I don’t know how many articles you’ve read about Valeant (VRX) in the past few weeks, but it’s probably safe to say too many. This article, you might be happy to hear, has very little to do with Valeant – mostly because I have nothing new or intelligent to say about the company (it’s buried deep in my “too hard” pile). Instead, it’s about following the lead of others when investing.
I had CNBC on a few days ago when some breaking news about Valeant was revealed. I turned up the volume in time to hear Jim Cramer say, in a nutshell, that Valeant is a complete disaster: there’s a lack of corporate governance, no one inside or outside the company has any sense for the numbers and so on. Later, on "Mad Money," Cramer rolled his eyes when talking about CEO “leadership” at Valeant. He summed up his thoughts on the saga a few days ago:
“Put simply, Michael Pearson, the now disgraced creator of Valeant, figured out how to parlay Wall Street, a broken tax system and a foolish, distorted, antiquated system of payments into one of the most predatory companies on Earth. He took advantage of every weakness the flawed health care system could offer. And he had the backing of some of the biggest hedge funds in the world championing him all the way up. ... He played everyone like a fiddle.”
When Cramer said “everyone,” I thought he might be setting himself up for a discussion about his own history with the company (he didn’t). For example, in February 2015, TheStreet.com published an article titled “Jim Cramer on Valeant: This Is an Amazing Pharmaceutical Firm.” Here’s a sample of some of the things he said at that time (link):
“Valeant is amazing. And it merits this move.”
“I am shocked at how much better it is doing than we thought.”
“The company is an amazing acquirer.”
“They just get so much more out of their brands than other companies.”
“This is the fastest-growing major pharmaceutical. It is easier to see that it could trade to $240 if it executes. … That's not a pipe dream. It's a reality.”
Cramer was quite blunt in an interview at that time (link): “It’s not done going higher.”
Just to reiterate, that was 13 months ago. In his defense, Cramer has said to sell Valeant for at least the past month (and for some time, it did go higher). While selling would’ve helped (versus still owning VRX today), you still would've lost more than half your investment since then.
If you accepted Cramer’s arguments and bought Valeant without questioning his conclusions – for example, how Valeant gets more out of brands than its competitors – you ended up paying a high cost for your negligence. Here’s the point: If you need to lean on others to justify an investment, your best option is to pass. Resist the urge to dabble and search for greener pastures elsewhere.
For another example, consider my painful experience with JC Penney (JCP): while I did my own research on the investment, there’s no question I let myself get a bit lazy due to the personal involvement and financial commitments of Bill Ackman (Trades, Portfolio) and Steve Roth.
Investing in JC Penney was a mistake. I simply did not do enough research, particularly relative to the sizable financial commitment I ultimately made (as a percentage of my portfolio).
My reliance on the work and conviction of others was an egregious mistake on my part. What happened as a result of that mistake rests squarely on my shoulders.
There’s nothing different at Valeant: if you bought it, it’s on you. If you think differently, just remember that no one – not Cramer, Ackman, Jeff Ubben (Trades, Portfolio) or the team over at Sequoia – will be sending you a check to help cover your losses.
My opinion is you shouldn’t own anything unless you’ve personally done the work to make the argument for doing so. This comes with the kicker that it’s quite difficult, at least in my experience, to do so objectively when you already know the opinion of investors you admire.
What’s a value investor to do? As an example, if you hear Ackman is a big fan of Valeant, it’s probably best to do all of your research and draw your own conclusions before you watch his four-hour presentation outlining his thoughts on the company. It’s likely his commentary would impact my ability to analyze Valeant without falling back on his arguments. If I can’t draw the conclusions on my own, or at least independently verify them once I’ve taken a deep dive into the business, then that’s simply not a good foundation for an investment. While you don’t need to turn a blind eye to their arguments, it’s best to build your own foundation first.
Most people who end up taking a position in a stock like Valeant solely because of the inclusion of a big-name investor would probably admit that their decision was a roll of the dice. As Ben Graham once said, speculation is neither immoral nor illegal. However, I’d still argue that it’s best to keep gambling as far away from your investments as possible.
Making small bets on securities that you barely know about or understand is unlikely to produce excess returns in the long run – and probably not even market returns. If you really want to gamble, it’s best to do so at a nice casino in Las Vegas, not in your brokerage account (not to stretch too far, but I think it’s likely that online trading, despite much lower trading costs, has been a net negative for a large percentage of individual investors for exactly this reason).
I’d argue you’re likely to have an unfavorable result if you try to segregate actions in your brokerage account between “investments” and “speculation.” I say that because it’s already hard enough to stay level-headed and focus on the long term when you fully dedicate yourself to that approach. Adding coin flips into the mix, along with the baggage that entails, seems unwise.
This isn’t the most enlightening conclusion. With that said, it bears repeating, particularly years into a bull market when many investors are having trouble finding attractive ideas. It’s a lot easier to get sucked into Valeant when you’re holding 20% cash than when you’re fully invested.
I’ll close with a quote from Warren Buffett (Trades, Portfolio):
“I think people are making a big mistake if they are piggybacking me or 10 other people whose names appear in the paper. That is not a great strategy.”
