‘Investors don’t care about valuations’: Billionaire hedge fund honcho David Einhorn says value investing — Warren Buffett’s favorite strategy — is ‘dead.’ Is he right?

David Einhorn, president of Greenlight Capital, recently shared with Barry Ritholtz, chairman and chief investment officer at Ritholtz Wealth Management, why he’s moved away from value investing.

What is value investing?

Simply put, value investing involves seeking out and investing in stocks at a discounted (or undervalued) price. Value investors don’t necessarily invest in the “hottest” stocks but put their money in what they consider to be value companies with long-term potential.

It’s certainly worked for Warren Buffett, who used the strategy to amass his whopping $136.4 billion fortune. Buffett has always said he looks for companies that have a competitive advantage, including factors like a strong brand, a sizable customer base, and a rather high barrier to entry. For example, an early investment pick of his was GEICO Insurance company, which grew dramatically, until he eventually acquired it.

Einhorn used to follow the same value investing strategy as Buffett. However, now he argues that “market structures are broken and value investing is dead,” regardless of what some billionaires believe.

How Einhorn’s investing strategy differs from value investing

Einhorn founded Greenlight in the mid-1990s and made a reputation for himself as a value investor. But since then, the industry has changed drastically — in particular, the number of money managers actively paying attention to stocks has plummeted.

Einhorn theorizes that means managers can no longer expect to get the same returns they once did, leading him to make the stunning declaration that “investors don’t care about valuations” anymore.

He says his new strategy involves seeking companies that rather than undervalued are actually misunderstood, offering the example of Apple in its early days. Some investors saw just a hardware company, but Einhorn says he sensed it also had potential as a software company and a services company.