. The CFO used to work at SEC and the well-connected company contributed generously to various political campaigns. The board contained persons with extensive Washington rolodexes. For Einhorn the short position was one of many portfolio positions. For the management of Allied it was a matter of survival, an attack on their cash cow that threatened to send them to jail. They decided to put up a fight that would last for 6 years. The book turns into something of a Frederick Forsyth story, with shady spin doctors, illegal phone tapping, Allied's recruitments of SEC officers with inside case information and probable bribes. Allied actually managed to get Greenlight indicted instead of the reverse. Media gratefully retold Allied's story of malicious short sellers instead of digging into the truth The credit rating agencies and sell side analysts, easily swayed by rating fees and revenues from never ending share issues, saw no problem. At the same time governmental agencies showed minimal interest in investigating Allied even though Greenlight hired a private investigator to be able to hand the government a clear criminal case on a plate. It turned out that SBA aggressively lobbied other agencies against touching Allied as it was instrumental in securing the loan volume goals that the agency had. It was Greenlight against everybody. In the end the truth won out and when the company's shareholders eventually refused yet another share issue the game was over for Allied. Yet, until this day the leading officials of the company haven't been reached by the presumed long arm of the law.

For a finance book written by a portfolio manager this reads more like a crime novel. It's hard to stop reading. However, it's also evident that Einhorn was deeply touched by the attacks from Allied. He has fought for so long to be believed, so he must document everything in detail. This also means that the reader must put up with a rather lengthy description of a catalogue of loans where there was no chance, or even intent, to repay. One of the parts of the book that I appreciated the most was the description of Greenlight's investment philosophy. The fund is a long short value investor driven by fundamental analysis, but instead of starting their search process with companies that appear cheap and then weed out value traps, they start with asking: "where can we trade with less informed or motivated counterparties?". After that they try to work out if there is a long or short case in the located areas.

It's easy to share Einhorn's frustration and chock over how all the parties that was supposed to act like watch dogs failed so miserably. On average I think hedge funds are overcharging their investors but sometimes we should all be glad that someone has the resources to perform real in depth analysis - in this case really, really deep.

This is a review by investingbythebooks.com

I wish more trading books were like this book. David Einhorn starts his own hedge funds and makes monster returns on capital by buying and selling companies based on their fundamentals. In this book you can read how he started out, how he looks at companies and anlyses them and how to trade them. The main theme of the book is the story on Allied Capital's downfall (due to their irregular accounting).

When I ordered this book I kind of expected a lot from it, since I already follow Greenlight for a few years in the media. This book met my expectations completely.
Strongly recommended.

This is a complex story of hedge fund manager, David Einhorn, vs Allied Capital. Mr Einhorn wants corporate accounting transparency; Allied wants good quarterly numbers. The rules keep changing. The SEC looks the other way. How well the company is doing depends on who you ask.
It takes a clear head to follow the details of Allied's accounting but you get the point. Reading about the Detroit area operations of one of Allied's investments, BLX (Business Loans Express), sounds like a Nigerian scam. The reader wonders why no stock analyst or government agency notices this or even cares when it is brought to their attention. This isn't Nigeria, this is happening in the USA. Luckily Mr. Einhorn is persistent and hopefully for investors he will keep it up.

My aim when reading any financially oriented book is to learn something. I'm reading in the hope of becoming a better investor. In this instance David clearly demonstrates the value to the market of short sellers. The media biases us to believe that these short sellers are pure evil. During the financial meltdown I was convinced they were evil and honestly wanted them caned headfirst into the soil but this book left me better informed and I now think they are an important part of the market.

While it may be that some short sellers jump on any old share and seek to drive it down this does not guarantee success whereas finding a share that is fundamentally overvalued and shorting it is a much more reliable way of making money because there will come a reckoning. David shows that the short sellers pump a boatload of research into identifying sick men in the market. These guys have Mucho skin in the game so it is in their interest to make the right calls. The plus for all of us is that they do all the research so the rest of us don't have to. My takeaway here is if a company is heavily shorted, in all probability it is shorted for solid fundamental reasons and steer clear of it. As David and many other better investors than me have said, a big part of winning in the longer term is avoiding losers.

Perhaps the only honest modern book on investments I have read. Also gives a limited insight into Einhorn's mind and way of thinking as an investor.

