Bill Ackman (Trades, Portfolio) was one of Wall Street's rising stars after the financial crisis. He made a name for himself by making two significant bets the rest of the market seems to have overlooked. As early as 2002, Ackman started betting against the U.S. mortgage market. He purchased credit default swaps against MBIA's (MBI, Financial) debt and shorted the company's stock. Eventually, in 2008, after five years of waiting, the investment paid off, yielding a substantial return for Ackman and his investors.
Around the same time, he also invested $60 million in General Growth Properties. The troubled mall operator was on the brink of bankruptcy, but its subsequent turnaround yielded a payoff of $1.6 billion for Ackman.
The hedge fund investor's star continued to rise until he became involved with the pharmaceutical company Valeant (BHC, Financial). In the debacle that followed, Ackman lost $3 billion of his and his investors' money. He sold the position at the beginning of 2017.
Between 2012 and 2018, Ackman also held a short position against health supplement company Herbalife Ltd. (HLF, Financial). Once again, this did not work out in his favor, and the negative publicity it attracted significantly impacted the hedge fund manager's reputation.
After these disasters, in 2017 and 2018, Ackman decided to go back to basics. He almost disappeared from public life and informed investors that he was re-evaluating Pershing Square's investment strategy, as well as his own mindset.
This reset immediately started to yield results. In 2018, Pershing Square outperformed the S&P 500 by around 5%. It beat the S&P 500 by 15% in 2019, and in 2020, it outperformed by 40%.
Looking back at the investor's decisions since 2018, we can see how his change in strategy helped produce these returns. According to Pershing Square's historical 13F reports, we can see that in 2017, Ackman started shifting the portfolio. Out went companies like Nomad Foods Ltd (NOMD, Financial) and Air Products & Chemicals (APD, Financial), and in came Automatic Data Processing Inc. (ADP, Financial).
Nomad and Air Products produce frozen food and industrial gases, respectively, two markets that are pretty commoditized. They also rely heavily on suppliers and consumers. Meanwhile, Automatic Data Processing fulfills a vital role for businesses with its HR and payroll processing. As this software is essential for many companies, it is a relatively sticky product.
Ackman also made significant investments in Lowe's (LOW, Financial) and Raytheon Technologies Corp. (RTX, Financial). Once again, these are companies with strong competitive advantages. In the past four years, other major acquisitions have included Starbucks (SBUX, Financial) and Hilton Worldwide (HLT, Financial).
Pershing Square's portfolio is currently dominated by these holdings and other long-term core holdings, including Restaurant Brands International (QSR, Financial) and Chipotle Mexican Grill (CMG, Financial).
What's interesting about the Ackman story is that he realized his mistakes and moved on in 2017 and 2018. Rather than pursuing a strategy that has not yielded positive results, he reverted back to what he knew best. This was investing in high-quality companies that have a solid competitive advantage. He also continues to hold companies that he knows well and that have been strong long-term performers.
As Warren Buffett (Trades, Portfolio) says, you only need one or two good investments during your life to become wealthy. It certainly seems as if Ackman has tried to take that to heart. He has held a position in Restaurant Brands since 2014 and Howard Hughes (HHC, Financial) since 2010.
Ackman might not be the world's most successful investor, but his performance over the past few years is outstanding. It is unlikely he would have accomplished this without revisiting his strategy when it wasn't working. This shows how important it is for investors to analyze and review their strategy when something goes wrong.