David Einhorn Says Stock Market 'Fundamentally Broken' By Passive And Algorithmic Trading: 'Value Industry Has Gotten Completely Annihilated'

David Einhorn, the founder of Greenlight Capital, has expressed his concerns about the increasing dominance of passive and algorithmic trading, stating that it has made value investing more challenging.

What Happened: In a recent episode of the Masters in Business podcast, Einhorn voiced his unease about the current state of the stock market. He attributed the difficulty in value investing to the growing popularity of passive and algorithmic trading, reported Business Insider.

“I view the market as fundamentally broken,” Einhorn stated.

“The value industry has gotten completely annihilated.”

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He explained that the shift from active to passive investment has resulted in fewer investors trading based on individual stock merits. This has made it harder for firms like Greenlight to identify undervalued companies that could potentially close the gap with the rest of the market.

Einhorn also highlighted the impact of algorithmic machine trading, stating that quant traders focus more on short-term price moves rather than a company’s broader value. This has led to a disproportionate buying of overvalued segments of the market.

Despite these challenges, Greenlight saw a 22.1% increase last year. However, Einhorn noted that further growth was limited by four significant losses on the fund’s short positions.

Why It Matters: The concerns raised by Einhorn echo those of other prominent investors. In a recent note, John Hussman, the president of the Hussman Investment Trust, warned of a potential market fallout due to the current “Cluster of Woe,” which has led to the most overvalued stocks since 2021 and the five weeks around the new year in 1929, according to his firm’s “most reliable valuation measures.”

Another investor, Robert Prechter, the founder of Elliot Wave International, has also cautioned that the current market situation is reminiscent of the years leading up to the 1929 crash. He highlighted the extreme bullishness among investors and the various warning signs in the market.

These warnings come at a time when the U.S. stock market is in a precarious position due to robust job numbers and wage growth, which suggest that the Federal Reserve’s interest rate hikes may not be having the desired impact, as highlighted by Cole Smead, CEO of Smead Capital Management.

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