Einhorn masterfully tells the true tale of his battle against stock manipulation, corrupt and lax government, unscrupulous management, fee-hungry and conflict-laden investment banks, and careless and lazy long investors.

In the foreword, Greenblatt says something to the effect that he doesn't want his kids to read this book, because that will cause them to lose their innocence too soon. People should read this book for precisely that reason: to gain an appreciation for the sort of underhanded tactics that big business and the financial industry uses all of the time to part the little guys with their hard-earned money. And how the government often turns a blind eye (case in point Madoff, Stanford, Allied Capital, etc.)

If you are like me and prefer evidence and logical analysis in order to be convinced rather than footwork, spin and political BS, then this book is for you. I actually bought it for my better half as a Xmas present, but as soon as the wrapper was removed I highjacked it and read it first instead. You don't even need to be an expert in finance to be entirely captivated by this book. David Einhorn generously and patiently walks his readers through the financial and stock market technicalities to provide that necessary context. And, boy, do you want to know about these things before investing your hard earned money on the stock market!

When I finished reading this book, my (preconceived, media-primed) opinion about hedge funds was changed forever; I now truly believe that not all hedge funds, if indeed any, are the evil market manipulators as some have been trying to portray them for obvious reasons. Some hedgefunds, like Greenlight, have even gone through the pains of exposing and pursuing corporate fraud, something that is clearly the SEC's job. As David demonstrates, it's knowledge of financial rules and regulations, doing your homework - plenty of it! - and clear analytical thinking that makes a successful investor, especially hedgefunds.

For anyone giving a toss what happened to the global financial markets during the GFC, and why, this is a must-read. The only reason I give this book only four out of five stars, is that I would have liked to see more of characters' personalities come across, but I understand why the author may have chosen to have the book written more like an investigative report rather than a story. This is not to say that his humour doesn't surface in little pearls such as "Allied borrowed money it didn't need to cover for losses it claimed it didn't have".

It would suffice that this book is well-written, engaging and informative, but it is more than that. It is an important book, for two reasons. First, it shows how much of an investment edge it can be to employ deep research and critical thought. The fact that many other investors continued to be fooled by the company even after Einhorn published his analysis may seem frustrating to the reader, but as an investor I view that reaction as confirmatory that there will always be lots of ways for independent, meticulous thinkers to make money. Second, the book demonstrates how difficult and lonely it can be to engage in activist investing, especially from the short side. Consistent with the story in this book, I have almost invariably found that the more correct the activist's views are, the more likely s/he will be subjected to ad hominem attacks; and that, when presented with cogent evidence of a serious problem, government officials either do nothing or protect the malefactor. Indeed, the business news of the last nine months is replete with examples of this. I am unaware of another book on investing that captures this second element. It is all the more commendable that Einhorn can tell this incredibly frustrating tale calmly, resisting the temptation to engage in histrionics or self-righteousness.

This is an interesting story of a hedge fund manager who becomes obsessed with a short position in a company that seems, at a minimum, a little shady. None of the characters in the book are likeable and at the end of the book it's not clear if Einhorn is making a mountain out of a molehill or not. But it is a fascinating detailed look at an ugly mix of management greed, an investor's ego and government waste and intimidation.

I have not read an investment related book since Liar's Poker which I wanted to keep reading and finish in a single day. I liken this book to Michael Lewis' work only in that it will likely stand as equally as much of a "must read," however one important distinction should be made - this book dives much deeper into the actual investment premise and process of a position. It is just as much educational as it is truly entertaining. For anyone in the investment business, you will get something out of it above the inevitable a laugh or gasp at some of what went on at Allied Capital. I found myself exclaiming out loud that some of what went on was just too ridiculous to be true. Unfortunately it did indeed happen, and the book is full of supporting evidence. Further, it details a culture of inaction at regulators, which comes at the expense of taxpayers. The combination of dishonest management and lapses on the part of the watchdogs is enough to make anyone mad.

David's writing style and voice are excellent. The story told was exciting. I would recommend this book strongly to anyone who has ever looked at investing in a company in any capacity, especially those who have sat through the conference calls and taken management at face value. It inspires a healthy dose of skepticism which we should all have when we make investment choices, and as I see ALD indicated to open near to its lows seen since the Fall '07 credit crisis, it shows that real digging and sweating over research can result in picking the right names to be long or short in.

