Bill Ackman’s Biggest Problem

I’ve never met Bill Ackman. I have nothing against him personally. I simply have a problem with a certain philosophy of his. Let me explain.

Back in 2002, Ackman went short the bond insurer MBIA (Symbol: $MBI). I won’t bore you with the CDS and CDO details, but his main reasoning was that the bond insurer was running a high-risk business model. And you know what? He was dead right! According to the SEC filings, he went short around $45 and covered around $4. A great trade on the surface, but let’s dig into the details.

1) He went short in 2002 around $45. The stock hit a high of $76 in January 2007. THAT’S A LONG TIME TO STAY SHORT A STOCK, ESPECIALLY WHEN A POSITION IS GOING AGAINST YOU FOR 5 YEARS!!! While I somewhat admire his conviction, there’s a fine line between conviction and stubbornness. My question to him would be: What was your contingency plan in case you were wrong? Did you ever factor in that you MIGHT be wrong? Were you just going to stay short forever? What if the stock went to $200???

2) During the time he was short, we had an incredible bull market from 2003-2007. Now I realize that he didn’t have all of his assets in this one position, but while he was waiting for his thesis to play out, there were TONS of stocks that went up 300%-3000% during that same period!!! He could have saved the headache of being short, saved his investors the interest he was paying to borrow the stock, and bought ANYTHING on the long side during this time. I simply call it “effective use of capital.”

Let’s fast forward to today. The man is repeating the same pattern. He is 100% convinced that Herbalife (Symbol: $HLF) is going to $0. He says this is the most conviction he’s ever had in a trade. I know I’m a nobody who manages pennies compared to Ackman, but if I had the opportunity to ask him one question, it would simply be: “WHAT IF YOU ARE WRONG???” My guess is he would respond: “I’m not wrong, I will play this out, and I have NO PLANS of covering.”

To me, this is Bill Ackman’s biggest problem: HIS EGO. No person is bigger than the stock market. The market doesn’t care if you’re a billionaire. It will chew you up and spit you out. To think that you’re going to be right on a trade and NEVER plan on being wrong is just 100% PURE ARROGANCE! By the way, if I’m seeing this, you don’t think his peers see this? Of course they do! And they even admit that it’s fun going after him.

4 final points:

1) Back in 2010, there was a Chinese water treatment company called RINO. It was a $30 stock that I was 100% convinced was going to the moon. I got stopped out at $27 and it never showed up on my screens again. I looked up the stock recently and it’s now trading at 0.04. Yes, 4 cents! Thankfully, I wasn’t stubborn because all it takes is one disaster to ruin your account and potentially put you out of business.

2) Never talk about your positions if you manage big money, especially your short positions. You are just setting yourself up to get screwed. The main reason we know of a big manager’s position is because of SEC filings. Otherwise, you rarely see the big guys on Wall Street discussing their stocks.

3) To be fair to Mr. Ackman, he has made some amazing investments in his career. In addition, he has donated a great deal of money to many great causes. As I said in the beginning, this is nothing against him personally, just against the concept of never accepting that one can be wrong in the stock market.

4) In interest of full disclosure, I own $HLF. I’ve been in it for my clients since $45. I think it goes much higher into year-end. But you know what? If I’m wrong and the stock breaks down, I’m gone!

It’s called separating your ego from your trading.

I can be reached at: [email protected].

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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