Is This Billionaire Investor Brilliant or Crazy?

Billionaire investor David Einhorn is founder and president of Greenlight Capital, a long-short value-oriented hedge fund. Greenlight was founded in 1996, with original capital of $900,000. Nearly 20 years later, Greenlight has $12 billion in assets under management.
Bloomberg reports that from 1996 to 2005, the first decade in which Einhorn’s fund traded, he generated a 29% average annual return compared to an 11.8% average return from all hedge funds. In the past five years, Greenlight has returned 12% annually compared to 4.7% for all hedge funds.
Greenlight has made Einhorn a very wealthy man. Forbes magazine estimates his net worth at $1.8 billion.
So, Einhorn knows what he is doing, or does he?
Einhorn has made news for a rather provocative investment. He has been a big buyer of Consol Energy (NYSE: CNX), the worst performing stock in the S&P 500 over the past year. Consol operates in the two worst-performing segments in the U.S. economy: oil and gas exploration and production (E&P) and coal mining. Over the past year, Consol’s share price has dropped 80%.
If Einhorn were simply buying into oil, natural gas and coal today, you could easily argue that he’s simply making a legitimate contrarian investment. After all, oil is trading at prices last seen in early 2009. Natural gas is priced near April 2012 lows, which were lows last seen in January 2002. As for coal, it too is priced near a decade low.
But Einhorn’s Consol investment isn’t a new investment. He’s been buying Consol shares over the past year. What’s more, he’s continually bought into a downward price trend:

Greenlight Capital owns over 29.6 million Consol Energy shares, or 12.9% of outstanding shares. Greenlight’s cost basis in Consol Energy is around $30 a share. Today, Consol’s share price is around $8.
Is Einhorn crazy? Has he simply thrown good money after bad?
My answer is “no” on both accounts. For one, I like the investment thesis: energy prices are at multi-year lows, and they’ve been this low for most of the past year. Oil, natural gas and, yes, even coal are the energy sources of the future. The future extends past my lifetime and yours.
As for Consol in particular, Einhorn highlighted the fact that the company owns most of its resource properties outright. It doesn’t pay royalties and it doesn’t need to drill in order to maintain its rights. The risk, though, is that long-term debt is high at $3.73 billion, while the cash account is low at $83 million.
I sympathize with Einhorn, because I’m also a value investor. I also average down into falling prices.  I do so because timing a bottom is impossible. A lower price frequently goes lower. But if I have conviction in my analysis, I logically buy into the lower price. I’m lowering my cost basis for the eventual turnaround.
Keep in mind, too, that value investing is a time-consuming strategy. A value investment can take three, five or even 10 years to produce a return that can be annualized to prove that the reward was worth the risk.
If you don’t have the time, don’t be a value investor. If you do have the time, averaging down in an investment with long-term viability can be a very profitable strategy. Einhorn has proven this to be the case over his 20-year career.