Elite investor David Einhorn warns of bubble-level hype around the hottest stocks - and teases a mystery bet

• The hype around speculative stocks hit bubble levels last quarter, David Einhorn said in a letter.
• Einhorn's Greenlight Capital teased a big, mystery position that it's still building.

The hype around the market's hottest stocks rose to dangerous levels in the fourth quarter, David Einhorn said in a letter to investors on Monday that was published by Hedge Fund Alpha. Greenlight Capital's founder and president also teased a mystery bet.

Greenlight notched a net gain of 22.1% in 2023, trailing the S&P 500's 24.2% return. The hedge fund was on track to beat the benchmark stock index until the last couple of months of the year, when "the market took off and most of our short book performed poorly," Einhorn wrote.

"Bubblelike conditions returned for the most speculative stocks and a handful of our shorts went parabolic," he added. Elon Musk's Tesla, a market darling that Einhorn has bet against in recent years, surged by nearly 25% in the last two months of 2023.

Einhorn and his team established a new position that they expect to rank among Greenlight's top-five holdings, but declined to name it as they're still building it. Warren Buffett's Berkshire Hathaway, with the SEC's help, has also kept in-progress bets under wraps to avoid other investors piling in and raising its cost base, including Chevron and Verizon in 2020 and at least one purchase in the third quarter of last year.

The Greenlight chief swore off buying stocks in the third quarter, given the chance that foreign conflicts would drive up gas prices and thus squeeze consumers, stall the economy, and pull down stock prices. He reopened his wallet last quarter.

"We ended our buyers' strike and found several promising new investments that we believe will help us in 2024," he wrote. Greenlight added several names to its portfolio including Alight and Viatris, and also bet on defense stocks via two exchange-traded funds on the basis that foreign conflicts could fuel demand for ammunition and other military supplies.