Don't Make This Legendary Investor's Mistakes
Ackman is waving the 'white flag' again... The end of the Herbalife saga... Don't make this legendary investor's mistakes... Volatility returns...
Bill Ackman is a Wall Street legend...
His Pershing Square hedge fund racked up one of the most impressive initial track records in history.
From its inception in 2004 through the end of 2014, Ackman's fund absolutely crushed the broad market. While the benchmark S&P 500 Index rose less than 150% over this time, Pershing Square returned nearly 750% to its investors. And this was after Ackman's hefty management fees.
But Ackman hasn't fared so well of late...
The S&P 500 has risen 30% since 2015, but Pershing Square has lost money in each of the last three years. The fund lost 21% in 2015, 14% in 2016, and 4% last year.
You see, Ackman's investment style is as brash as his personality. He likes to make big, concentrated bets in just a handful of companies. This means he can make huge returns when he's right... and suffer huge losses when he's wrong. And unfortunately, he has been spectacularly wrong of late...
Back in October 2010, Ackman made a massive gamble on troubled mall retailer JC Penney (JCP)...
Porter recounted the details of this foolish bet in the September 22,
Take Pershing Square's ill-fated foray into JC Penney. Bill Ackman's presentations and decisions about that turnaround never made any sense. Nothing his team did for that business worked. And most of the stuff they tried was just plain stupid.
Making a lesbian couple the center of their big annual ad campaign to make the brand hip? That was one of the dumbest things I've ever seen done in business. No New York hipster is going to shop at JC Penney because the merchandise is cheap and frumpy. So why risk alienating your core buyer (a middle-class housewife) with a lifestyle and images of a lifestyle that many find offensive? That decision was a perfect example of how tone-deaf Ackman was about this business.
Likewise, hiring the guy who built out Apple's stores. That kind of retail concept works great when you're selling luxury electronics... but so would any retail concept that had exclusive access to iPhones.
It was immediately clear to me that Ackman simply didn't know anything about retail... and that spending another $1 billion on JC Penney's stores wasn't going to do anything to stop the company's decline. There are bigger factors at play: demographics, the rise of Internet retail, the decline of malls, and most obvious to me, the new kind of "trunk" sales approach that has made going to a department store an unnecessary hassle for the best buyers.
Of course, Ackman's turnaround plan failed. By August 2013, JC Penney shares had fallen another 50%. Ackman finally threw in the towel and sold his entire stake at a loss of nearly $500 million.
Ackman's bet on Valeant Pharmaceuticals (VRX) fared even worse...
Ackman began buying shares of the controversial drugmaker in early 2015. And when allegations of fraud caused shares to fall later that year, he wasn't swayed.
In fact, he "doubled down," buying even more as shares fell from above $250 to less than $100 by the next spring. And he was the company's largest shareholder when its stock plunged an additional 50% in a single day back in March 2016.
By the time Ackman unloaded the last of his Valeant shares last March, Pershing had lost a mind-numbing $4.1 billion... or approximately $7.7 million every single day the market was open during that time.
But that wasn't even his most publicized mistake of the past few years...
That award goes to his vendetta against nutraceutical company Herbalife (HLF).
As longtime Digest readers may recall, Ackman publicly announced a $1 billion short position in December 2012. He called the company a "pyramid scheme" that would eventually be shut down by the
His short position gained even more attention when fellow billionaire investor Carl Icahn took the other side of that bet, becoming the company's biggest shareholder in 2013. (The two even engaged in a public shouting match on financial television that year.)
Ackman maintained his campaign for nearly five years. And he scored a few small victories along the way, most notably getting the Federal Trade Commission to investigate the company for fraud.
However, the investigation was eventually closed without serious charges, and Ackman largely failed to convince the market of his thesis. Shares have nearly doubled since he first announced his short position. And yesterday, Ackman officially waved the "white flag." As the Wall Street Journal reported last night...
Ackman is ending his crusade against Herbalife in what amounts to a bruising defeat in one of Wall Street's longest-running, most expensive and acrimonious fights.
It isn't clear how much Mr. Ackman's Pershing Square Capital Management LP lost, but it is likely in the hundreds of millions. Herbalife stock, which Mr. Ackman contended would go to zero, hit a new high of nearly $96 Wednesday on the news, earlier reported by CNBC. The shares closed up 6.3% at $92.10...
In the end, investors sided with Herbalife and the company – and Mr. Icahn – won. Mr. Icahn now owns 26% of Herbalife and has made over $1 billion, according to filings. "Bill Ackman put up a great fight and while I really enjoy a great fight, especially when I believe I'm 100% in the right, and I'm certainly happy we won, much more importantly the company is much better off without this distraction," Mr. Icahn said in an interview on Wednesday. "I wish Bill well."
We don't bring this up simply to point out a billionaire's misfortunes...
It's also a valuable reminder
You see, Ackman's losses aren't simply bad luck. They're primarily the result of a few big mistakes that we see many novice investors make again and again.
For example, his entire portfolio consists of just a handful of stocks... He puts a huge percentage of his money in each position... And he refuses to cut his losers short. In fact, he often increases his stake
In other words, he ignores proper diversification... He doesn't use reasonable position sizing... And he doesn't have an exit plan (like trailing stop losses).
If a legendary hedge-fund manager can eventually blow himself up by neglecting these principles, how successful do you think you'll be?
Returning to the market, an historic streak is officially over...
The S&P 500 closed at 2,714 on Wednesday, representing a decline of 2.6% for the month of February, on a total-return basis.
This marks the first monthly decline in U.S. stocks since October
Unfortunately, March isn't starting much better... Today, the market closed lower for the third straight day. All three major indexes – the S&P 500, Nasdaq, and Dow – closed down more than 1.2% on the day. And the CBOE Volatility Index ("VIX") – the market's "fear gauge" – is moving higher again. It's now trading back above 20 for the first time since stocks plunged 10% early last month.
We suspect the market could test last month's lows in the near term. We could even see lower lows before this correction is done. But for now, we continue to believe that's all it will be... a correction in an ongoing bull market, and not the start of a more serious bear market.
Our advice remains the same: Stay long, but stay smart. Be sure you're properly managing risk, and keep a close eye on your trailing stops.
New 52-week highs (as of 2/28/18):
A quiet day in the mailbag. Are you prepared for a continued correction? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
March 1, 2018