Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New

problem was that I did not have any idea what the job entailed when I started working there. When DLJ recruited its analysts, it sought a mix between finance/economics types and liberal arts types. As a government major, I fell into the latter group. I did not have any friends who had taken junior investment banking jobs, so I did not understand what the company’s representatives meant when they asked me during the recruiting process, “Are you willing to work hard?” I gave the right answer, but I didn’t realize I had just committed to 100-hour-plus workweeks. When I grew up, Dad made it home for dinner every night, and, I believe, so did all of my friends’ dads. I had never heard about jobs that required sitting in the office all day waiting for assignments that were generally passed out around dinner. The work lasted into the wee hours and often overnight. I did not understand the concept of staying in the office until everyone senior to me left—even when I had nothing to do. Further, I did not understand that being an analyst was a rite of passage that required “sacrifice” for its own sake, even when it provided no benefit to the project at hand. But I did it anyway because that was the culture.

I would often sleep on a pillow under my desk while the word-processing department prepared documents or the copy center made them into presentation books. Cheryl, my wife, would bring me a clean shirt in the morning on her way to work. I had certainly never before heard the adage, “If you aren’t coming in on Saturday, don’t even think about coming in on Sunday!” I started in August 1991 and by Thanksgiving had lost fifteen pounds.

After two years, analysts were expected to need a break that would be provided by business school. I had no intention of continuing my life as an investment banker, so I decided not to go to school. When a headhunter called and asked if I would like to interview at a hedge fund, my first response was, “Yes.” Then I asked, “What’s a hedge fund?” That is how Siegler, Collery & Company (SC) found me.

Gary Siegler and Peter Collery managed the SC Fundamental Value Fund, a mid-sized hedge fund with about $150 million under management. Today, a similar fund would have a couple of billion dollars. SC grew to about $500 million by the time I left. It was a great place to learn the business.

There, I learned how to invest and perform investment research from Peter, a patient and dedicated mentor. I spent weeks researching a company, reading the SEC filings, building spreadsheets and talking to management and analysts. Then I went into Peter’s office to discuss the opportunity with him. He heard me out and then took my file on the train. The next morning he returned to work having read everything and made a detailed list of questions that I wished I had asked. When I started working at SC, I would not know the answers to any of them; after a couple of years, I usually could answer about half.

Peter combed through the SEC filings for ambiguities in the description of the business or the discussion of the results. He spotted signs of good or poor corporate behavior, not to mention aggressive or conservative accounting. There were three basic questions to resolve: First, what are the true economics of the business? Second, how do the economics compare to the reported earnings? Third, how are the interests of the decision makers aligned with the investors?

In early 1996, along with an SC colleague, Jeff Keswin, I resigned from the firm to start Greenlight Capital. Cheryl named the firm, giving me the green light. When you leave a good job to go off on your own and don’t expect to make money for a while, you name the firm whatever your wife says you should.

CHAPTER 2

Getting the “Green light”

Jeff Keswin and I made our initial business plan on a napkin at a restaurant around the corner from SC’s offices. He would be the marketer and business partner, while I would be the portfolio manager. He did not know exactly where he would raise the initial capital, but figured that with his contacts we could start with $10 million. I told my parents about it, and to my surprise, in a vote of support, they volunteered to invest $500,000.

Jeff and I each wrote a $10,000 check to start Greenlight. It was the only check I ever wrote for the business. We printed stationery and bought computers, a TV, and a fax machine. We rented a 130-square-foot space from Spear, Leeds & Kellogg, our custodian or prime broker. It was a tight squeeze getting past the filing cabinet to my desk. We shared a photocopier with the five other small trading outfits in our “suite.”

In February 1996, I wrote a brochure outlining our investment program and illustrating sample investments. Though the hedge fund industry is generally known for its secrecy, I saw no reason to be secretive. I felt that if we explained our investment program, how individual investments fit into the program and what happened and why, our investors would have greater confidence in us. They would also understand that even our failures came from reasoned, disciplined decisions.

Either way, I believed this would lead to a more informed, confident, and stable partner base. We refer to our investors as “partners” because that is how we view them.

Part of the reputation hedge funds have for secrecy comes from the SEC’s prohibitions against advertising. As a result, many hedge funds make fewer public disclosures than they otherwise would. SEC Commissioner Paul Atkins noted the problem in a speech in January 2007: “We need to stop scaring ourselves and others with rhetoric about hedge funds. Rather than talking about how hedge funds ‘operate in the shadows,’ let us take a look at the regulatory constraints on hedge fund advisers