Hedge fund manager Bill Ackman learns a $4bn lesson

Stocktake: betting the farm is always dumb – whether you make a bundle or lose the lot

Hedge fund manager Bill Ackman last week finally gave up on controversial pharmaceutical firm Valeant, selling his stake and booking a loss thought to be in the region of $4 billion.

Ackman’s realisation that it was time to exit was a belated one. Valeant shares plunged from $263 in August 2015 to below $100 in October 2015 following accusations of price gouging and accounting fraud. Instead of getting out, Ackman doubled down, buying millions more shares. Valeant was cheap and could hit $306, he said.

It didn’t; shares fell below $11 last week.

Ackman can be blamed for his fundamental analysis, but let’s not be too cocky on that front – some of the world’s best investors make contrarian bets that fall flat. Similarly, the charge that he should have automatically cut his losses doesn’t really hold up. The old adage about cutting losses and running winners is fine for traders but not for investors like Ackman, who sometimes hold stocks for years.


Ackman's mistake is the same one Sean Quinn made with Anglo-Irish Bank shares – his position was just too big. Big bets sometimes work out. Ackman made billions in 2014 and was christened "Baby Buffett" by Forbes. When a big bet pays off, it's described as "bold", and recklessness gets mistaken for skill. In truth, betting the farm is always a dumb idea – irrespective of whether you make a bundle or lose the lot.

Blame Jim Cramer for Bannon’s nationalism

Investors and economists alike are alarmed by the economic nationalism espoused by Steve Bannon, Donald Trump's controversial chief strategist. It turns out that Bannon's ideas were inspired by an unlikely source – loudmouth CNBC host and former hedge fund manager Jim Cramer.

At the height of the global financial crisis in October 2008, Cramer implored viewers to get out of the stock market if they needed to use their money over the following five years. Unfortunately, Bannon’s octogenarian father, Marty, was watching. Spooked, he made a very expensive mistake, selling all the stock he had accumulated in AT&T – his former employer – over his lifetime.

Bannon told the Wall Street Journal last week that the episode shattered his faith in institutions and caused him to embrace economic nationalism. "Everything since then has come from there," he said. "All of it."

One sympathises with Marty Bannon, now 95. However, as a former Goldman Sachs banker, his son surely knows it’s a bad idea to put one’s life savings in a single stock, especially if you’re in your late 80s; it’s a bad idea to panic in bear markets; and it’s a really, really bad idea to make life-changing decisions on the advice of sensationalist TV presenters.

Lack of down days is not a warning signal

You could be forgiven for thinking that markets are complacent at the moment. After all, it’s been more than five months since the S&P 500 suffered a daily decline of 1 per cent – the longest streak since 1995.

The longer stocks defy gravity, the greater the chances of a steep correction – right? Well, no. LPL Research strategist Ryan Detrick examined what happened following the ending of extremely long streaks without a 1 per cent daily decline. A year later, the S&P 500 was higher 75 per cent of the time, enjoying median gains of 14.4 per cent.

This time may be different, of course, but “a lack of big down days or a lack of volatility by itself isn’t a warning sign”, says Detrick.

Time is an investor’s best friend

Barclays’ latest Equity Gilt Study is a reminder that nothing in investment is quite as important as time and compound interest.

UK stocks have beaten cash in 68 per cent of two-year periods and 75 per cent of five-year periods. Those odds increase to 91 per cent if one holds for 10 years, or 99 per cent after 18 years.

As for small sums compounding over time, note that £100 invested in UK equities in 1899 would have grown to £16,004 if you didn’t reinvest dividend income. And if you did reinvest those dividends? Your nest egg would be unrecognisable, growing to more than £2.6 million.

Sucking up to management

Analysts aren't always great at stock-picking, but they're seriously good at sucking up to company management. According to a new study, An Investigation of Analysts' Praise of Management During Earnings Conference Calls, analysts used the words "good", "great" or "strong" more than 215,000 times during company conference calls over the 2003-13 period.

“Congratulations” was used 11,831 times, “congrats” 2,687 times. “Great quarter”, “good quarter” and “nice quarter” were also used on thousands of occasions, as were “great job”, “good job” and “nice job”. Incidentally, investors should take note when the tributes are especially gushing – companies attracting such praise outperform markets in the coming months.