I've been following Bill Ackman (Trades, Portfolio) carefully over the past several years.
Ackman was once considered to be one of the best investors in the world, but in the wake of the Valeant scandal, he lost this crown.
The hedge fund manager has been on a voyage of discovery since then. He's reduced his staff, moved his office and reconsidered his approach to investing, all in the hopes of being able to turn around his performance.
It is essential to look at these scenarios because they are great case studies for regular investors. After all, the best way to learn is by examining other people's mistakes, so you don't have to foot the bill yourself.
A big setback
Ackman's problems in 2015 and 2016 attracted plenty of attention. He bet heavily on Valeant Pharmaceuticals, which is now Bausch Health Companies Inc. (BHC, Financial), making the stock his most significant position. Unfortunately, the stock then went on to lose 96% of its value in two years after peaking in the summer of 2015.
The activist investor finally decided to give up on the company in March 2017. He sold Pershing Square's entire stake for around $11 per share. The stock was, at one point, worth as much as $257 per share.
Following this debacle, Pershing Square's assets under management plunged. From more than $20 billion in the summer of 2015, they were just $7 billion as of June 2019.
A big turnaround
After selling out of Valeant in 2017, Ackman's comeback started to take shape in 2018. Even though he ended the year with a loss, the fund still outperformed the S&P 500 by 370 basis points.
2019 has been even more impressive. According to initial figures, Pershing Square Capital, Ackman's publicly traded hedge fund, ended the year up 58.1%, massively outperforming the S&P 500's near 30% return and the average hedge fund's near 10% return.
The last time Ackman was able to produce a return even close to this figure was in 2014, when he returned 40.4%.
Following 2019's performance, Ackman is back in the game. According to the figures posted on Pershing Square Capital's website, the hedge fund's net asset value at launch in September 2014 was $25. It ended 2019 at nearly $27.
Granted, this is only a compounded annual growth rate of 1.55%, although it does also include dividends and the fund has been buying back stock recently. Still, it means Ackman has recovered all of his losses and then some. Since hitting its low of $16.30 in October 2016, the net asset value has grown at a compounded annual rate of around 15%, outperforming the S&P 500.
The turnaround
So how did Ackman pull off this turnaround?
In 2019, he attributed his performance to reading Warren Buffett (Trades, Portfolio)'s early letters to investors, particularly regarding his thoughts about a long-term capital structure.
Referencing Buffett's decision to shutter his investment partnerships in 1969, Ackman told the 13-D Active-Passive Investor Summit, "I think what Mr. Buffett realized in 1969 is that being a longterm investor with short-dated capital is just ultimately going to lead to a bad outcome at some point in time."
This is why Ackman has been concentrating his efforts on his publicly traded vehicle rather than the private hedge fund, which is susceptible to short-termism.
The value manager also told his audience in 2019 that he's refocused his operations on finding simple, predictable and cash flow-positive companies rather than complex, high-risk, high-reward opportunities like Valeant.
We can learn a lot from Ackman's turnaround. He's admitted his mistakes, reinvented his portfolio and moved on. That requires a lot of humility and emotional strength. He might have attracted criticism for investments in the past, but we can't attack his decision to take a step back and re-evaluate his process.
Disclosure: The author owns no stocks mentioned.
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