David Einhorn's New Book: Fooling Some of the People All of the Time

The WSJ has reviewed David Einhorn's new book: Fooling Some of the People All of the Time

Einhorn's book covers his experience trying to short Allied Capital's stock, and the frustrations he had trying to bring to light the accounting gimmicks that he saw within the Company.

What gives the book a special value, beyond its backstage look at the life of an elite trader, is its insight into two important but usually neglected aspects of the investment business. First, Mr. Einhorn's carefully documented battles with Allied Capital say a lot about the temperament needed to be a great investor. Tenacity is vital. So is patience. And so, too, is an ability to keep a sane perspective.

As Mr. Einhorn's own firm prospered, he could have jammed far more money into his Allied Capital short position, determined to prevail by brute force. He didn't. He kept 3% of assets in that position but invested most of his money in other ideas that worked out better. Such discipline, we come to realize, is what distinguishes the wisest long-term investors from obstinate short-timers who veer between triumph and ruin.

The book also shows why good accounting really matters. It is easy to mock finicky people with green eyeshades who worry about financial footnotes. But reliable numbers are essential if capital is to be allocated properly in our economy. Otherwise good projects starve and foolish ones burn up money.

Mr. Einhorn is a hard-liner, wanting strict accounting standards that punish missteps quickly. Allied Capital, to judge by his version of events, liked living in a more lenient world, where there was plenty of time to patch up problems quietly. Regulators were comfortable with an easy-credit philosophy, too, to a degree that startled Mr. Einhorn.

In the current financial shakeout, people like Mr. Einhorn are entitled to say: "I told you so." It's to his credit that, telling the Allied story, he is often angry but never smug.