This was overall an interesting book. It offers insight into the kinds of analysis that a long/short hedge fund uses before deciding on an investment position or adopting an investment thesis. In fact, Einhorn goes into great (some might say minute) detail when it comes to the various valuation and accounting techniques used by Allied Capital. However, I find it very surprising that he is almost completely silent on what would make the story REALLY interesting to the financially-minded: how was he trading the stock and options on it?

Einhorn is very open about his thoughts and actions throughout the story. However, not once does he provide any detail on how his trading actually works (e.g. "On Monday I bought 5,000 February put options at $25.") This struck me as very strange actually, considering the entire story is about shorting a stock. So, I was quite disappointed by this. Perhaps disclosing this information might expose Greenlight to legal liabilities. Who knows? Einhorn just never comments on why it's excluded. In any event, don't expect to get any insight on specific Greenlight trading strategies by reading this book.

If you manage your own investments, and especially if you buy individual stocks, this book is a "must read" for you. It will open your eyes about the risks of owning individual company stocks. Few people have the ability to research a company the way the author's hedge fund can. Even with those resources Greenlight hasn't been able to force Allied Capital to come clean about their dishonest accounting practices. The only hope individual investors have is to stay clear of companies like this.

So few individuals think clearly on Wall Street that when one of them actually lays it out in a book as Einhorn has the effect is to give us valuable lessons in developing the clear thinking necessary to work through the sea of mediocrity on Wall Street with its multi-level hidden agenda and sales oriented analyses. I rate Einhorn a superior thinker and an excellent writer-a great combination.

Just finished the Kindle version.Very technical but please persist as the info in this book is mind boggling. I applaud David Einhorn's persistence and am appalled at the slack enforcement by federal agencies and the failure of the news media to do the hard work that was required to unveil this fraud. But the real un-nerving aspect is how so many of the perpetrators got away with and profited by this scheme including the politicians who protected them.

Gretchen Morgenstern had an article in todays New York Times that mentioned this book:

Following Clues the S.E.C. Didn't
[...]

In the article she says

"Fooling Some of the People" should be required reading for Mary L. Schapiro, the new chairwoman of the S.E.C. Ditto for anyone else interested in assessing our nation's broken-down regulatory apparatus....

....shares in Allied Capital, a business development company that invests in small to midsize concerns, plummeted almost 50 percent. Allied, whose stock was favored by small investors for its rich dividend, said it was trying to renegotiate its own loans amid the credit crisis. Dividend in danger, Allied's stock closed at $1.56 on Friday; last September, the shares touched $16."

I rated the book a 5 on the basis of the article (since the store woudn't let me post without a rating). I haven't read the book yet, but I will.

Although some claims against Allied appear to be exaggerated, or at least are not fully substantiated within the covers of the book, this is an excellent look into the critical bird-dog role of financial analysts.

Plenty of literary criticisms to be made, but it is a relatively easy, even enjoyable, read.

It is also informative, albeit troubling, to read of the indifference and incompetence of many government officials in response to Greenlight's more damning findings of fraudulent and misleading activity. Although this is something we have come to expect over the course of the George "heckuva job" Bush administration, we need more voices in this fight.

A true professional's biopic on a battle that never should've lasted so long. Kudos to David Einhorn (& team) for the patient endurance to see this good work through to its rightful end. We can all learn from his experience.

I received this book around lunchtime and read it cover to cover by the end of the afternoon. It was a riveting read - I found myself shocked at the lengths a company management would go to discredit detailed research that pointed to both corporate deception and a tolerance of a culture of fraud, but more than anything disgusted by the laziness of the investigators who could have put a stop to this behavior. I am hopeful this important book makes a difference in both corporate governance and government oversight.

I like reading books about corporate collapses (eg about Enron and Worldcom), and this book, whilst not about a corporate collapse, details the author's extensive investigation into the accounting and other practices of Allied Capital. Both as a story and technically, this is an exciting book.

