Fooling Some of the People All of the Time — Einhorn: COMPLETE

The title is a borrowing. Abraham Lincoln's saying — that you can fool all of the people some of the time and some of the people all of the time — is the book's thesis in miniature: Allied Capital was kept alive not because everyone was fooled, but because enough people were fooled for long enough, while the rest of the market saw a safe dividend and had no incentive to dig. Einhorn's subtitle, A Long Short Story, describes the form: a long story about a short position.

The book was published by Wiley 2008 and later released in an expanded edition — but the core story is the same: how one of the United States' oldest and most beloved investment companies was kept alive by the story of 40 years of dividends, and what it cost to prove the opposite in public.

David Einhorn himself: born 1968, educated at Cornell, with a few years as a securities analyst behind him before he started Greenlight Capital. In 1996, at 27 years of age, he opened the fund with roughly 900 000 dollars — mainly family money, mostly paid in by his parents — and built it into one of the world's most respected value funds. Greenlight's style is Graham-style fundamentalism with a short side: buy mispriced quality, short mispriced theater.

By the time of the book the fund runs billions, and Einhorn is 33 years old when he steps onto the Ira Sohn stage. It is worth remembering that Einhorn is also the man behind the famous notebook he waved at poker tournaments — the man is methodical even in his leisure.

The course's differentiation: for AK1A reads three books as one. The Big Short (our course of the same name) is the MACHINE: an entire system of mortgages, CDOs and rating agencies that collapsed — the lesson is incentives and systemic risk. Kathryn Staley's The Art of Short Selling is the TECHNIQUE: borrow, sell, cover, the checklist, the catalyst, the clock — the lesson is fault-finding as a craft.

Einhorn's book is the DETAILED EXAMINATION: one company, six years, every relevant document — the lesson is how a balance sheet lies in detail, how a subsidiary can carry an entire fraud, and what happens when someone says it out loud. Keep the three in separate compartments: the system, the tool, the digging.

The story in a nutshell: on 15 May 2002 Einhorn presents a public short thesis against Allied Capital at the Ira Sohn Investment Research Conference in New York — a Business Development Company founded 1958, internally managed, loved by private investors for its high dividend and traded at a significant premium over net asset value. The thesis: net asset value is inflated because the loans are held at acquisition cost; the dividend is not covered by real earnings but by new share issues at a premium; the subsidiary Business Loan Express (BLX) hides non-accrual loans and is prettified by gain-on-sale profits.

After that: the stock falls, Allied answers with war — counterattacks, private investigators, media, and, according to the book, an authority that begins by taking an interest in the short seller. Six years later BLX admits crimes in federal court — and the premium is gone. Vindication without apology. The course quotes the book openly: figures given as approximate are the book's own material and sometimes the book's estimates — what matters is the method, not the decimal.

What is a BDC? A Business Development Company is a corporate form Congress created in 1980 to let the public invest in loans to small and medium-sized American companies — assets that were otherwise available only to banks and private equity. The core of the construction: a BDC is an investment fund in corporate clothing, with one decisive tax rule — it must pay out at least 90 percent of its taxable income to avoid being taxed at the corporate level.

That explains the Allied culture: the dividend is not a choice, it is the soul of the corporate form. Allied Capital was founded 1958 and was, at the time of the speech, one of the oldest and largest BDC companies, with a balance sheet in the billions — described in the book as roughly three billion dollars — full of private loans to small businesses.

The stock you inherited. Allied was a classic income stock: a dividend paid for decades without interruption, a higher dividend yield than the market, and a story that you could trust the company as one had trusted it since the Eisenhower era. The ownership base: private individuals, income funds, inheritances and pensioners — people who were not buying analysis but safety (V14 brand and customer loyalty in its purest form: the brand WAS the continuity of the dividend).

The company was internally managed — no external management fee, which sounded clean — but with incentive fees to the internal management tied to growth in net income and net asset value. The detail is the course's first mechanical warning: incentive fees tied to book value growth pay management for numbers growing — not for being true (V09).

The premium — the first signal, and V05. A company whose assets are illiquid private loans should reasonably trade AT or BELOW book value: that is the standard discount for fund-like companies (think investment companies with marketable holdings — Swedish readers recognize the discount to book value). Allied instead traded at a significant premium — on the order of a third or more over net asset value at the time of the speech, according to the book's review. The premium is a claim: the market believes management creates value beyond book — or that book value is undervalued.

Einhorn's inversion: if book value is instead OVERVALUED, the true premium is far larger than it looks — and the true dividend yield far lower. This is how you could have spotted it: a fund-like company at a premium is not wrong per se — but it is a claim that requires proof, and the proof lives in the accounting principles, not in the dividend's history.

The accounting as the load-bearing construction. Allied's vital organs: the loan portfolio was in principle reported at acquisition cost — cost marking — with valuation assumptions determined internally (and approved by an auditor who signed off year after year). This is the technical foundation of the entire case: when the assets are not marked to market, net asset value becomes an opinion — and whoever writes down damages both bonus and story. The course's AKM1 lens summarizes the company: V05 (premium to book value — the claim), V12 (earnings quality — interest income from borrowers who do not pay, see chapter 5), V19 (share issues as source of financing, see chapter 3), V14 (the trust brand 40 years of dividend), V17 (the state as counterparty through the SBA guarantees, see chapter 4).

A Swedish parallel, illustrative and nameless: investment companies and credit brokers trading at a premium to adjusted net asset value while small parts of the portfolio trade on the stock exchange at far lower levels — the same question: who is right, the premium or the market price of the holding?