3 Pieces of Investing Advice from a Billionaire Fund Manager – Part 2

When it comes to money management, David Einhorn’s likely one of the best in the business. This is why: Since Einhorn stared his investment firm Greenlight Capital in 1996, it has generated an annualised return of just over 19%.

To put that number into perspective, a $1,000 investment in 1996 that’s compounding at 19% would have become nearly $23,000 by 2014. Einhorn’s achievements as an investor has led him to accumulate a fortune of some US$1.75 billion today, according to Forbes.

Recently, I chanced upon an old January 2011 interview that my Foolish colleague John Reeves had conducted with Einhorn. There are two parts to the interview (see here and here) and it contains some great takeaways for retail investors like you and me.

For the sake of brevity, I’ve broken the takeaways into three parts. Here’s one of them.

On the need to dig deeper into your own investments

Reeves: What are your thoughts on the ratings agencies like Moody’s, Standard & Poor’s (a division of McGraw-Hill), and the like?

Einhorn: The main reason ratings agencies exist is for the convenience of Wall Street. Wall Street uses them to make money at the expense of passive long-term credit investors like pension funds. Wall Street firms make money when the ratings are wrong. They are able to front-run the passive buyers of bonds who depend on ratings by dumping bad bonds on them.

People sometimes ask how can passive investors survive without the protection of the ratings agencies. Actually, they would be the biggest beneficiaries of a system without the ratings agencies. As for Wall Street needing ratings to assist in the capital raising process, if we didn’t have official ratings, underwriters like Bank of America, for example, would just figure out a different way to market new bonds.”

Einhorn’s comment here is very specific to what’s going on in the U.S., but there’s still an important takeaway for investors in Singapore: We have to depend on our own judgements as well when it comes to investing in bonds.

In this year, there have been a number of bonds issued by companies and trusts in Singapore’s stock market that are available for retail investors; some examples include those from Aspial Corporation (SGX: A30) and Perennial Real Estate Holdings Limited (SGX: 40S). The aforementioned bond offerings from the two companies are not given ratings, but even if they are, that does not mean that investors have no more homework to do.

It’s still important for investors to get a good grasp of a company’s ability to service and eventually repay its bonds. Some good places to start would be a company’s interest coverage and debt to equity ratios.

That’s all for now. For the other two parts, check out below!

On the need for investors to protect themselves – check out here.

On the need to not follow even the best investors blindly – check out here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.