In a world where the answer to every vexing economic problem seems to be "Deregulation" (if not lower taxes!) here comes a wildly successful hedge fund manager (of all things!) to show us that in a world where the current crop of referees are either incompetent, asleep or bought off, the solution is hardly to wish for a world with no referees and/or no rules. Indeed, a Wall Street world without proper rules and vigilant rule-keepers is a scary and dangerous place--as the current Credit Crisis makes well clear. If this book was only about one duplicitous company called Allied Capital and Einhorn's awful experience shorting its stock, it would still be a provocative and insightful read by an unusual insider-as-outsider. But it is more than that. It is the story of the how truly skewed things can get when our government chooses to look the other way. Einhorn doesn't start the story as a true-innocent--no hedge fund titan, however young, is that--but it is amazing what happens once his speech about the company (for a charity, no less!) starts this book, and his world, spinning: it is as if he's fallen down a rabbit hole and finds himself on some surrealistic, subterrean level beneath Wall Street. Nothing like being investigated by the S.E.C. for having the termerity to short a stock and the "unpatriotic" cojones to talk about it. Einhorn points out that free speech, in certain circumstances, is not so very free but gets quite expensive...so much so that it gets quashed.

The book might have more accounting arcana than some readers would wish, but one can easily fast-forward through those sections and still get the meat of Einhorn's argument. Since hedge fund managers are being blamed for everything from the housing bust to raising the price of high-art (sharks in formaldehyde) and other assorted commodities (corn, oil, Ferraris) it's a bracing surprise to be presented with a book that is as useful, as righteous, and as necessary as this one.

Einhorn's pain is our gain.

Allied's ultimate collapse proves Einhorn was not crying "Wolf. wolf" and that the SEC, SBA and their governmental cousins were asleep or wilfully ignoring Allied's nefarious conduct . The story is a good one, and worth reading if you can make it through a lot of tedium that the author could have left out or summarized.

The author recorded his fight against Allied Capital. It give us some insight of the war between the short-seller and the attached company. This is a smooth and interesting reading.

But it lacks of depth.

David Einhorn makes the complex simple, and the sad truth irrefutable.
His work should instigate significant change in our financial governing agencies.
Those who do not read this book risk maintaining dangerous misunderstandings about the governance of our corporations and our financial markets.

His astonishing story teaches a harsh reality - that America's assumptions about corporate honesty and government protection are simply wrong.
His experience of SEC unresponsiveness to corporate fraud, exactly the situation we expect them to protect us against, is so well grounded in fact that page after page I kept asking myself, "could there possibly be more???"

David Einhorn's book contains quite a lot of good advice, but its subtitle "A Long Short Story", says it all; this book does not need to be 350 pages long. In fact, I can give you a good portion of its wisdom here: 1) Avoid losing positions, as it takes winners to offset them just to get back to even; 2) Avoid "evolving hypotheses", which means that if you buy a stock for a reason, the catalyst occurs, and the stock doesn't respond as you wanted, don't sit around and create a new reason to own it; rather, sell it and move on. 3) A company's paying of a dividend does not necessarily signal financial strength..in fact in the case of Allied Capital they frequently raised capital in the equity markets in order to pay the dividend (which Einhorn accurately likens to a Ponzi Scheme).

Where the book falls apart is the many dealings that Einhorn claims to have had with various agencies, most of which Einhorn claims wronged him. The reality is that only Einhorn and the counter-parties know for sure whether these dealings truly happened as he portrays, but there are strong signals that his book is a self-serving diatribe; for example, when Harvard Business School wrote a case about the Einhorn/Allied Capital issue, Einhorn says that the case was biased in favor of Allied, and that he wasn't offered the chance to comment on the case as was customary because of his conspiracy theory that the research assistant had formerly worked at Capital Research, which owned Allied Capital stock. Futhermore, he implicates esteemed Harvard Business School professor Andre Perold in his revisionist history account, claiming that Greenlight was denied the right to offer input in the case. That, I can state with great confidence, is factually incorrect. The fact that the one claim in the book that I chose to attempt to verify proved untrue makes me quite suspicious about the balance of its contents.

In sum, there is some good financial advice from a great investor, but the book is twice as long as it should be, and there are too many self-serving stories of questionable veracity.

A fascinating story told at the intersection of investing, accounting, regulation, business interests, greedy management, private investigators and government malfeasance.... A tale of how the real world works and how there are a few souls fighting on our behalf.

