Regular readers of my articles will know that I like to keep an eye on well-known investors who have fallen from grace. I enjoy trying to gain an understanding of why these investors started to struggle in the first place, and the strategy they used to recover.
It is essential to look at these scenarios because they are great case studies for regular investors detailing what they should and should not be doing. After all, the best way to learn is to learn from other people's mistakes; that way, you don't have to foot the bill yourself.
This year's comeback award
This year, the comeback award has to go to Bill Ackman (Trades, Portfolio) and his investment vehicle, Pershing Square Holdings. As of June 11, Pershing Square was up 31% for 2019, based on the dollar net asset value of the publicly traded Pershing Square Holdings.
Following two years of stagnation, this performance is outstanding. In 2018 the net asset value per share of the publicly traded investment vehicle declined by 0.7% and in 2017, the loss was 4%. The returns in 2018 and 2017 were disappointing, but they were significantly better than in 2016 when it lost 13.5% and 2015 when it shed 20.5%. In 2014, Pershing added 40.4% for investors.
Ackman's problems in 2016 and 2015 were well publicized. He decided to bet heavily on pharmaceutical group Valeant Pharmaceuticals, which at one point was his most significant single position. But after peaking in summer 2015, the stock lost 96% of its value over the next 24 months. Ackman finally decided to give up the company in March 2017, selling the entire stake for around $11 per share, compared to its high of $257 in the summer of 2015.
Ackman's Valeant saga not only damaged his returns, but it smashed his reputation as well. Assets under management at Ackman's Pershing Square hedge fund firm dropped from more than $20 billion in the summer of 2015 to $11 billion by 2017. Assets under management have since declined to around $7 billion as of June 2019.
Announcing the disposal in 2017, Pershing Square said in a statement, "The investment required a disproportionately large amount of time and resources." It went on to say, "As a result, we elected to sell our investment and realize a large tax loss which will enable us to dedicate more time to our other portfolio companies and new investment opportunities."
Based on the company's performance since 2017, he looks as if this was the right decision. Although there are still six months left of 2019, if Ackman's current performance continues, his returns will be almost back on track. Even though net asset value per share declined in 2018, the fund still outperformed the S&P 500 by 370 basis points and during 2019, based on the current figures, Pershing is outperforming by 24.9%.
The right decision
We will have to wait until the investment fund publishes its full-year results for 2019 before we get the whole picture, but it looks as if Ackman has made substantial progress since the losses in 2015 and 2016. And this is a great case study of how important it is to cut your losses and move on.
Ackman's biggest mistake was Valeant, but the rest of his portfolio has continued to produce results. The fact that he cut his losses and moved on is a testament to his skill as an investor. He could have doubled down on Valeant and refused to take a loss, which would have lead to further losses and outflows. Instead, the activist investor swallowed his pride and moved on. It looks as if this is already paying off.
So, the lesson from this case study seems to be that no matter how big or public your mistake, cutting losses and moving on is the best thing you can do. Letting the loss dominate and influence your investment strategy should be avoided, because, as Ackman has shown, it's possible to come back from terrible losses (he suffered an estimated total loss of $4 billion on Valeant), if you cut out the rot and focus on better opportunities.
Disclosure: The author owns no share mentioned.
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