Hedge Fund Manager - Lessons from Bill Ackman

For many years, Bill Ackman has been the most successful hedge fund manager. He has been the ‘unofficial’ poster-boy of activist fund managers. In 2015, he appeared on the cover of Forbes magazine. The article, love him or hate him, Bill Ackman runs the largest hedge fund received thousands of reviews and comments. It proclaimed Ackman as the next Warren Buffet. In 2014, his fund had just returned a massive 40% net of fees. His bet for Valentines Pharmaceuticals buying Allegan failed but he pocketed more than $2 billion for his investors. Then things started to go wrong. In 2015, after a great first half, his fund started losing. His massive bet in Valentines Pharmaceuticals failed. The company fell from $250 a share to less than $20. His other investments too fell. To me either matters worse, he had shorted a company called Herbalist and pressured FTC to investigate it. A few weeks ago, the FTC found out that the company was not a pyramid scheme leading to a spike in its shares. At the end, in 2015, he returned -23% and in 2016 YTD, his hedge fund has lost 20%. In all, Bill has lost more than $8 billion in the last 2 years. Here are the top lessons for traders and fellow investors from one of the best hedge fund manager:

#1 - Not all Trades will go your way

One of the best performing trades by Ackman was a short call for a company called MBA that insures municipal bonds. After placing the short trade, his trade was in the negative for more than 7 years before the company’s shares fell from $70 to $1. He earned more than $1 billion from the investment. Many investors shorted Herbalist after Bill announced his investment based on his historical success. Unfortunately, the FTC announced that though Herbalife had some problems, they didn’t amount to the pyramid scheme Ackman claimed they were. The shares are now on the upward trajectory and Ackman will have to liquidate after spending more than $50 million battling the company. As a trader, this is a major lesson you should learn. Not all trades will go your way. Today, your bullish bet on Brent oil could make you good money while tomorrow, the same bet will cost you a fortune. Always position your trades knowing that they might go wrong.

#2 - Be Ready to Walk Out

Another thing you should learn from Ackman’s troubles is on the need to walk out when your investment thesis doesn’t seem to work out. The best company to illustrate this is Valeant Pharmaceuticals (VRX). For many years, Valeant was the darling of investors. They flooded the company raising the shares from less than $30 in 2011 to a high of $257. In 2015, the company problem’s started when Hillary Clinton talked about regulating the pharmaceutical industry. VRX was notorious for hiking drug prices. This wad coupled with the fact the company had borrowed massively to buy drug companies. When these problems started, Ackman had an opportunity to exit but he didn’t. He assumed that there would be a recovery. At $70, he bought more shares and put in place forward contracts assuming that the price for VRX would rise to $160. Forbes now estimates that Ackman has lost more than $1 billion (in personal cash) from the investment as a hedge fund manager.

#3 - Be Frugal

Another important lesson you should learn from Ackman is on the need for being frugal even when you have the best year/month. In his best year, Ackman was always in the news. He broke the internet when he bought a condo for $90 million. In the same year, he listed his hedge fund in Amsterdam raising $5 billion. His family foundation gave millions to select organizations. He gave speeches to several organizations. As a trader, you might be tempted to show other people you are successful. This is wrong because during your down year, the same people will laugh at you.

#4 - Accept our Mistakes

In a recent interview with Bloomberg and in his quarterly letter to investors, Ackman was quick to point out his mistakes. At one point, an interviewer asked him whether he regretted anything in his investment. The ‘right’ answer at the moment could be that he did not regret anything. He did the opposite and accepted the mistake. Perhaps, this is the reason why only a few investors have redeemed their funds with him. The fact is that in investment not all your thesis will go right. At times, you will make mistakes. Accept the mistakes, correct them, and learn from them. Ackman is still one of the best hedge fund managers in the world. Yes, he has made some significant losses in a period when the market is hitting new highs on a daily basis. The same will happen to you at times. You should not panic. Instead you should let these experiences make you a better investor.

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