Overview:
David Einhorn, founder of a successful Wall Street hedge fund, has written a book which describes the controversy surrounding David's hedge fund selling short Allied Capital. While David makes some very damning points about Allied's management, he does not prove his central thesis, namely that Allied engaged in fraud. Despite this flaw, the book is still a worthwhile read.

Background
David's conclusion about ALD were based on his previous experience shorting Sirrom, a company that *was* a fraud and subsequently went bankrupt. Sirrom was in the same industry as Allied, namely loans to small businesses. David concluded that ALD must be a fruad since they, like Sirrom, did not write down the value of troubled assets in a timely manner and management was less than truthful when confronted with this fact (pg. 52). Referring to ALD's managers, David writes "people who are willing to lie about small things have no problem lying about big things" (pg. 64). The rest of the book, almost 300 pages, is David's attempt, unsuccessful in my estimation, to substantiate this claim.

Why "Fooling..." is Worth Reading
Despite the fundamental flaw of stating a thesis that he then fails to substantiate, "Fooling..." is still a worthwhile read for four reasons:
1) David has made a lot of money, and his investment methodology is explained in detail. This is unique, and worthy of serious study.
2) The book documents the inability of regulatory authorities to protect investors from dishonest management practices. Very sobering. Allied did engage in a number of unauthorized accounting practices that victimized it's investors, and none of it's managers were ever punished. In fact, they got rich at their investors expense.
3) It shows that even superstar investors are human. On display is how a very rich man's obsession with proving he is right drove him to stick with a losing position, pouring time and resources into what became a personal crusade. I have made this mistake on a much smaller scale, and I imagine most investors have. Obviously, the book did not intend to teach this lesson, but there it is.
4) Allieds is a "Business Development Corporations" (BDC), and the book explains how BDCs operate and make their money. David opines that BDCs are similar to junk bond funds, but are riskier (pg. 48). BDCs in general are very lucrative and pay high distributions when the USA economy is doing well, and tend to lose a lot of money during a recession. There is a lot of info here that investors can put to work.

Synopsis of Events:
David Einhorn, who is about as successful as a man can be on Wall Street without being Warren Buffet, concluded that Allied Capital is a fraud. He invested almost 8% of his hedge fund selling ALD short (he profits if ALD goes down, loses if it goes up). He then proceeded to try to get regulatory authorities, including the SEC and Eliot Spitzer (at the time the NY Attorney General) to investigate improper practices at Allied. For his efforts, he got investigated himself by these authorities. He recently published "Fooling Some of the People All of the Time" to prove he is right, and the rest of the world (SEC, financial press, investors, the stock market) are all wrong. David calls ALD a "ponzi scheme" (pg. 330), continually raising new capital to pay the dividend. While this claim should be easy to substantiate, no evidence or proof of any kind is offered. David predicts that eventually, ALD's fraudulent practices will cause the demise of the company. When the book was published, despite 6 years of intense effort on David's part to expose ALD, he lost money on his position (when you factor in dividends which he had to pay having shorted the stock).

Epilogue
Today, 8 years after his accusation were first made, ALD is still in business. While it's stock price has under-performed the market, when you factor in the dividends (actually tax distributions) it has been a pretty decent investment. It is hard to imagine how a company that systematically defrauded it's investors could survive 8 years of constant hostile scrutiny from a smart and rich hedge fund, paying hefty dividends the whole time. If it was a ponzy scheme, it should have imploded years ago. As far as I am concerned, this fact, combined with David's lack of hard evidence, disproves his thesis.

Very boring to read. Explains at length reasoning that leads to short sales. Unless short-selling is of particular interest to you or, if you face an imminent encounter with SEC, this book is unlikely to be of any value to you.

Einhorn is not alone in believing that financial statements are sometimes a form of creative writing. But dividends are not; when a dividend check successfully clears, there can be absolutely no doubt that the money really was in the bank. And given that Allied Capital not only pays a hefty dividend but has also defended and increased its hefty dividend for more than four decades, it is simply silly to mount the kind of bear raids that Einhorn has repeatedly mounted on Allied Capital during the last decade. All he has done has been to make it possible for savvy investors to get pieces of a very successful enterprise at bargain prices.