Fooling Some of the People All of the Time: A Masterclass in Skepticism 🔍

The Setup: Something Doesn't Add Up

Einhorn, a respected value investor, started researching Allied Capital as a potential investment. What he found didn't make sense. The numbers looked wrong. The accounting seemed suspicious. The business model appeared unsustainable.

So he did what any rational investor would do: he shorted the stock and publicly explained why Allied was overvalued and potentially fraudulent. He assumed the market would correct itself once the truth came out.

He was wrong about that last part.

The Core Lesson: Markets Can Stay Irrational Longer Than You Can Stay Solvent

This famous Keynes quote comes to life in painful detail throughout the book. Even when Einhorn methodically documented Allied's questionable practices—aggressive accounting, misleading disclosures, loans to companies that couldn't repay them—the stock didn't collapse. It barely budged.

Why? Because Allied had powerful friends, complicit regulators, and enough institutional support to weather the storm. Truth, it turns out, isn't always enough.

The Watchdogs That Don't Watch 🐕

One of the book's most disturbing revelations is how completely the regulatory system failed. The SEC, which should have investigated Allied's practices, instead investigated Einhorn for daring to speak publicly about his concerns.

Read that again: the regulator investigated the whistleblower, not the potential fraud.

Allied complained that Einhorn was manipulating the market by sharing his research. Never mind that he was transparent about his short position. Never mind that everything he said was documented and verifiable. The system protected the established company over the skeptical investor.

Auditors: The Gatekeepers Who Left the Gate Open

Allied's auditor, BDO Seidman, signed off on financials that Einhorn believed were misleading. When questioned, they defended their work. The book raises uncomfortable questions about auditor independence and whether firms can truly provide objective oversight of companies that pay their fees.

This wasn't unique to Allied. It's a systemic problem: auditors are hired by the companies they audit, creating an inherent conflict of interest. Who wants to lose a lucrative client by being too skeptical?

The Power of Storytelling Over Substance 📊

Allied's CEO, Bill Walton, was a master storyteller. He positioned Allied as a noble mission—lending to small businesses that big banks ignored. It was capitalism with a conscience, supporting the American dream.

This narrative was powerful enough to overshadow inconvenient facts. Politicians loved Allied. The Small Business Administration backed them. Questioning Allied meant questioning support for small businesses. Einhorn wasn't just fighting a company; he was fighting a story.

The lesson: a compelling narrative can shield bad behavior longer than most people imagine. People want to believe the story, especially when the alternative is admitting they were fooled.

Confirmation Bias in Action

Einhorn documents how Allied's supporters dismissed or rationalized away every red flag. When loans went bad, it was because of economic conditions, not Allied's lending practices. When accounting seemed aggressive, it was because Einhorn didn't understand their business model.

This is confirmation bias at an institutional scale. Once people decided Allied was legitimate—investors, regulators, politicians—they interpreted every piece of evidence through that lens. Contradictory information wasn't integrated; it was explained away.

The Lonely Road of Being Right Early ⏰

Here's what makes the book so relatable: Einhorn was right, but being right early feels exactly like being wrong. His fund lost money on the short position for years. Investors questioned his judgment. Critics mocked his obsession with Allied.

Vindication eventually came—Allied's stock did collapse, the company failed during the financial crisis—but it took nearly a decade. That's a long time to be "right" while watching your position bleed.

The takeaway: in markets and in life, being correct isn't enough. Timing matters. Patience matters. And the ability to withstand being called wrong while you wait for reality to catch up matters most of all.

The Fraud Triangle: Pressure, Opportunity, Rationalization

Though Einhorn doesn't explicitly use this framework, Allied's story illustrates all three elements:

Pressure – Allied needed to show consistent returns to maintain its stock price Opportunity – Complex accounting rules and lax oversight created room for manipulation Rationalization – "We're helping small businesses" became justification for questionable practices

Understanding this triangle helps recognize similar situations elsewhere. Where all three exist, skepticism should increase.

Media: Help or Hindrance? 📰

Einhorn received mixed treatment from financial media. Some journalists investigated his claims seriously. Others dismissed him as a short-seller with an agenda. Allied actively worked to discredit him in the press.

The book reveals how difficult it is to get complex financial stories covered accurately. Journalists face tight deadlines, limited expertise, and pressure to present "both sides." This often means giving equal weight to documented analysis and corporate spin.

The Network Effect of Credibility

Allied accumulated credibility through associations. Respected investors owned the stock. Politicians praised the company. Auditors approved the financials. Each endorsement made the next more likely.

This network effect works both ways. Once cracks appeared, the same network accelerated Allied's collapse. Former supporters distanced themselves. The media narrative shifted. Credibility, once lost, evaporates quickly.

But gaining that initial credibility—even through deception—can sustain a company for years.

What This Means for Regular Investors 💼

Most people aren't shorting stocks or conducting forensic accounting investigations. So what's the practical takeaway?

Trust, but verify. Just because regulators approved something, auditors signed off, or smart investors bought in doesn't mean it's legitimate.

Complexity is a red flag. If a company's business model or accounting requires mental gymnastics to understand, that's often by design.

Follow the incentives. Who benefits from maintaining the current narrative? Who's paid to look the other way?

Consensus can be wrong. The crowd isn't always wise. Sometimes it's just a crowd.

The Bigger Picture: System Failure

Ultimately, this isn't just Allied's story. It's a story about how systems designed to protect investors can instead protect fraudsters. How complexity creates hiding places. How institutions defend institutions.

The financial crisis of 2008—which occurred while Einhorn was fighting Allied—proved these weren't isolated problems. The same patterns appeared everywhere: aggressive lending, questionable accounting, regulatory capture, and misplaced confidence.

The Bottom Line 🎯

"Fooling Some of the People All of the Time" is a reminder that markets aren't perfectly efficient, regulators aren't always vigilant, and truth doesn't automatically triumph. Sometimes the bad guys win for years before justice arrives.

But it's also a testament to persistence. Einhorn could have moved on after his first public presentation about Allied. Instead, he documented everything, spoke up repeatedly, and endured ridicule and investigation. Eventually, reality asserted itself.

The title comes from Lincoln: "You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time."

Allied fooled enough people for long enough to matter. The real question is: what else are we being fooled about right now? And who's brave (or stubborn) enough to keep asking uncomfortable questions until we find out?